<PAGE>
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 1, 1996
                                                    REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ----------------
                           AASTROM BIOSCIENCES, INC.
            (Exact name of registrant as specified in its charter)
         MICHIGAN                    2834                    94-3096597
     (State or other          (Primary Standard            (IRS Employer
     jurisdiction of              Industrial            Identification No.)
     incorporation or        Classification Code
      organization)                Number)
                               ----------------
                          24 FRANK LLOYD WRIGHT DRIVE
                                 P.O. BOX 376
                           ANN ARBOR, MICHIGAN 48106
                                (313) 930-5555
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                               ----------------
                          R. DOUGLAS ARMSTRONG, PH.D.
                      PRESIDENT, CHIEF EXECUTIVE OFFICER
                           AASTROM BIOSCIENCES, INC.
                          24 FRANK LLOYD WRIGHT DRIVE
                                 P.O. BOX 376
                           ANN ARBOR, MICHIGAN 48106
                                (313) 930-5555
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                               ----------------
                                  COPIES TO:
          T. KNOX BELL, ESQ.                 RICHARD R. PLUMRIDGE, ESQ.
         DOUGLAS J. REIN, ESQ.                 MICHAEL A. CONZA, ESQ.
          MATT KIRMAYER, ESQ.              BROBECK PHLEGER & HARRISON LLP
         DAYNA J. PINEDA, ESQ.               1301 AVENUE OF THE AMERICAS
     GRAY CARY WARE & FREIDENRICH             NEW YORK, NEW YORK 10019
   4365 EXECUTIVE DRIVE, SUITE 1600
      SAN DIEGO, CALIFORNIA 92121
                               ----------------
 
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 

                        CALCULATION OF REGISTRATION FEE
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
          TITLE OF EACH CLASS OF                 PROPOSED MAXIMUM
        SECURITIES TO BE REGISTERED         AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------
<S>                                         <C>                         <C>
Common Stock, No Par Value.................         $37,375,000                  $11,326
</TABLE>

 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the registration fee.
 
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
 
PROSPECTUS (Subject to Completion)
Dated November 1, 1996
 
                                3,250,000 Shares
 
                        [LOGO] AASTROM BIOSCIENCES INC
 
                                  Common Stock
 
                                --------------
 
  All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered are being sold by Aastrom Biosciences, Inc. ("Aastrom" or the
"Company").
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ASTM."
 
                                --------------
 
 THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
                           PAGE 5 OF THIS PROSPECTUS.
 
                                --------------
 
 THESE   SECURITIES  HAVE  NOT  BEEN   APPROVED  OR
  DISAPPROVED  BY  THE   SECURITIES  AND  EXCHANGE
   COMMISSION OR ANY  STATE SECURITIES COMMISSION
    NOR   HAS   THE   SECURITIES   AND   EXCHANGE
    COMMISSION    OR   ANY   STATE    SECURITIES
     COMMISSION  PASSED  UPON THE  ACCURACY  OR
      ADEQUACY   OF   THIS   PROSPECTUS.   ANY
       REPRESENTATION TO  THE  CONTRARY  IS  A
       CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                          Underwriting
                                        Price to          Discounts and        Proceeds to
                                         Public           Commissions(1)        Company(2)
- ------------------------------------------------------------------------------------------
<S>                                <C>                 <C>                 <C>
Per Share........................          $                   $                   $
Total(3).........................         $                   $                   $
- ------------------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933. See
    "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $900,000.
(3) The Company has granted to the Underwriters an option, exercisable within
    30 days of the date hereof, to purchase an aggregate of up to 487,500
    additional shares at the Price to Public less Underwriting Discounts and
    Commissions to cover over-allotments, if any. If all such additional shares
    are purchased, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Company will be $   , $   and $   ,
    respectively. See "Underwriting."
                                --------------
 
  The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of the certificates for the shares will be made at the offices of
Cowen & Company, New York, New York, on or about   , 1996.
                                --------------
 
COWEN & COMPANY                                               J.P. MORGAN & CO.
 
    , 1996

<PAGE>
 
 
     [COLOR FLOW CHART DEPICTING "STEM CELL THERAPY METHODS"
     DESCRIBING STEM CELL THERAPY UTILIZING BONE MARROW HARVEST,
     PROGENITOR BLOOD CELL MOBILIZATION AND THE AASTROM CPS]
 
       [COLOR PHOTOGRAPH OF A PROTOTYPE OF THE AASTROM CPS WITH A
                      CLINICIAN INNOCULATING CELLS]
 
 
 
  A prototype of the Aastrom CPS is currently being used in a clinical trial
and ongoing development activities are directed at completing production level
components of the Aastrom CPS. The Company may not market the Aastrom CPS
unless and until FDA and other necessary regulatory approvals are received.
 
  IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
 
                                       2

<PAGE>
 

                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Prospective investors should carefully consider
the information set forth under the heading "Risk Factors."
 

                                  THE COMPANY
 
  Aastrom Biosciences, Inc. is developing proprietary process technologies and
devices for a range of cell therapy applications, including stem cell therapies
and gene therapy. The Company's lead product under development, the Aastrom
Cell Production System (the "Aastrom CPS") consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method will
be less costly, less invasive and less time consuming than currently available
stem cell collection methods. The Aastrom CPS is designed as a platform product
which implements the Company's pioneering stem cell replication technology and
which the Company believes can be modified to produce a wide variety of cell
types for emerging therapies. The Aastrom CPS is currently in a pre-pivotal
clinical trial under an Investigational Device Exemption for autologous stem
cell therapy. The Company has entered into a strategic collaboration for the
development of the Aastrom CPS in stem cell therapy with Cobe BCT, Inc., a
subsidiary of Gambro AB and a world leader in blood cell processing products.
In ex vivo gene therapy, the Company is developing a proprietary directed
motion gene transfer process (the "Aastrom Gene Loader") and the Aastrom CPS to
enable high efficiency genetic modification and production of cells.
 
  Stem cell therapy is a rapidly growing form of cell therapy used to restore
blood and immune system function to cancer patients following chemotherapy or
radiation therapy. The Company estimates that over 35,000 stem cell therapy
procedures were completed worldwide in 1995 and that the number of such
procedures is growing at a compound annual rate of over 20%. Other novel cell
therapies are under development by third parties, including stem cell therapy
for the treatment of autoimmune diseases and for augmenting recipient
acceptance of organ transplants. Current stem cell therapy methods, including
bone marrow harvest and peripheral blood progenitor cell mobilization, are
costly, invasive and time-consuming for both medical personnel and patients.
Technologies which facilitate a more readily available source of cells may
contribute to additional growth in cell therapy procedures. Umbilical cord
blood ("UCB") is emerging as a new source of cells for stem cell therapy,
offering additional market opportunity, although the more widespread use of UCB
transplants has been restricted by cell quantity limitations.
 
  The Company believes that the Aastrom CPS will offer significant advantages
over traditional cell collection methods. Compared with current stem cell
collection methods, the Aastrom CPS is expected to involve one patient visit
rather than approximately five to seven visits, less than two hours of
procedure time rather than in excess of twenty hours of procedure time and
approximately four to ten patient needle sticks rather than twenty-five or more
patient needle sticks. The Aastrom CPS may permit higher and more frequent
doses of chemotherapy to be administered to cancer patients by enabling the
production of multiple doses of therapeutic stem cells from patient samples
taken at the initial collection.
 
  Aastrom is currently conducting a pre-pivotal autologous stem cell therapy
trial. The trial is designed to show that cells produced in the Aastrom CPS can
by themselves safely enable recovery of bone marrow and cells of the blood and
immune systems in accordance with trial endpoints in patients who have received
ablative chemotherapy. Based on the outcome of this and other related trials,
the Company intends to seek FDA approval to begin a multi-center pivotal trial
for use of the Aastrom CPS in stem cell therapy. It is anticipated that the
results of this pivotal trial will be used to support the Company's Pre-Market
Approval ("PMA") submission to the FDA. In the near future, the Company plans
to initiate a stem cell therapy clinical trial in France, the results of which
are expected to be used for the CE Mark registration necessary to market the
Aastrom CPS in Europe.
 
  The Company's business strategy is to: (i) establish a consumable-based
business model; (ii) focus initially on the currently-reimbursed stem cell
therapy market; (iii) leverage Aastrom's cell production technology across
multiple cell therapy market opportunities; and (iv) market through
collaborative relationships.
 
  Aastrom has entered into a strategic collaboration with Cobe BCT to support
the development and marketing of the Aastrom CPS in the field of stem cell
therapy. In 1993, the Company entered into a series of agreements in which Cobe
BCT purchased $15,000,000 of the Company's equity securities and acquired the
worldwide distribution rights to the Aastrom CPS for stem cell therapy. Under
the terms of the collaboration, Aastrom retains manufacturing rights as well as
the majority share of all revenue generated by Cobe BCT's sale of the Aastrom
CPS. Aastrom also retains all marketing and distribution rights to the Aastrom
CPS for other cell types and ex vivo gene therapy applications, including stem
cells.
 
  The Company's patent portfolio includes patents relating to both stem and
progenitor cell production, processes for the genetic modification of stem and
other cell types, and cell culture devices for human cells. As of September 30,
1996, the Company had exclusive rights to five issued U.S. and three foreign
patents, and a number of U.S. patent applications and certain corresponding
foreign applications.
 
                                       3

<PAGE>
 
                                  THE OFFERING
 

<TABLE>
<S>                        <C>
Common Stock offered...... 3,250,000 shares
Common Stock to be out-    13,235,734 shares(1)
 standing after this of-
 fering...................
Use of proceeds........... For clinical trials, the development and manufacture
                           of the Aastrom CPS, research and development of
                           other product candidates, working capital and other
                           general corporate purposes.
Proposed Nasdaq National   ASTM
 Market symbol............
</TABLE>

 
                             SUMMARY FINANCIAL DATA
 

<TABLE>
<CAPTION>
                                                                                                 THREE MONTHS
                                             YEAR ENDED JUNE 30,                             ENDED SEPTEMBER 30,
                         ---------------------------------------------------------------  ---------------------------
                            1992         1993         1994         1995         1996         1995           1996
                         -----------  -----------  -----------  -----------  -----------  -----------  --------------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS
 DATA:
Total revenues.......... $       --   $   784,000  $   872,000  $   517,000  $ 1,609,000  $   211,000   $   224,000
Costs and expenses:
 Research and
  development...........   1,090,000    2,600,000    5,627,000    4,889,000   10,075,000    1,195,000     3,160,000
 General and
  administrative........     272,000    1,153,000    1,565,000    1,558,000    2,067,000      446,000       452,000
                         -----------  -----------  -----------  -----------  -----------  -----------   -----------
  Total costs and
   expenses.............   1,362,000    3,753,000    7,192,000    6,447,000   12,142,000    1,641,000     3,612,000
Other income, net.......      94,000      122,000      180,000      213,000      616,000      131,000       115,000
                         -----------  -----------  -----------  -----------  -----------  -----------   -----------
Net loss................ $(1,268,000) $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(1,299,000)  $(3,273,000)
                         ===========  ===========  ===========  ===========  ===========  ===========   ===========
Pro forma net loss per
 share(2)............... $      (.32) $      (.49) $      (.82) $      (.66) $      (.98) $      (.13)  $      (.32)
                         ===========  ===========  ===========  ===========  ===========  ===========   ===========
Pro forma weighted
 average number of
 shares outstanding(2)..   3,919,000    5,840,000    7,461,000    8,644,000   10,103,000   10,094,000    10,107,000
                         ===========  ===========  ===========  ===========  ===========  ===========   ===========
<CAPTION>
                                                                                              SEPTEMBER 30, 1996
                                                                                          ---------------------------
                                                                                            ACTUAL     AS ADJUSTED(3)
                                                                                          -----------  --------------
<S>                                                                                     <C>           <C>
BALANCE SHEET DATA:
 Cash, cash equivalents and short-term investments..................................      $ 7,108,000   $33,410,500
 Working capital....................................................................        6,540,000    32,842,500
 Total assets.......................................................................        8,931,000    35,233,500
 Deficit accumulated during the development stage...................................      (30,298,000)  (30,298,000)
 Total stockholders' equity.........................................................        7,618,000    33,920,500
</TABLE>

- -------
(1) Excludes options and warrants to purchase 1,132,361 shares of Common Stock
    at a weighted average exercise price of $6.50 per share, assuming the
    closing of this offering at a price of $9.00 per share. See "Management--
    Stock Option and Employee Benefit Plans" and Notes 4 and 9 of Notes to
    Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
    computation of pro forma net loss per share and shares used in computing
    pro forma net loss per share.
(3) Adjusted to reflect the sale by the Company of 3,250,000 shares of Common
    Stock offered hereby at an assumed initial public offering price of $9.00
    per share, after deduction of estimated underwriting discounts and
    commissions and estimated offering expenses. See "Use of Proceeds" and
    "Capitalization."
 
  Unless otherwise indicated, all information contained in this Prospectus (i)
gives effect to a two-for-three reverse stock split to be effected prior to the
closing of this offering, (ii) gives effect to the conversion of all
outstanding shares of the Company's Preferred Stock into 8,098,422 shares of
Common Stock upon the closing of this offering, (iii) gives effect to the
filing of an Amended and Restated Articles of Incorporation upon the closing of
this offering to, among other things, create a new class of undesignated
preferred stock and (iv) assumes no exercise of the Underwriters' over-
allotment option. See "Description of Capital Stock" and "Underwriting." This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
 
                                       4

<PAGE>
 

                                 RISK FACTORS
 
  In addition to the other information in this Prospectus, prospective
investors should consider the following risk factors in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.
 
UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY
 
  The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization
of the Company's lead product candidate, the Aastrom CPS, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the Aastrom CPS or its other product
candidates, or successfully market its technologies or product candidates,
which lack of success would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
  The Company or its collaborators may encounter problems and delays relating
to research and development, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. There can be no
assurance that the Company's research and development programs will be
successful, that its cell culture technologies and product candidates will
facilitate the ex vivo production of cells with the expected biological
activities in humans, that its technologies and product candidates, if
successfully developed, will prove to be safe and efficacious in clinical
trials, that the necessary regulatory approvals for any of the Company's
technologies or product candidates and the cells produced in such products
will be obtained or, if obtained, will be as broad as sought, that patents
will issue on the Company's patent applications or that the Company's
intellectual property protections will be adequate. The Company's product
development efforts are primarily directed toward obtaining regulatory
approval to market the Aastrom CPS as an alternative to the bone marrow
harvest and peripheral blood progenitor cell ("PBPC") stem cell collection
methods. These stem cell collection methods have been widely practiced for a
number of years, and there can be no assurance that any of the Company's
technologies or product candidates will be accepted by the marketplace as
readily as these or other competing processes and methodologies, or at all.
The failure by the Company to achieve any of the foregoing would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
UNCERTAINTIES RELATED TO CLINICAL TRIALS
 
  The approval of the United States Food and Drug Administration (the "FDA")
will be required before any commercial sales of the Company's product
candidates may commence in the United States, and approvals from foreign
regulatory authorities will be required before international sales may
commence. Prior to obtaining necessary regulatory approvals, the Company will
be required to demonstrate the safety and efficacy of its processes and
product candidates and the cells produced by such processes and in such
products for application in the treatment of humans through extensive
preclinical studies and clinical trials. To date, the Company has only tested
the safety of cells produced in the cell culture chamber predecessor of the
Aastrom CPS, and only in a limited numbers of patients. The Company is
currently conducting a pre-pivotal clinical trial to demonstrate the safety
and biological activity of patient-derived cells produced in the Company's
cell culture chamber in a limited number of patients with breast cancer and,
if the results from this pre-pivotal trial are successful, the Company intends
to seek clearance from the FDA to commence its pivotal clinical trial. The
results of preclinical studies and clinical trials of the Company's product
candidates, however, may not necessarily be predictive of results that will be
obtained from subsequent or more extensive clinical trials. Further, there can
be no assurance that pre-pivotal or pivotal clinical trials of any of the
Company's product candidates will demonstrate the safety and efficacy of such
products, or of the cells produced in such products, to the extent necessary
to obtain required regulatory approvals or market acceptance.
 
  The ability of the Company to complete its clinical trials in a timely
manner is dependent upon many factors, including the rate of patient
enrollment. Patient enrollment is a function of many factors, including the
size of the patient population, the proximity of suitable patients to clinical
sites and the eligibility criteria for the
 
                                       5

<PAGE>
 
study. The Company has experienced delays in patient accrual in its current
pre-pivotal clinical trial. Further delays in patient accrual, in the
Company's current pre-pivotal clinical trial or in future clinical trials,
could result in increased costs associated with clinical trials or delays in
receiving regulatory approvals and commercialization, if any. Furthermore, the
progress of clinical investigations with the Aastrom CPS and the Company's
other product candidates will be monitored by the FDA, which has the authority
to cease clinical investigations, at any time, due to patient safety or other
considerations. Any of the foregoing would have a material adverse effect on
the Company's business, financial condition and results of operations. See "--
Uncertainty of Regulatory Approval" and "--Extensive Government Regulation."
 
  The Company's current pre-pivotal trial is designed to demonstrate specific
biological safety and activity of cells produced in the Aastrom CPS, but is
not designed to demonstrate long-term sustained engraftment of such cells. The
patients enrolled in this pre-pivotal trial will have undergone extensive
chemotherapy treatment prior to the infusion of cells produced in the Aastrom
CPS. Such treatments will have substantially weakened these patients and may
have irreparably damaged their hematopoietic systems. Due to these and other
factors, there is risk that one or more of these patients may die or suffer
severe complications during the course of the pre-pivotal trial. Further,
there can be no assurance that patients receiving cells produced with the
Company's technologies and product candidates will demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
 
  The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the manufacturing of its product candidates and
their components with third parties, and expects to continue to do so in the
forseeable future. The Company has entered into collaborative product
development agreements with SeaMED Corporation ("SeaMED") and Ethox
Corporation ("Ethox") for the collaborative development and manufacture of
certain components of the Aastrom CPS. The Company is also dependent upon
Immunex Corporation ("Immunex"), Life Technologies, Inc., Biowhittaker and
Anchor Advanced Products for the supply of certain cytokines, serum, media and
injection molded materials, respectively, to be used in conjunction with, or
as components of, the Aastrom CPS. With regard to cytokines that are not
commercially available from other sources, Immunex is currently the Company's
sole supplier and few alternative supply sources exist. Apart from SeaMED,
Ethox and Immunex, the Company currently does not have contractual commitments
from any of these manufacturers or suppliers. There can be no assurance that
the Company's supply of such key cytokines, components and other materials
will not become limited, be interrupted or become restricted to certain
geographic regions. Furthermore, the Company currently only has the right to
distribute cytokines obtained from Immunex in the United States and there can
be no assurance that the Company will be able to obtain the worldwide right to
distribute such cytokines or manufacture such cytokines by or for itself in
the event that the Company's agreement with Immunex is terminated. There can
also be no assurance that the Company will be able to obtain alternative
components and materials from other manufacturers on terms or in quantities
acceptable to the Company or that the Company will not require additional
cytokines, components and other materials to manufacture or use its product
candidates. In the event that any of the Company's key manufacturers or
suppliers fail to perform their respective obligations or the Company's supply
of such cytokines, components or other materials become limited or
interrupted, the Company would not be able to market its product candidates on
a timely and cost-competitive basis, if at all which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  Like SeaMED and Ethox, other suppliers would need to meet FDA manufacturing
requirements and undergo rigorous facility and process validation tests
required by federal and state regulatory authorities. Any significant delays
in the completion and validation of such facilities could have a material
adverse effect on the
 
                                       6

<PAGE>
 
ability of the Company to complete clinical trials and to market its products
on a timely and profitable basis, which in turn would have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
  There can also be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis.
 
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
 
  The Company is a development stage company and there can be no assurance
that its product applications for cell therapy will be successful. The Company
has not yet completed the development and clinical trials of any of its
product candidates and, accordingly, has not yet begun to generate revenues
from the commercialization of any of its product candidates. Aastrom was
incorporated in 1989 and has experienced substantial operating losses since
inception. As of September 30, 1996, the Company has incurred net operating
losses totaling approximately $30.3 million. Such losses have resulted
principally from costs incurred in the research and development of the
Company's cell culture technologies and the Aastrom CPS, general and
administrative expenses, and the prosecution of patent applications. The
Company expects to incur significant and increasing operating losses for at
least the next several years, primarily owing to the expansion of its research
and development programs, including preclinical studies and clinical trials.
The amount of future losses and when, if ever, the Company achieves
profitability are uncertain. The Company's ability to achieve profitability
will depend, among other things, on successfully completing the development of
its product candidates, obtaining regulatory approvals, establishing
manufacturing, sales and marketing arrangements with third parties, and
raising sufficient funds to finance its activities. No assurance can be given
that the Company's product development efforts will be successful, that
required regulatory approvals will be obtained, that any of the Company's
product candidates will be manufactured at a competitive cost and will be of
acceptable quality, or that the Company will be able to achieve profitability
or that profitability, if achieved, can be sustained.
 
LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS
 
  The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution
capabilities. The Company has established a strategic alliance with Cobe
Laboratories, Inc. and Cobe BCT, Inc. (collectively, "Cobe") for the worldwide
distribution of the Aastrom CPS for stem cell therapy and related uses. Cobe
has the right to terminate its Distribution Agreement with the Company upon
twelve month's notice upon a change of control of the Company, other than to
Cobe, or at any time after December 31, 1997, if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. See "--Consequences of Cobe Relationship."
 
  The amount and timing of resources that Cobe commits to its strategic
alliance activities with the Company are, to a significant extent, outside of
the control of the Company. There can be no assurance that Cobe will pursue
the marketing and distribution of the Company's products, continue to perform
its obligations under its agreements with the Company or that the Company's
strategic alliance with Cobe will result in the successful commercialization
and distribution of the Company's technologies and product candidates. There
can also be no assurance that Cobe will be successful in its efforts to market
and distribute the Company's products for stem cell therapy. The suspension or
termination of the Company's strategic alliance with Cobe or the failure of
the strategic alliance to be successful would have a material adverse effect
on the Company's business, financial condition and results of operations.
 
  Subject to the contractual requirements of the Cobe relationship, the
Company will seek to enter into other agreements relating to the development
and marketing of product candidates and in connection with such
 
                                       7

<PAGE>
 
agreements may rely upon corporate partners to conduct clinical trials, seek
regulatory approvals for, manufacture and market its potential products. There
can be no assurance that the Company will be able to establish collaborative
relationships for the development or marketing of the Company's product
candidates on acceptable terms, if at all. The inability of the Company to
establish such collaborative relationships may require the Company to curtail
its development or marketing activities with regard to its potential products
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
 
  To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. The Company anticipates that
the net proceeds of this offering, together with the Company's available cash
and expected interest income thereon, will be sufficient to finance its
research and development and other working capital requirements for 18 months
or less. This estimate is based on certain assumptions which could be
negatively impacted by the matters discussed under this heading and elsewhere
under the caption "Risk Factors." In order to grow and expand its business,
and to introduce its product candidates into the marketplace, the Company will
need, among other things, to raise additional funds.
 
  The Company's future capital requirements will depend upon many factors,
including, but not limited to, continued scientific progress in its research
and development programs, costs and timing of conducting clinical trials and
seeking regulatory approvals and patent prosecutions, competing technological
and market developments, possible changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and effective commercialization activities and
facilities expansions if and as required. Because of the Company's potential
long-term funding requirements, it may attempt to access the public or private
equity markets if and whenever conditions are favorable, even if it does not
have an immediate need for additional capital at that time. There can be no
assurance that any such additional funding will be available to the Company on
reasonable terms, or at all. If adequate funds are not available, the Company
may be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities. If the Company is not successful in finding, entering
into and maintaining arrangements with collaborative partners, its development
efforts could be delayed. Furthermore, there can be no assurance that the
Company will be able to implement collaborative development agreements under
acceptable terms. Any of the foregoing capital constraints would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
 
UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION
 
  The Company's research and development activities, preclinical studies,
clinical trials, and the anticipated manufacturing and marketing of its
product candidates are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. These activities are also
regulated in other countries where the Company intends to test and market its
product candidates. The approval of the FDA will be required before any
commercial sales of the Company's product candidates may commence in the
United States. Additionally, the Company will be required to obtain approvals
from foreign regulatory authorities before international sales may commence.
 
  The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, or as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS for stem cell therapy as a Class III
medical device through the Center for Biologics Evaluation and Research.
However, there can be no assurance that the FDA will ultimately regulate the
Aastrom CPS for stem cell therapy as a medical device or that regulatory
approval for such product will be obtained in a timely fashion or at all.
 
  Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products, and recently proposed a new type of license for autologous
cells manipulated ex vivo and
 
                                       8

<PAGE>
 
intended for structural repair or reconstruction; autologous cells are cells
obtained from, and administered to, the same patient. This proposal may
indicate that the FDA will impose a similar approval requirement on other
types of autologous cellular therapies, such as autologous cells for stem cell
therapy. Any such additional regulatory or approval requirement could
significantly delay the introduction of the Company's product candidates to
the market, and have a material adverse effect on the Company's business,
financial condition and results of operations. Until the FDA issues definitive
regulations covering the Company's product candidates, the regulatory
requirements for approval of such product candidates will continue to be
subject to significant uncertainty.
 
  Before marketing, the Aastrom CPS or other product candidates developed by
the Company must undergo an extensive regulatory approval process. The
regulatory process, which includes preclinical studies and clinical trials to
establish safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent FDA approval. In addition, delays or rejections may be encountered
based upon changes in FDA policy for medical product approvals during the
period of product development and FDA regulatory review of applications
submitted by the Company for product approval. Similar delays may also be
encountered in foreign countries. There can be no assurance that, even after
the expenditures of substantial time and financial resources, regulatory
approval will be obtained for any products developed by the Company. Moreover,
if regulatory approval of a product is obtained, such approval may be subject
to limitations on the indicated uses for which it may be marketed. Further,
even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions
on such product or manufacturer, including a withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. Further,
additional government regulation may be established which could prevent or
delay regulatory approval of the Company's products. See "Business--Government
Regulation."
 
CONSEQUENCES OF COBE RELATIONSHIP
 
  Following the completion of this offering, Cobe will be the largest single
shareholder of the Company, beneficially owning approximately 19% of the
outstanding Common Stock. In addition, Cobe has certain preemptive rights to
maintain its relative percentage ownership and voting interest in the Company
following this offering, and has the right, for a period of three years
following this offering, to purchase from the Company an amount of Common
Stock equal to 30% of the Company's fully diluted shares after the exercise of
such option, at a purchase price equal to 120% of the public market trading
price of the Company's Common Stock. If such option is exercised, Cobe would
significantly increase its ownership interest in the Company and, as a
consequence of such share ownership, obtain effective control of the Company.
Such effective control would include the ability to influence the outcome of
shareholder votes, including votes concerning the election of directors, the
amendment of provisions of the Company's Restated Articles of Incorporation or
Bylaws, and the approval of mergers and other significant transactions. Cobe
also has been granted a "right of first negotiation" in the event that the
Company determines to sell all, or any material portion, of its assets to
another company or to merge with another company. Furthermore, the Company has
agreed to use reasonable and good faith efforts to cause a nominee designated
by Cobe to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding Common Stock. In addition, Edward C. Wood, Jr.,
the President of Cobe BCT, is a director of the Company. The existence of the
foregoing rights or the exercise of such control by Cobe could have the effect
of delaying, deterring or preventing certain takeovers or changes in control
of the management of the Company, including transactions in which shareholders
might otherwise receive a premium for their shares over then-current market
prices. See "Description of Capital Stock--Rights of Cobe."
 
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
 
  Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes,
preserve its trade secrets, defend and enforce its rights against infringement
and
 
                                       9

<PAGE>
 
operate without infringing the proprietary rights of third parties, both in
the United States and in other countries. The validity and breadth of claims
in medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that any patents
based on pending patent applications or any future patent applications of the
Company or its licensors will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the patents that have been or may be issued to the
Company or its licensors will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held or licensed by the Company. Furthermore, there can be
no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
that have been or may be issued to the Company or its licensors. Since patent
applications in the United States are maintained in secrecy until patents
issue, the Company also cannot be certain that others did not first file
applications for inventions covered by the Company's and its licensors'
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications. The
Company relies on certain licenses granted by the University of Michigan and
Dr. Cremonese for the majority of its patent rights. If the Company breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, the Company may lose its rights
under the patents held by the University of Michigan and Dr. Cremonese, which
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business--Patents and Proprietary
Rights--University of Michigan Research Agreement and License Agreement" and
"Business--Patents and Proprietary Rights--License Agreement with J.G.
Cremonese." The Company also relies on trade secrets and unpatentable know-how
which it seeks to protect, in part, by confidentiality agreements with its
employees, consultants, suppliers and licensees. There can be no assurance
that these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets or
unpatentable know-how will not otherwise become known or be independently
developed by competitors.
 
  The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurance that the Company
would be able to obtain such licenses or that such licenses, if available,
could be obtained on commercially reasonable terms. Furthermore, the failure
to either develop a commercially viable alternative or obtain such licenses
could result in delays in marketing the Company's proposed products or the
inability to proceed with the development, manufacture or sale of products
requiring such licenses, which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to defend itself against charges of patent infringement or
to protect its own proprietary rights against third parties, substantial costs
will be incurred regardless of whether the Company is successful. Such
proceedings are typically protracted with no certainty of success. An adverse
outcome could subject the Company to significant liabilities to third parties,
and force the Company to curtail or cease its development and sale of its
products and processes. See "Business--Patents and Proprietary Rights."
 
NO ASSURANCE OF THIRD PARTY REIMBURSEMENT
 
  The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which payment for the Company's products
and related treatments will be available from government healthcare programs,
such as Medicare and Medicaid, as well as private health insurers, health
maintenance organizations and other third party payors. Government and other
third-party payors are increasingly attempting to contain health care costs,
in part by challenging the price of medical products and services.
Reimbursement by third-party payors depend on a number of factors, including
the payor's determination that use of the product
 
                                      10

<PAGE>
 
is safe and effective, not experimental or investigational, medically
necessary, appropriate for the specific patient and cost-effective. Since
reimbursement approval is required from each payor individually, seeking such
approvals is a time-consuming and costly process which will require the
Company to provide scientific and clinical support for the use of each of the
Company's products to each payor separately. Significant uncertainty exists as
to the payment status of newly approved medical products, and there can be no
assurance that adequate third-party payments will be available to enable the
Company to establish or maintain price levels sufficient to realize an
appropriate return on its investment in product development. If adequate
payment levels are not provided by government and third-party payors for use
of the Company's products, the market acceptance of those products will be
adversely affected.
 
  There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's product candidates, that
any reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payors will not reduce the demand for, or
negatively affect the price of, the Company's products. The unavailability or
inadequacy of third-party reimbursement for the Company's product candidates
would have a material adverse effect on the Company. Finally, the Company is
unable to forecast what additional legislation or regulation relating to the
healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have on the
Company's business.
 
COMPETITION AND TECHNOLOGICAL CHANGE
 
  The Company is engaged in the development of medical products and processes
which will face competition in a marketplace characterized by rapid
technological change. Many of the Company's competitors have significantly
greater resources than the Company, and have developed and may develop product
candidates and processes that directly compete with the Company's products.
Moreover, competitors that are able to achieve patent protection, obtain
regulatory approvals and commence commercial sales of their products before
the Company, and competitors that have already done so, may enjoy a
significant competitive advantage. The Company's product development efforts
are primarily directed toward obtaining regulatory approval to market the
Aastrom CPS for stem cell therapy. That market is currently dominated by the
bone marrow harvest and PBPC collection methods. The Company's clinical data,
although early, is inconclusive as to whether or not cells expanded in the
Aastrom CPS will enable hematopoietic recovery within the time frames
currently achieved by the bone marrow harvest and PBPC collection methods. In
addition, the bone marrow harvest and PBPC collection methods have been widely
practiced for a number of years and, recently, the patient costs associated
with these procedures have begun to decline. There can be no assurance that
the Aastrom CPS method, if approved for marketing, will prove to be
competitive with these established collection methods on the basis of
hematopoietic recovery time, cost or otherwise. The Company also is aware of
certain other products manufactured or under development by competitors that
are used for the prevention or treatment of certain diseases and health
conditions which the Company has targeted for product development. In
particular, the Company is aware that competitors such as Amgen, Inc.,
CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp. and Rhone-
Poulenc Rorer Inc. ("RPR") are in advanced stages of development of
technologies and products for use in stem cell therapy and other market
applications currently being pursued by the Company. In addition, Cobe, a
significant shareholder of the Company, is a market leader in the blood cell
processing products industry and, accordingly, a potential competitor of the
Company. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive,
that the Company will be able to keep pace with new technological developments
or that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
HAZARDOUS MATERIALS
 
  The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and
 
                                      11

<PAGE>
 
regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. In the event of any contamination
or injury from these materials, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company. Furthermore, the failure to comply with current or future regulations
could result in the imposition of substantial fines against the Company,
suspension of production, alteration of its manufacturing processes or
cessation of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with any such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Any failure by the Company to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of,
or assist in the cleanup of, hazardous chemicals or hazardous, infectious or
toxic substances could subject the Company to significant liabilities,
including joint and several liability under certain statutes. The imposition
of such liabilities would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
 
  The Company is, and will continue to be, subject to the risk of product
liability claims alleging that the use of its products has adverse effects on
patients. This risk exists for product candidates tested in human clinical
trials as well as products that are sold commercially, if any. Further, given
the medical conditions for which the Aastrom CPS is expected to be utilized,
any product liability claim could entail substantial compensatory and punitive
damages. The assertion of product liability claims against the Company could
result in a substantial cost to, and diversion of efforts by, the Company.
There can be no assurance that the Company would prevail in any such
litigation or that product liability claims, if made, would not result in a
recall of the Company's products or a change in the indications for which they
may be used. The Company maintains product liability insurance coverage in the
aggregate of $5,000,000 for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that the Company will
be able to maintain such insurance or obtain product liability insurance in
the future to cover any of its product candidates which are commercialized or
that such existing or any future insurance and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. Consequently, a product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
DEPENDENCE ON KEY PERSONNEL
 
  The success of the Company depends in large part upon the Company's ability
to attract and retain highly qualified scientific and management personnel.
The Company faces competition for such personnel from other companies,
research and academic institutions and other entities. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. See "Business--Employees" and "Management."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
  Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon
completion of this offering, the Company will have a total of 13,235,734
shares of Common Stock outstanding, of which the 3,250,000 shares offered
hereby will be freely tradeable without restriction under the Securities Act
of 1933, as amended (the "Securities Act") by persons other than "affiliates"
of the Company, as defined under the Securities Act. The remaining 9,985,734
shares of Common Stock outstanding are "restricted securities" as the term is
defined by Rule 144 promulgated under the Securities Act (the "Restricted
Shares"). Of the 9,985,734 Restricted Shares, 6,996,920 shares may be sold
under Rule 144, subject in some cases to certain volume restrictions and other
conditions imposed thereby. An additional 152,056 shares will become eligible
for sale 90 days after completion of the offering pursuant to Rule 144 and
701. The remaining 2,836,758 shares will be eligible for sale upon the
expiration of their respective holding periods as set forth in Rule 144. The
Securities and Exchange Commission has proposed certain amendments to Rule 144
that would reduce by one year the holding periods required for shares subject
to Rule 144 to become eligible for resale in
 
                                      12

<PAGE>
 
the public market. This proposal, if adopted, would permit earlier resale of
shares of Common Stock currently subject to holding periods under Rule 144. No
assurance can be given concerning whether or when the proposal will be adopted
by the Securities and Exchange Commission. Furthermore, 9,810,503 of the
Restricted Shares are subject to lock-up agreements expiring 180 days
following the date of this Prospectus. Such agreements provide that Cowen &
Company may, in its sole discretion and at any time without notice, release
all or a portion of the shares subject to these lock-up agreements. Upon the
expiration of the lock-up agreements, 7,148,976 of the 9,985,734 Restricted
Shares may be sold pursuant to Rule 144 or 701, subject in some cases to
certain volume restrictions imposed thereby. Certain existing stockholders
have rights to include shares of Common Stock owned by them in future
registration by the Company for the sale of Common Stock or to request that
the Company register their shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Following the date of this Prospectus,
the Company intends to register on one or more registration statements on Form
S-8 approximately 1,837,160 shares of Common Stock issuable under its stock
option and stock purchase plans. Of the 1,837,160 shares issuable under its
stock option and stock purchase plans, 336,254 shares are subject to
outstanding options as of September 30, 1996, 318,920 of which shares are
subject to lock-up agreements. Shares covered by such registration statements
will immediately be eligible for sale in the public market upon the filing of
such registration statements. In addition, the Company has issued warrants to
purchase 69,444 shares of Common Stock which become exercisable 90 days after
the closing of this offering and, upon the effective date of this offering,
will grant an immediately exercisable option to purchase 333,333 shares of
Common Stock, which shares are subject to a lock-up agreement. See
"Management--Benefit Plans," "Certain Transactions" and "Shares Eligible for
Future Sale."
 
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
 
  Upon completion of this offering, the Company's directors, executive
officers, and certain principal shareholders, including Cobe, affiliated with
members of the Board of Directors and their affiliates will beneficially own
approximately 39% of the Common Stock (approximately 38% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such shareholders,
acting together, may have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to
the Company's shareholders for approval. The voting power of these holders may
discourage or prevent certain takeovers or changes in control of the
management of the Company unless the terms are approved by such holders. See
"Principal Shareholders."
 
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
 
  Prior to this offering there has been no public market for the Common Stock,
and an active public market for the Common Stock may not develop or be
sustained. The initial public offering price will be determined through
negotiation between the Company and the Representatives of the Underwriters
based on several factors that may not be indicative of future market prices.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price. The trading price of the Common Stock and
the price at which the Company may sell securities in the future could be
subject to wide fluctuations in response to announcements of clinical results,
research activities, technological innovations or new products by the Company
or competitors, changes in government regulation, developments concerning
proprietary rights, variations in the Company's operating results,
announcements by the Company of regulatory developments, litigation, disputes
concerning patents or proprietary rights or public concern regarding the
safety, efficacy or other implications of the products or methodologies to be
developed by the Company or its collaborators or enabled by the Company's
technology, general market conditions, the liquidity of the Company or its
ability to raise additional funds, and other factors or events. In addition,
the stock market has experienced extreme fluctuations in price and volume.
This volatility has significantly affected the market prices for securities of
emerging biotechnology companies for reasons frequently unrelated to or
disproportionate to the operating performance of the specific companies. These
market fluctuations as well as general fluctuations in the stock markets may
adversely affect the market price of the Common Stock.
 
ANTI-TAKEOVER EFFECT OF CHARTER AND BY-LAW PROVISIONS AND MICHIGAN LAW
 
  The Company's Restated Articles of Incorporation authorize the Board of
Directors to issue, without shareholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion, and other rights and
 
                                      13

<PAGE>
 
preferences that could materially and adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of Preferred Stock
or of rights to purchase Preferred Stock could be used to discourage an
unsolicited acquisition proposal. The Company's Bylaws contain procedural
restrictions on director nominations by shareholders and the submission of
other proposals for consideration at shareholder meetings. The possible
issuance of Preferred Stock and the procedures required for director
nominations and shareholder proposals could discourage a proxy contest, make
more difficult the acquisition of a substantial block of Common Stock, or
limit the price that investors might be willing to pay in the future for
shares of Common Stock. In addition, certain provisions of Michigan law
applicable to the Company could also delay or make more difficult a merger,
tender offer, or proxy contest involving the Company. See "Description of
Capital Stock."
 
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
 
  Purchasers of the Common Stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the Common Stock.
Additional dilution is likely to occur upon the exercise of outstanding
options granted by the Company. The Company has never paid cash dividends and
does not anticipate paying any cash dividends in the foreseeable future. See
"Dilution" and "Dividend Policy."
 

                                  THE COMPANY
 
  Aastrom was incorporated in Michigan in March 1989 under the name Ann Arbor
Stromal, Inc. In 1991, the Company changed its name to Aastrom Biosciences,
Inc. The Company's principal executive offices are located at 24 Frank Lloyd
Wright Drive, P.O. Box 376, Ann Arbor, Michigan 48106 and its telephone number
is
(313) 930-5555. Aastrom(TM) and the Company's stylized logo are trademarks of
the Company. Leukine and Neupogen are registered trademarks of Immunex
Corporation and Amgen, Inc., respectively.
 

                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered hereby are estimated to be $26,302,500 ($30,382,875 if
the Underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $9.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
 
  The net proceeds from this offering are expected to be used to fund product
development of the Aastrom CPS, other research and development activities,
including pre-pivotal and pivotal clinical trials of the Aastrom CPS, and for
working capital and other general corporate purposes, including scheduled
repayments of obligations under equipment leases. The Company has $339,000 of
outstanding equipment lease commitments as of September 30, 1996 with final
payments due between November 1996 and May 1999 and bear interest ranging from
9.7% to 12.1%.
 
  The Company anticipates that the net proceeds of this offering, together
with the Company's available cash and expected interest income thereon, should
be sufficient to finance the Company's research and development and other
working capital requirements for approximately 18 months. This estimate is
based on certain assumptions which could be negatively impacted by the matters
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending such uses, the net proceeds will be invested in short-
term, interest bearing investment grade securities.
 

                                DIVIDEND POLICY
 
  The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying such cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all future
earnings, if any, for use in the development of its business.
 
                                      14

<PAGE>
 

                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company (i) as of
September 30,1996, and (ii) on a pro forma as adjusted basis to reflect the
conversion of all outstanding shares of Preferred Stock into Common Stock upon
the closing of this offering and the receipt of the estimated net proceeds
from the Company's sale of 3,250,000 shares of Common Stock pursuant to this
offering. See "Use of Proceeds" and "Certain Transactions."
 

<TABLE>
<CAPTION>
                                                         SEPTEMBER 30, 1996
                                                      -------------------------
                                                                    PRO FORMA
                                                        ACTUAL     AS ADJUSTED
                                                      -----------  ------------
<S>                                                   <C>          <C>
Long-term portion of capital lease obligations(1).... $   147,000  $    147,000
Stockholders' equity(2):
 Preferred stock, no par value: 10,157,647 shares au-
    thorized, 9,657,648 shares issued and outstand-
    ing, actual; 5,000,000 shares authorized, no
    shares issued and outstanding, as adjusted.......  37,718,000           --
 Common stock, no par value: 18,500,000 shares autho-
    rized, 1,887,312 shares issued and outstanding,
    actual; 40,000,000 shares authorized, 13,235,734
    issued and outstanding, as adjusted, in each case
    net of stockholder notes receivable..............     198,000    64,218,500
Deficit accumulated during the development stage..... (30,298,000)  (30,298,000)
                                                      -----------  ------------
Total stockholders' equity...........................   7,618,000    33,920,500
                                                      -----------  ------------
Total capitalization................................. $ 7,765,000  $ 34,067,500
                                                      ===========  ============
</TABLE>

- --------
(1) See Note 7 of Notes to Financial Statements.
(2) Excludes options and warrants to purchase 1,132,361 shares of Common Stock
    at a weighted average exercise price of $6.50 per share, assuming the
    closing of this offering at a price of $9.00 per share. See "Management--
    Stock Option and Employee Benefit Plans" and Notes 4 and 9 of Notes to
    Financial Statements.
 
                                      15

<PAGE>
 
                                   DILUTION
 
  The Company's pro forma net tangible book value at September 30, 1996 was
approximately $7,618,000 or $.76 per share. Pro forma net tangible book value
per share represents the amount of the Company's shareholders' equity, less
intangible assets, divided by 9,985,734, the number of shares of Common Stock
outstanding as of September 30, 1996, after giving effect to the automatic
conversion of all Preferred Stock into Common Stock upon the closing of this
offering.
 
  After giving effect to the sale of 3,250,000 shares of Common Stock in this
offering at an assumed initial public offering price of $9.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the pro forma net tangible book value of the
Company as of September 30, 1996 would have been $33,920,500, or $2.56 per
share. This represents an immediate increase in pro forma net tangible book
value of $1.80 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $6.44 per share to purchasers of Common
Stock in this offering, as illustrated in the following table:
 

<TABLE>
     <S>                                                            <C>   <C>
     Assumed initial public offering price per share...............       $9.00
      Pro forma net tangible book value per share as of September
       30, 1996.................................................... $ .76
      Increase per share attributable to new investors.............  1.80
                                                                    -----
     Pro forma net tangible book value per share after this offer-
      ing..........................................................        2.56
                                                                          -----
     Dilution per share to new investors...........................       $6.44
                                                                          =====
</TABLE>

 
  Utilizing the foregoing assumptions, the following table summarizes the
total consideration paid to the Company and the average price per share paid
by the existing stockholders and by purchasers of shares of Common Stock in
this offering:
 

<TABLE>
<CAPTION>
                           SHARES PURCHASED     TOTAL CONSIDERATION
                         --------------------- ---------------------- AVERAGE PRICE
                           NUMBER   PERCENTAGE   AMOUNT    PERCENTAGE   PER SHARE
                         ---------- ---------- ----------- ---------- -------------
<S>                      <C>        <C>        <C>         <C>        <C>
Existing stockholders...  9,985,734     75%    $38,083,000     57%        $3.81
New investors...........  3,250,000     25%     29,250,000     43%         9.00
                         ----------    ---     -----------    ---
  Total................. 13,235,734    100%    $67,333,000    100%
                         ==========    ===     ===========    ===
</TABLE>

- --------
  The foregoing excludes options and warrants to purchase 1,132,361 shares of
Common Stock at a weighted average exercise price of $6.50 per share, assuming
the closing of this offering at a price of $9.00 per share. In the event such
options and warrants are exercised, investors may experience further dilution.
See "Management--Stock Option and Employee Benefit Plans" and Notes 4 and 9 of
Notes to Financial Statements.
 
                                      16

<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The statement of operations data for the fiscal years ended June 1994, 1995
and 1996, and the balance sheet data at June 30, 1995 and 1996, are derived
from, and are qualified by reference to, the audited financial statements
included elsewhere in the Prospectus and should be read in conjunction with
those financial statements and notes thereto. The statement of operations data
for the fiscal years ended June 30, 1992 and 1993, and the balance sheet data
at June 30, 1992, 1993 and 1994, are derived from audited financial statements
not included herein. The information presented below for the three-month
periods ended September 30, 1995 and 1996, and as of September 30, 1996, have
been derived from the unaudited financial statements of the Company. In the
opinion of the Company's management, the unaudited financial statements have
been prepared by the Company on a basis consistent with the Company's audited
financial statements and include all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the financial
position and the results of operations for those periods. Operating results
for the three-month period ended September 30, 1996 are not necessarily
indicative of the results that will be achieved for the entire year ended June
30, 1997. The data set forth below are qualified by reference to, and should
be read in conjunction with, the financial statements and notes thereto, and

Management's Discussion and Analysis of Financial Condition and Results of
Operations.
 

<TABLE>
<CAPTION>
                                                                                                     THREE MONTHS
                                                   YEAR ENDED JUNE 30,                            ENDED SEPTEMBER 30,
                               ---------------------------------------------------------------  ------------------------
                                  1992         1993         1994         1995         1996         1995         1996
                               -----------  -----------  -----------  -----------  -----------  -----------  -----------
<S>                            <C>          <C>          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 Research and development
  agreements.................  $       --   $       --   $    49,000  $   396,000  $ 1,342,000  $   172,000  $   195,000
 Grants......................          --       784,000      823,000      121,000      267,000       39,000       29,000
                               -----------  -----------  -----------  -----------  -----------  -----------  -----------
 Total revenues..............          --       784,000      872,000      517,000    1,609,000      211,000      224,000
Costs and expenses:
 Research and development....    1,090,000    2,600,000    5,627,000    4,889,000   10,075,000    1,195,000    3,160,000
 General and administrative..      272,000    1,153,000    1,565,000    1,558,000    2,067,000      446,000      452,000
                               -----------  -----------  -----------  -----------  -----------  -----------  -----------
 Total costs and expenses....    1,362,000    3,753,000    7,192,000    6,447,000   12,142,000    1,641,000    3,612,000
Loss before other income and
 expense.....................   (1,362,000)  (2,969,000)  (6,320,000)  (5,930,000) (10,533,000)  (1,430,000)  (3,388,000)
Other income (expense):
 Interest income.............       94,000      148,000      245,000      279,000      678,000      149,000      126,000
 Interest expense............          --       (26,000)     (65,000)     (66,000)     (62,000)     (18,000)     (11,000)
                               -----------  -----------  -----------  -----------  -----------  -----------  -----------
Net loss.....................  $(1,268,000) $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(1,299,000) $(3,273,000)
                               ===========  ===========  ===========  ===========  ===========  ===========  ===========
Pro forma net loss per
 share(1)....................  $      (.32) $      (.49) $      (.82) $      (.66) $      (.98) $      (.13) $      (.32)
                               ===========  ===========  ===========  ===========  ===========  ===========  ===========
Pro forma weighted average
 number of shares
 outstanding(1)..............    3,919,000    5,840,000    7,461,000    8,644,000   10,103,000   10,094,000   10,107,000
                               ===========  ===========  ===========  ===========  ===========  ===========  ===========
</TABLE>

 

<TABLE>
<CAPTION>
                                                 JUNE 30,                               SEPTEMBER 30,
                         -------------------------------------------------------------  -------------
                            1992        1993        1994         1995         1996          1996
                         ----------  ----------  -----------  -----------  -----------  -------------
<S>                      <C>         <C>         <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
 Cash, cash equivalents
  and
  short-term invest-
  ments................. $5,640,000  $3,085,000  $ 6,730,000  $11,068,000  $10,967,000   $ 7,108,000
 Working capital........  5,399,000   2,744,000    6,187,000   10,319,000    9,851,000     6,540,000
 Total assets...........  6,414,000   4,156,000    8,227,000   12,551,000   12,673,000     8,931,000
 Deficit accumulated
  during the
  development stage..... (2,404,000) (5,251,000) (11,391,000) (17,108,000) (27,025,000)  (30,298,000)
 Total stockholders' eq-
  uity..................  6,104,000   3,268,000    6,985,000   11,186,000   10,850,000     7,618,000
</TABLE>

- --------
(1) See Note 1 of Notes to Financial Statements for information concerning the
    computation of pro forma net loss per share and shares used in computing
    pro forma net loss per share.
 
                                      17

<PAGE>
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
  Since inception, the Company has been in the development stage and engaged
in research and product development, conducted both on its own behalf and in
connection with various collaborative research and development agreements with
other entities. The Company expects that its revenue sources for at least the
next several years will continue to be limited to grant revenues and research
funding, milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future revenues, if any, will be
subject to significant fluctuations, based in part on the success of the
Company's research activities and the timing of the achievement of certain
milestones. Substantially all of the Company's revenues from product sales, if
any, will be subject to royalty payments ranging from 2% to 5%. Further, under
the Company's Distribution Agreement with Cobe, Cobe will perform marketing
and distribution activities and in exchange will receive from 38% to 42% of
the Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume-based adjustments. Research and development
expenses may fluctuate due to the timing of expenditures for the varying
stages of the Company's research and clinical development programs. Research
and development expenses will increase as product development programs and
applications of the Company's products progress through research and
development stages. Under the Company's License Agreement with Immunex, annual
renewal fees of $1,000,000 are payable in each of the next four years. Under
the Company's Distribution Agreement with Cobe, regulatory approval activities
for the Company's products for stem cell therapies outside of the United
States will be conducted, and paid for, by Cobe. As a result of these factors,
the Company's results of operations have, and are expected to continue to,
fluctuate significantly from year to year and from quarter to quarter and
therefore may not be comparable to or indicative of the results of operations
for other periods.
 
  Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs and administration.
Assuming capital is available to finance such growth, the Company's operating
expenses will continue to increase as a result. At least until such time as
the Company enters into arrangements providing research and development
funding, the net loss will continue to increase as well. The Company has been
unprofitable since its inception and does not anticipate having net income for
several years. Through September 30, 1996, the Company had an accumulated
deficit of $30,298,000. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis, if at all.
 
  This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed under this caption, as well as those discussed under
the caption "Risk Factors" and elsewhere in this Prospectus.
 
RESULTS OF OPERATIONS
 
  THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
 
  Total revenues were $224,000 for the three months ended September 30, 1996
compared to $211,000 for the same period in 1995. These revenues consist
primarily of research and development revenue under the Company's research
collaboration with RPR, which was terminated in September 1996. See "Certain
Transactions."
 
  Total costs and expenses were $3,612,000 for the three months ended
September 30, 1996 compared to $1,641,000 for the same period in 1995. The
increase in costs and expenses in 1996 is primarily the result of an increase
in research and development expenses to $3,160,000 in 1996 from $1,195,000 in
1995 and to a lesser extent by general and administrative expenses, which
increased to $452,000 for the three months ended September 30, 1996 from
$446,000 for the same period in 1995.
 
                                      18

<PAGE>
 
  Interest income was $126,000 for the three months ended September 30, 1996
compared to $149,000 for the same period in 1995 and reflects a decrease in
the levels of cash, cash equivalents and short-term investments in 1996.
 
  The Company's net loss increased to $3,273,000 for the three months ended
September 30, 1996 from $1,299,000 for the same period in 1995, primarily as a
result of increased costs and expenses in 1996.
 
  YEARS ENDED JUNE 30, 1996, 1995 AND 1994
 
  Total revenues were $1,609,000 in 1996, $517,000 in 1995, and $872,000 in
1994. Grant revenues increased to $267,000 in 1996 from $121,000 in 1995,
which had decreased from $823,000 in 1994, reflecting the timing of grant
awards and related research activities and funding under the grants. Grant
revenues accounted for 17%, 23% and 94% of total revenues for the years ended
June 30, 1996, 1995 and 1994, respectively. Revenues from research and
development agreements totaled $1,342,000 in 1996, $396,000 in 1995 and
$49,000 in 1994, reflecting research funding received by the Company under its
collaboration with RPR which commenced in September 1995. Revenues from RPR
accounted for 83% and 48% of such revenue in 1996 and 1995, respectively. In
September 1996, the Company's research collaboration with RPR terminated.
 
  Total costs and expenses were $12,142,000 in 1996, $6,447,000 in 1995, and
$7,192,000 in 1994. The increase in 1996 costs and expenses, compared with
1995, is primarily the result of an increase in research and development
expense to $10,075,000 in 1996 from $4,889,000 in 1995. The increase in
research and development expense reflects an increase in research, clinical
development and product development activities. The decrease in costs and
expenses in 1995, compared with 1994, is primarily the result of a decrease in
research and development expense to $4,889,000 in 1995 from $5,627,000 in
1994. General and administrative expenses were $2,067,000 in 1996, $1,558,000
in 1995 and $1,565,000 in 1994. The increase in general and administrative
expenses in 1996 is the result of increasing finance, legal and other
administrative and marketing expenses which are expected to continue to
increase in support of the Company's increasing product development and
research activities. The decrease in general and administrative expense in
1995 is reflective of generally lower spending in 1995 as compared to 1994.
 
  Interest income was $678,000 in 1996, $279,000 in 1995, and $245,000 in
1994. The increases in interest income in 1996 and 1995 are due primarily to
corresponding increases in the levels of cash, cash equivalents and short-term
investments for such periods. Interest expense was $62,000 in 1996, $66,000 in
1995, and $65,000 in 1994, reflecting varying amounts outstanding under
capital leases during the periods.
 
  The Company's net loss was $9,917,000 in 1996, $5,717,000 in 1995, and
$6,140,000 in 1994. The Company expects to report substantial net losses for
at least the next several years.
 
  The Company has not generated any net income to date and therefore has not
paid any federal income taxes since inception. At June 30, 1996, the Company
had deferred tax assets totaling $9,650,000 consisting primarily of net
operating loss and research tax credits that begin to expire from 2004 through
2011, if not utilized. A full valuation allowance for deferred tax assets has
been provided. Utilization of federal income tax carryforwards is subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. The completion of this offering is likely to limit the Company's
ability to utilize federal income tax carryforwards under Section 382. The
annual limitation could result in expiration of net operating losses and
research and development credits before their complete utilization.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has financed its operations since inception primarily through
private placements of Preferred Stock and other equity investments, which from
inception, have totaled approximately $37,916,000, and to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest
 
                                      19

<PAGE>
 
earned on cash, cash equivalents, and short-term investments, and funding
under equipment leasing agreements. These financing sources have historically
allowed the Company to maintain adequate levels of cash and other liquid
investments.
 
  The Company's combined cash, cash equivalents and short-term investments
totaled $10,967,000 at June 30, 1996, a decrease of $101,000 from June 30,
1995. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1996 included $8,967,000 to finance the
Company's operations and working capital requirements, $445,000 in capital
equipment additions and $270,000 in scheduled debt payments. During the year
ended June 30, 1996, the Company received $3,500,000 in equity payments from
RPR and $5,965,000 in net proceeds from the sale of Series E Convertible
Preferred Stock. The Company plans to continue its policy of investing excess
funds in short-term, investment-grade, interest-bearing instruments.
 
  The Company's combined cash, cash equivalents and short-term investments
totaled $7,108,000 as of September 30, 1996 compared to $10,967,000 at June
30, 1996. The decrease was primarily attributable to the use of $3,614,000 to
fund operations and working capital requirements during the period and to a
lesser degree by $173,000 in capital equipment purchases and $73,000 in
scheduled debt payments.
 
  In October 1996, the Company executed a financing commitment to provide the
Company with up to $5,000,000 in additional equity funding from Cobe and
$5,000,000 under a convertible loan agreement with another current investor.
In connection with the convertible loan agreement, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made hereby; or (b) 85% of the fair market value
of the Company's Common Stock at the time of exercise. As of the date of this
Prospectus, the Company has not obtained any financing under these
commitments. These funding commitments expire upon the closing of this
offering.
 
  The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for several years, if
at all, due to the expected increase in spending for research and development
programs and the expected cost of commercializing its product candidates. The
Company may seek additional funding through research and development
agreements with suitable corporate collaborators and through public or private
financing transactions. The Company anticipates that the net proceeds of this
offering, together with the Company's available cash and expected interest
income thereon, will be sufficient to finance its research and development and
other working capital requirements for 18 months or less. This estimate is
based on certain assumptions which could be negatively impacted by the matters
discussed under this heading and elsewhere under the caption "Risk Factors."
The Company expects that its primary sources of capital for the foreseeable
future will be through collaborative arrangements and through the public or
private sale of its equity securities. There can be no assurance that such
collaboration arrangements, or any public or private financing transaction,
will be available on acceptable terms, if at all, or can be sustained on a
long-term basis. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
research and development programs, which may have a material adverse effect on
the Company's business. See "Risk Factors--Future Capital Needs; Uncertainty
of Additional Funding" and Notes to Financial Statements.
 
RECENT PRONOUNCEMENTS
 
  During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based
compensation and incentive plans and requires additional disclosures for those
companies that elect not to adopt
 
                                      20

<PAGE>
 
the new method of accounting. Adoption of the new accounting pronouncement is
required for the Company's fiscal year beginning July 1, 1996 and the Company
intends to provide the additional disclosures required by the pronouncement in
its financial statements for the year ended June 30, 1997.
 
  During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires the Company to review
for impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will
become effective for the Company's fiscal year beginning July 1, 1996.
Management has studied the effect of implementing SFAS 121 and, based upon its
initial evaluation, does not expect it to have a significant impact on the
Company's financial condition or results of operations.
 
                                      21

<PAGE>
 

 
                                  BUSINESS
 
OVERVIEW
 
  Aastrom is developing proprietary process technologies and devices for a
range of cell therapy applications, including stem cell therapies and gene
therapy. The Company's lead product under development, the Aastrom Cell
Production System (the "Aastrom CPS"), consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method
will be less costly, less invasive and less time consuming than currently
available stem cell collection methods. The Aastrom CPS is designed as a
platform product which implements the Company's pioneering stem cell
replication technology and which the Company believes can be modified to
produce a wide variety of cell types for emerging therapies. The Aastrom CPS
is currently in a pre-pivotal clinical trial under an IDE for autologous stem
cell therapy. The Company has entered into a strategic collaboration for the
development of the Aastrom CPS in stem cell therapy with Cobe BCT, Inc., a
subsidiary of Gambro AB and a world leader in blood cell processing products.
Additionally, Aastrom is developing products and processes for the delivery of
ex vivo gene therapy that are designed to address the production of gene-
modified cells.
 
CELL THERAPY
 
  Cell therapy is the use of human cells to treat a medical disorder. The most
common types of cell therapy, blood and platelet transfusions, have been
widely used for many decades. More recently, bone marrow-derived cells have
been used to restore the bone marrow and the blood and immune system cells
which are damaged by chemotherapy and radiation therapy during the treatment
of many cancers. Transplantation of these cells is known as stem cell therapy.
Other cell therapies have recently been used for generating skin and cartilage
tissue and additional cell therapies are being developed by various companies
and researchers to restore immune system cells as well as bone, kidney, liver,
vascular and neuronal tissues.
 
  Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with FDA good manufacturing practices ("GMP"), which are not generally
available in hospitals. As a result, cells needed for such therapies often
require specialized cell production facilities which use labor-intensive,
manual cell culture techniques.
 
  There are numerous forms of cell therapy at an early stage of development.
One such example is ex vivo gene therapy, in which genes are introduced into
target cells in order to selectively correct or modulate disease conditions,
or to modify cells for production of a therapeutic protein. The Company
believes that the successful practice of ex vivo gene therapy will require the
development of processes and products for the reliable, high-efficiency
transfer of genes into cells and a means to produce the necessary dose of the
genetically modified cells under GMP conditions.
 
STEM CELL THERAPY
 
  Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic
system, which is comprised of the bone marrow and cells of the blood and
immune systems. The objective of stem cell therapy is to restore the
hematopoietic system via the infusion and subsequent engraftment of healthy
cells to replace bone marrow and result in the rapid recovery of neutrophils
and platelets that have been destroyed by chemotherapy and radiation therapy.
Stem cell therapy
 
                                      22

<PAGE>
 
reduces the risk of life-threatening infections and bleeding episodes
following cancer treatments. In order to treat many cancers, high intensity
chemotherapy or radiation is often required, which may severely destroy
("myeloablation") or partially destroy ("myelosuppression") the patient's
hematopoietic system.
 
  Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment
the growth of bone marrow. In the adult, all of these cell types originate in
the bone marrow. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under anesthesia, known as bone
marrow collection, or through blood apheresis following treatment with drugs
which cause cells to be released or mobilized from the bone marrow into the
blood. This latter technique is known as a peripheral blood progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently,
it has been demonstrated that the blood cells found in the umbilical cord of
newborn infants include cells effective for stem cell therapy. This source of
cells is being explored by physicians as a major new direction in stem cell
therapy, but is currently limited by difficulties in obtaining sufficient
quantities of these cells.
 
  Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, cells from a suitable
donor are generally required in order to avoid reintroducing the disease
during cell infusion. Such donor derived transplants are termed "allogeneic"
transplants. Procedures using cells derived from the patient are termed
"autologous" transplants.
 
  STEM CELL THERAPY MARKET OPPORTUNITY
 
  The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. Stem cell therapy, in the
form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been
shown to promote the rapid recovery of hematopoietic function, it is now being
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high
intensity therapies have a greater probability of eradicating dose sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be
given without stem cell therapy. As a result, some patients are treated with
lower and less effective doses, and fewer cycles, of therapy than might
otherwise be used.
 
  The Company estimates that over 35,000 stem cell therapy procedures were
completed worldwide in 1995, and that the number of such procedures is growing
at a compound annual rate of over 20%. This growth has been driven by
encouraging clinical results in the treatment of dose-sensitive solid tumors,
such as breast and ovarian cancers. The Company expects that stem cell therapy
procedures will continue to grow due to increased incidence and prevalence of
cancer, continued clinical demand for myelotoxic cancer treatment, and the
increased cost effectiveness of stem cell therapy treatments.
 
  Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets because
a delayed recovery of these cells can leave the patient susceptible to life-
threatening infection and bleeding episodes, and this limitation may allow for
the regrowth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such
as Leukine, which enhance the development of mature circulating white blood
cells and platelets from the early progenitor bone-marrow derived cells,
thereby decreasing the time between cycles of therapy and the probability of
infection. However, during high dose or multi-cycle therapy, the stem and
progenitor cells on which these growth
 
                                      23

<PAGE>
 
factors act are often depleted. Without these cells, growth factors have a
limited or negligible effect. Stem cell therapy generally enhances the
effectiveness of growth factors by introducing target stem and progenitor
cells for growth factors to act upon such that patients generally exhibit a
more rapid and consistent hematopoietic recovery.
 
  CURRENT STEM CELL COLLECTION METHODS
 
  Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBPC
collection method.
 
  Bone Marrow Harvest
 
  A traditional bone marrow harvest is a costly and invasive surgical
procedure in which a physician removes approximately one liter of bone marrow
from a patient or donor. This volume of bone marrow is removed using needles
inserted into the cavity of the hip bone. The bone marrow harvest procedure
typically requires between two to four hours of operating room time, with the
physician often making more than 100 separate puncture sites in the hip bone
to collect the necessary amount of bone marrow. Due to the length of the
procedure and the trauma to the patient, general surgical anesthesia is
administered and the patient is typically hospitalized for a day. Frequently,
the patient suffers pain from the procedure for several days after being
discharged from the hospital. Furthermore, complications resulting from the
general anesthesia or invasive nature of the procedure occur in a small
percentage of patients. Bone marrow harvest provides a reliable source of stem
and stromal accessory cells and has been the preferred source of cells in
allogeneic transplants.
 
  PBPC Mobilization and Collection
 
  PBPC mobilization is a newer technique in which bone marrow-derived cells
are harvested from a patient's or donor's circulating blood, rather than from
bone marrow. In a PBPC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone
marrow to mobilize into the circulating blood. The mobilized cells are then
collected by connecting the patient to a blood apheresis device, which draws
and returns large volumes of the patient's or donor's blood in order to
selectively remove the therapeutic volume of stem and progenitor cells. Each
collection procedure typically lasts for two to six hours and is typically
repeated on two to eight consecutive days. Specialized laboratory testing over
the period of mobilization and cell harvesting is necessary to determine that
a sufficient quantity of desired cells has been collected, adding to the cost
of the procedure. The PBPC process has become the predominant procedure in
autologous stem cell therapy.
 
  Procedure Considerations
 
  Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the
high costs of procuring cells, the invasive nature of traditional cell
procurement techniques, and by the technical difficulties related to those
collection procedures. The Company estimates that current costs for bone
marrow harvest and processing are approximately $10,000 to $15,000 per
procedure, with considerable variability between institutions. The Company
estimates that current costs for PBPC collection, including mobilization with
growth factors, are approximately $12,000 to $20,000 for a two to three cycle
procedure, with considerable variability between institutions depending on the
total volume, time and number of aphereses required.
 
  Overall costs of stem cell therapy include the costs of the cell collection
procedure, and the costs associated with supporting the patient during post-
transplant recovery. Post-transplant costs include hospitalization time,
antibiotic support, management of adverse reactions to the large volume cell
infusions, and infusions of platelets and red blood cells. Any new stem cell
therapy process will generally need to provide similar recovery endpoints to
be competitive with the current procedures. In this regard, PBPC procedures
have gained popularity compared with bone marrow harvests because the number
of platelet transfusions is reduced for some patients.
 
                                      24

<PAGE>
 
  Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC collections. CD34 selection is a process designed to
isolate specific types of cells in order to decrease storage and infusion
problems associated with the large volume of fluids collected in bone marrow
or multiple apheresis procedures. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. To
date, the CD34 selection procedure has demonstrated limited therapeutic
benefit to the patient, but substantially increases the costs of the
procedure. A future objective of CD34 selection is to assist in depleting
tumor cells from the transplant cells collected, thereby expanding the
availability of stem cell therapy to new patient populations.
 
  UMBILICAL CORD BLOOD
 
  Umbilical cord blood ("UCB"), which is collected directly from the umbilical
cord after delivery, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBPC collection methods. After
collection, UCB is typically frozen for later use in a stem cell therapy
procedure. Storage of UCB samples involves small volumes of cells, compared to
typical bone marrow or PBPC storage. Accordingly, the costs of collection and
storage of UCB cells are comparatively low. This source of cells is also
"tumor-free," such that UCB would be preferred for many current stem cell
therapy procedures in metastatic cancer patients. Before UCB can become a
major supply source for stem cell therapy, a coordinated UCB banking system
must emerge. In this regard, several organized UCB banking institutions have
been established to date, and the group is growing in both number and size.
 
  One current disadvantage of UCB is the relatively low number of available
cells. Unlike bone marrow or PBPC harvest, where the collection of more cells
to meet a particular treatment is typically achievable, the number of cells
available from a UCB donor is limited. This problem is exacerbated by the
required cryopreservation of the cells, which causes a significant cell loss.
The resultant low cell number is believed to be responsible for the longer
hematopoietic recovery times observed with UCB transplants, as compared with
bone marrow or PBPC transplants. Further, because of the low cell number, UCB
transplants are typically restricted to small patients. Therefore, increasing
the number of therapeutic cells from a UCB sample would facilitate the more
widespread use of UCB transplants. Aastrom believes that providing the
transplant site with the capability to carry out the UCB cell expansion will
be a major factor in the increased use of UCB for stem cell therapy and a
significant business opportunity.
 
AASTROM TECHNOLOGY
 
  Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology and is designed to
enable the ex vivo production of human stem and progenitor cells as an
alternative to the bone marrow harvest and PBPC mobilization methods and as an
enhancement to the UCB collection method. The Company believes that the
Aastrom CPS may be used for other cell production processes which are being
developed by third parties and, in combination with the Company's proprietary
gene transfer process, may have application in the developing field of ex vivo
gene therapy.
 
  CORE TECHNOLOGY
 
  Stem Cell Growth Process
 
  Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of
 
                                      25

<PAGE>
 
natural bone marrow. This process enables the stem and early and late-stage
progenitor cells needed for an effective stem cell therapy procedure to be
concurrently expanded. Growth factors can be added to stimulate specific cell
lineages to grow or to increase cell growth to meet a particular therapeutic
objective. The stem cell growth process can best be completed with little or
no additional stem cell selection or purification procedures. This stem cell
replication process can also enable or augment the genetic modification of
cells by providing the cell division step needed for new genes to integrate
into the stem cell DNA. Currently available cell culture methods tend to
result in a loss of stem cells, either through death or through
differentiation into mature cells. The Company has exclusive license to two
U.S. patents and additional applications that cover these processes. See "--
Additional Stem Cell and Other Cell Therapies."
 
  Aastrom Cell Culture Chamber
 
  Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale, and allow for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells used for
lymphocyte therapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive
licenses to two U.S. patents and additional applications for its cell culture
chamber device technology. See "--Additional Stem Cell and Other Cell
Therapies."
 
  Efficient Gene Transfer
 
  Aastrom has developed proprietary processes and device technology that
enables increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or
gene loading technology is intended to have applications for most cell and
tissue types and most vector technologies. The Company intends to develop
products based upon its gene loading technology that it believes will
facilitate the advancement of numerous gene therapy protocols into the clinic
and ultimately the market. The Company has received a U.S. Patent and has
additional applications for this technology. See "Aastrom Product Candidates
For Ex Vivo Gene Therapy."
 
  THE AASTROM CPS
 
  The Aastrom CPS is the Company's lead product under development for multiple
cell therapy applications, including stem cell therapy. The Aastrom CPS is a
proprietary system that the Company believes will enable the large scale ex
vivo production of a variety of therapeutic cells at health care facilities,
independent laboratories, transplant centers and blood banks, and has been
designed to implement Aastrom's stem cell growth process as well as processes
for the production of other cell types.
 
  The Aastrom CPS is comprised of several components, including single-use
disposable cassettes and reagents and microprocessor-controlled instruments,
which are at various stages of development. The Cell Cassette is a single-use
disposable cartridge which contains the Aastrom cell culture chamber and the
related media supply waste reservoirs and harvest bag. The microprocessor-
controlled instruments include the Incubator which controls the culture
conditions for the operation of the Cell Cassette, and the Processor which
automates the priming and harvesting of the cells from the cell cassette. The
System Manager is a user interface computer that is being developed to
simultaneously track and monitor the cell production process in over thirty
CPS Incubators and record relevant process variables and operator actions.
Prototype components of the Aastrom CPS are currently being used in a clinical
trial and ongoing development activities are directed at completing other
production level components of the Aastrom CPS.
 
  The Aastrom CPS is designed to be operated with minimal operator activity by
a medical or laboratory technician and can implement clinical scale cell
production at the patient care site. The end product of the Aastrom process is
a sterile bag of cells. The control and documentation features of the Aastrom
CPS have been designed to meet GMP requirements for the therapeutic production
of cells.
 
                                      26

<PAGE>
 
  AASTROM CPS FOR STEM CELL THERAPY
 
  The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS is based on a comparatively simple process in which a small volume
of bone marrow cells are collected from the patient or donor using a needle
aspiration procedure under a local anesthetic or sedative. This cell mixture
is quantified, and an appropriate volume of cells is then inoculated into one
or more cell cassettes with the necessary growth media. Therapeutic growth-
factor-stimulated cells are produced using the Aastrom CPS in approximately 12
to 13 days, with no further patient involvement. Depending upon the cell
quantity necessary for a therapeutic application, single or multiple cell
cassettes may be required, with a different volume requirement of starting
cells. The Aastrom CPS has been designed to minimize operator involvement
during the cell production process, and the steps required before and after
the Aastrom CPS are standard laboratory procedures.
 
  Advantages of Aastrom CPS
 
  The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, will provide improvements and
efficiencies over traditional cell collection processes. The following table
illustrates some potential advantages of the Aastrom CPS compared to
approximated patient visits, procedure time and needle sticks in connection
with currently established cell collection techniques:
 

<TABLE>
<CAPTION>
  CELL SOURCE                 VISITS(1) PROCEDURE TIME (HOURS) NEEDLE STICKS(2)
  -----------                 --------- ---------------------- ----------------
  <S>                         <C>       <C>                    <C>
  Bone Marrow Harvest(3).....      6               22                 100+
  PBPC Mobilization and Col-
   lection(4)................    5-7            23-27               20-30
  Aastrom CPS(5).............      1              1-2                4-10
</TABLE>

 --------
 (1) Includes all outpatient, inpatient, and home care episodes.
 (2) Includes bone marrow aspirates, blood samples, catheter placements, and
     subcutaneous injections.
 (3) Includes operating room procedure and all preparatory screening and
     testing.
 (4) Based on two to three 4-hour rounds of PBPC mobilization and collection
     after sequential G-CSF blood mobilization injections.
 (5) Based on data accumulated during the Company's clinical trials.
 
  Reduced Cost. The Company believes the Aastrom CPS has the potential to
replace more costly, labor intensive and invasive cell collection procedures
currently employed for stem cell therapy and to reduce physician, staff and
patient time requirements.
 
  Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the requirement for
general surgical anesthesia, multiple drug injections and blood apheresis.
Patient benefits include fewer needle sticks than with current cell collection
methods and a reduction in overall patient procedure time. Additionally,
Aastrom's process for cell expansion is expected to minimize the time
requirement for physicians compared with bone marrow harvest.
 
  Enhanced Multicycle High-Dose Chemotherapy.  The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multi-cycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.
 
  Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.
 
                                      27

<PAGE>
 
  Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because transplant may
reintroduce cancer cells into the patient. Additionally patients may have
undetected tumor cells in their marrow or PBPC transplant, which can
reestablish the cancer in the patient following transplant. The Aastrom CPS
process may offer benefits for these groups of patients. The Company and other
investigators have shown that some primary human tumor cells die or do not
grow during hematopoietic cell culture. Further, the smaller volume of
starting cells used for the Aastrom CPS compared with BMT or PBPC transplants
shall provide approximately 10 to 70 fold less tumor cells in a transplant.
This combination of passive depletion during culture with the lower starting
volume of tumor cells may result in a tumor-free or tumor-reduced cell product
for transplant. The benefit of such tumor depletion, if any, will vary
depending upon the type of cancer and state of disease.
 
CLINICAL DEVELOPMENT
 
  The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and in Europe for more general cell therapy applications. The
Company also intends to pursue approval of the Aastrom CPS for additional
clinical indications.
 
  The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a PMA application to, and obtain approval from, the FDA to allow it to market
this product in the United States. In order to obtain PMA approval, the
Company will be required to complete clinical trials under an IDE. See "--
Government Regulation--Devices."
 
  In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.
 
  Aastrom completed the first feasibility trial of its cell production system
technology under an IDE at the MD Anderson Cancer Center in October 1995. In
this trial, ten breast cancer patients, who were subjected to myeloablative
chemotherapy, were treated with cells obtained from a bone marrow harvest and
with cells produced from a sample of such cells with a predecessor of the
Aastrom CPS. The patients exhibited standard clinical recoveries, providing
evidence of the clinical safety of cells obtained from the Company's cell
production process and of the feasibility of cell production with a
predecessor of the Aastrom CPS by clinical personnel at an investigational
site.
 
  Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial under an IDE reviewed with the FDA. This clinical trial is designed to
demonstrate that cells produced using the Aastrom CPS can provide
hematopoietic recovery in accordance with trial endpoints in breast cancer
patients who have received myeloablative chemotherapy. Bone marrow obtained
from the patient by traditional methods will be available for precautionary
reasons at defined clinical stages. The results from the five patients accrued
at the first trial site have provided evidence of the clinical safety of the
Aastrom CPS-produced cells in patients and that the hematopoietic recovery
endpoints specified for the trial are achievable. The patients at this trial
site were Stage IV breast cancer patients who had received significant prior
cytotoxic therapies for their cancer. Four of these five patients received the
precautionary back-up marrow pursuant to the trial protocol. Preliminary
results from the first trial site were reviewed with the FDA, and the IDE was
amended to expand the trial to a second site. The amended IDE provided for the
enrollment of Stage II, III and IV patients, and a delayed use of the
precautionary back-up bone marrow. As of the date of this Prospectus, patient
accrual is ongoing and patient data from this site provides further evidence
that the hematopoietic recovery endpoints specified for the trial are
achievable.
 
                                      28

<PAGE>
 
  The objective of the current and anticipated future trials is to establish
the protocol for the pivotal trial of the Aastrom CPS in autologous stem cell
therapy. Provided that these pre-pivotal trials provide evidence of
feasibility and safety of the cells produced in the Aastrom CPS, the Company
anticipates initiating a pivotal clinical trial at multiple sites, with the
patient enrollment typical to support a PMA filing. See "Risk Factors--
Uncertainties Related to Preclinical and Clinical Testing."
 
  Aastrom, in partnership with Cobe, intends to initiate a clinical trial in
France in early 1997 to evaluate the use of Aastrom CPS cells to promote
hematopoietic recovery in breast cancer patients undergoing aggressive
myelosuppressive chemotherapy. The Company intends to seek approval to market
the Aastrom CPS in Europe through CE Mark Registration. See "--Government
Regulation--Regulatory Process in Europe."
 
  The preliminary results of the Company's pre-pivotal trial may not be
predictive of results that will be obtained from subsequent patients in the
trial or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trial will be successful, or that PMA
approval or required foreign regulatory approvals for the Aastrom CPS will be
obtained in a timely fashion, or at all.
 
BUSINESS STRATEGY
 
  Aastrom's objective is to build a leadership position in cell therapy
process technology. The primary elements of the Company's business strategy
are as follows:
 
  Establish Consumable Based Business Model. Aastrom's strategy is to sell the
Aastrom CPS to institutions, hospitals, and other clinical care or commercial
cell production facilities that are administering cell therapy. The Company
plans to obtain ongoing revenue from the sale of single-use disposable Cell
Cassettes and related cell culture media and reagents, which are utilized in
individual cell therapy applications. After cells are cultured in the Cell
Cassette, the cassette is discarded and a new cassette is utilized for a
subsequent patient. Along with ongoing revenue from the sale of instruments
and disposables for cell therapy applications, the Company believes it will be
able to obtain license revenue from its stem cell therapy applications for its
proprietary stem cell processes.
 
  Focus Initially on Established and Reimbursed Therapies. Aastrom will seek
to establish the use of the Aastrom CPS in the field of stem cell therapy for
the treatment of toxicity resulting from many cancer therapies, including
those for breast cancer, lymphoma, ovarian cancer, germ cell cancers,
leukemias and aplastic anemias. Stem cell therapy is a well-established and
growing treatment modality in cancer therapy, and current cell collection
procedures are widely reimbursed by third party payors.
 
  Leverage Platform Technology Across Multiple Market Opportunities. In
addition to stem cell therapy applications, the Company believes that the
Aastrom CPS may serve as a platform product that can be used to produce a
variety of other cells for multiple therapeutic applications, such as T-cells
for use in lymphocyte therapies, chondrocytes for cartilage replacement, and
mesenchymal cells for use in certain solid tissue therapies. The Company
believes that if the Aastrom CPS is well established as a method for cell
production for use in stem cell therapy, the system will be positioned for
commercialization of new cell and ex vivo gene therapies that are under
development.
 
  Market Through Collaborative Relationships. The Company plans to reach end
user markets through collaborative relationships with companies that have
established positions in those markets. In 1993, the Company formed a
strategic partnership with Cobe, a world leader in the marketing and
distribution of blood cell processing equipment and disposables. Cobe is the
Company's exclusive, worldwide distributor of the Aastrom CPS for stem cell
therapy applications, not including stem cell gene therapy. The Company will
seek to establish additional collaborations for other cell therapies as those
therapies and the Company's product lines develop. See "Business--Strategic
Relationships."
 
 
                                      29

<PAGE>
 
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
 
  The Company believes that the Aastrom CPS hardware and disposables may be
developed to serve as platform products for application in a variety of other
cell therapies in addition to stem cell therapy. The Company believes that the
Aastrom CPS has the potential to supplant current manual cell culture methods
to produce therapeutic quantities of cell types such as T-cells, chondrocytes,
mesenchymal cells, keratinocytes, neuronal cells and dendritic cells.
Currently such cells are often produced in specialized facilities generally
using manual cell culture techniques which limit the effective
commercialization of these cell types for therapy. Potential advantages of the
Aastrom CPS in these therapies may include: (i) reducing labor and capital
costs; (ii) enhancing process reliability; (iii) automating quality assurance;
and (iv) reducing the need for environmentally controlled facilities.
 
  Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized culture environments and which may need to be
incorporated within the Company's existing cell cassettes. There can be no
assurances that the Company will be able to successfully modify or develop
existing or future products to enable such additional cell production
processes. Furthermore, other than a limited application of chondrocyte
therapy, novel cell therapies are still in early stages of development by
third parties. The Company's business opportunity is dependent upon successful
development and regulatory approval of these novel cell therapies. No
assurance can be given that such novel therapies will be developed or approved
or that the Company's processes or product candidates will find successful
application in such therapies. See "--Business Strategy" and "--Clinical
Development" and "Use of Proceeds."
 
  Immunotherapies
 
  Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-cell lymphocytes and dendritic cells are being actively
investigated by other companies for this purpose, and these procedures require
ex vivo cell production.
 
  T-cells, a class of lymphocyte white blood cells, play a critical role in
the human immune system and are responsible for the human immune response in a
broad spectrum of diseases, including cancers and infectious diseases.
Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T-
cells from a patient and culturing them in an environment resulting in T-cells
with specificity for a particular disease target. Clinical trials by third
parties have been completed demonstrating CTL effectiveness for certain
diseases. The ex vivo production of these cells under conditions for use in
medical treatment represents a critical step in the advancement of this
therapy.
 
  Dendritic cells (the potent antigen presenting cells) are believed to play
an important role in the function of the immune system. Researchers believe
that cultured dendritic cells could augment the natural ability of a patient
to present antigens from the infectious agents to the immune system and aid in
the generation of a cytotoxic T-cell response to the infectious agent. The
Company intends to explore application of its products and processes for the
expansion of dendritic cells.
 
  Solid Tissue Cell Therapies
 
  One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves
the surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy.
The cells are then implanted into the patient's knee. Published reports
indicate that such cells then reestablish mature articular cartilage.
Currently, this cell production process is completed in highly specialized
laboratory facilities using trained scientists and manual laboratory
procedures. The Aastrom CPS has the potential to reduce costs associated with
the cell production procedure and may eventually facilitate the transfer of
the cell production capability away from specialized facilities directly to
the clinical care sites.
 
                                      30

<PAGE>
 
  Other Stem Cell Therapies
 
  Autoimmune Diseases. Stem cell therapy is under clinical investigation for
the treatment of other diseases. Clinical studies have suggested a potential
role for stem cell therapy in treatment of autoimmune diseases such as
rheumatoid arthritis, multiple sclerosis and lupus erythematosus. The generic
cause of these diseases is a malfunctioning immune system, including T-
lymphocytes. Clinical trials in which the patient receives treatment resulting
in immune ablation (usually involving myelotoxic cancer drugs or radiation),
followed by stem cell therapy to restore the bone marrow and cells of the
blood and immune system, have demonstrated remission of the autoimmune disease
in some patients.
 
  Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell
therapy to facilitate successful solid organ and tissue transplants between
human donors and recipients, as well as using organs from non-human species
for transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior
to the organ transplant, can provide for reduction of the normal immune
rejection response by the transplant recipient (e.g. heart, lung, liver or
kidney transplants).
 
  A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are available, which has
traditionally been the source of cells for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures.
 
AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY
 
  A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells procured from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies,
the ability to produce a therapeutic dose of these gene-modified cells is a
major limitation to the commercialization of these cell therapies. This
limitation is further exacerbated by the additional requirement that the cells
be genetically modified under conditions that are sterile and comply with GMP.
 
  Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into
a suitable vector that can be used to transport and integrate the gene into
the DNA of the target cell, and then cause the gene to become expressed. For
gene therapy to progress to clinical applications, a process to produce a
sufficient quantity of therapeutic cells is required as is an efficient means
to insert the gene vector into target cells. Gene therapy is still in an early
stage of development by third parties. The Company's business opportunity is
dependent upon the successful development and regulatory approval of
individual gene therapy applications. No assurance can be given that such
applications will be developed or approved or that the Company's processes or
product candidates will find successful applications in such therapies.
 
  THE AASTROM CPS FOR GENE THERAPY (GT-CPS)
 
  The Aastrom CPS has been developed to produce cells for therapy. Clinical
cell production is a limiting requirement for gene therapy to effectively move
into medical practice, and as such, the Company believes that the Aastrom CPS
may be useful in many potential ex vivo gene therapy applications.
 
 
                                      31

<PAGE>
 
  Further, the Company's proprietary stem cell production process technology
implemented by the Aastrom CPS provides the conditions for clinical scale stem
cell division, and enables or enhances the introduction of therapeutic genes
into stem cell DNA. The Company believes that its technology may also enable
expansion of more mature progeny of these stem cells to create a gene therapy
cell product with potential short and long term therapeutic effect.
 
  The Company has two principal objectives for the development of Aastrom GT-
CPS: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the GT-CPS's ability to enable large
scale stem cell division ex vivo; and (ii) the enablement of gene transfer and
therapeutic cell production by local and regional primary patient care
facilities and ancillary service laboratories.
 
  THE AASTROM GENE LOADER
 
  The Aastrom Gene Loader product technology, which is under development, is
being designed to transfer new therapeutic genes, which are carried by vectors
into the target cell. This process, which is typically inefficient in many
human cells, has represented a major hurdle preventing many ex vivo gene
therapies from moving forward in the clinic. The Aastrom Gene Loader will
incorporate the Company's proprietary directed motion gene transfer technology
and is expected to incorporate single-use sterile disposables, operated by
dedicated instrumentation.
 
  A major product objective of the Aastrom Gene Loader is the enhancement of
gene transfer efficiencies and reliability. Improving gene vector efficiencies
may enable a wide spectrum of gene therapies currently unable to realize
clinical application.
 
  The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology may favorably influence these gene therapy applications,
the development of which are impeded due to low transduction efficiencies and
the resultant need for use of extreme quantities of gene vectors and/or target
"delivery" tissues.
 
STRATEGIC RELATIONSHIPS
 
  On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe, a subsidiary of Gambro AB, for Cobe to be
the Company's exclusive, worldwide distributor of the Aastrom CPS for stem
cell therapy applications (the "Stem Cell Therapy Applications"). The Company
has retained the right to market the Aastrom CPS for uses outside the Stem
Cell Therapy Applications, such as for all gene therapy applications and for
production of other cells and tissues. The initial term of the Distribution
Agreement expires on October 22, 2003, and Cobe has the option to extend the
term for an additional ten-year period. The Company is responsible for the
expenses to obtain FDA and other regulatory approval in the United States,
while Cobe is responsible for the expenses to obtain regulatory approval in
foreign countries to allow for worldwide marketing of the Aastrom CPS for Stem
Cell Therapy Applications. See "Risk Factors--Consequences of Cobe
Relationship."
 
  Under the terms of the Distribution Agreement, the Company will realize
approximately 60% and 58% of the net sales price at which Cobe ultimately
sells the Aastrom CPS in the United States and Europe, respectively, for Stem
Cell Therapy Applications, subject to certain negotiated discounts and volume-
based adjustments. The Company is also entitled to a premium on United States
sales in any year in which worldwide sales exceed specified levels.
 
  The Distribution Agreement may be terminated by Cobe upon twelve (12) months
prior notice to the Company in the event that any person or entity other that
Cobe beneficially owns more than 50% of the Company's outstanding Common Stock
or voting securities. The Distribution Agreement may also be terminated by
Cobe at any time after December 31, 1997 if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely.
 
                                      32

<PAGE>
 
  In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe, whereby Cobe acquired certain
option, registration, preemptive and other rights pertaining to shares of the
Company's stock. See "Description of Capital Stock--Rights of Cobe."
 
MANUFACTURING
 
  The Company has no current intention of internally manufacturing its product
candidates and accordingly is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.
 
  On May 10, 1994, the Company entered into a Collaborative Product
Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this
agreement, the Company and SeaMED will collaborate on the further design of
certain instrument components in the Aastrom CPS, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory
and clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a "time and materials" basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. Subject to certain
conditions, the Company has committed to enter into a manufacturing agreement
with SeaMED for commercial manufacture of the instrument components for three
years after shipment by SeaMED of the first commercial unit pursuant to a
pricing formula set forth in the agreement. The Company retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement.
 
  On November 8, 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
Agreement, the Company and Ethox will collaborate on the further design of
certain bioreactor assembly and custom tubing kit components of the Aastrom
CPS, and enable Ethox to manufacture pre-production units of such components
for laboratory and clinical evaluation. The Company is paying Ethox for its
design and production work on a "time and materials" basis, utilizing Ethox's
customary hourly billing rates and actual costs for materials. The Company
retains all proprietary rights to its intellectual property which are utilized
by Ethox pursuant to this Agreement.
 
  In April 1996, the Company entered into a five-year License and Supply
Agreement with Immunex to purchase and resell certain cytokines and ancillary
materials for use in conjunction with the Aastrom CPS. The agreement required
the Company to pay Immunex an initial up-front fee of $1,500,000 to be
followed by subsequent annual fee payments equal to $1,000,000 per year during
the term of the agreement in addition to payment for supplies purchased by the
Company. The agreement may be terminated by the Company at any time subject to
the payment to Immunex of a specified amount for liquidated damages. Immunex
may terminate the agreement in the event that the Company fails to purchase a
minimum amount of its forecasted annual needs.
 
  There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Risk Factors--Manufacturing and Supply Uncertainties;
Dependence on Third Parties."
 
PATENTS AND PROPRIETARY RIGHTS
 
  The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company and its licensors are seeking patent protection for technologies
related to (i) human stem and progenitor cell production processes; (ii)
bioreactors and systems for stem and progenitor cell production and production
of other cells; and (iii) gene transfer devices and processes. The Company has
exclusive license rights to five issued United States patents that together
claim (i) certain methods for ex vivo stem cell division and stable genetic
transformation, optimization of hematopoietic progenitor cell cultures and
increasing the metabolism or growth factor secretion of stromal cells, in a
 
                                      33

<PAGE>
 
continuously or periodically perfused liquid culture medium; (ii) certain
devices for the simultaneous culture of stem cells and hematopoietic cells;
and (iii) certain methods of infecting or transfecting target cells with
genetic vectors. Patents equivalent to two of these United States patents have
also been issued in other jurisdictions: one in Australia and another in
Canada and under the European Patent Convention. These eight issued patents
are due to expire beginning in 2006, through 2013. In addition, the Company
and its exclusive licensors have filed applications for patents in the United
States and equivalent applications in certain other countries claiming other
aspects of the Company's products and processes, including five United States
patent applications and corresponding applications in other countries related
to various components of the Aastrom CPS. Of these pending patent
applications, the Company has received notices of allowance for certain claims
in a United States application relating to methods for obtaining ex vivo stem
cell division, and claims in a European Patent Convention application and in a
United States application relating to methods for efficient proliferation of
hematopoietic cells in culture.
 
  The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company or its licensors
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
patents that have been or may be issued to the Company or its licensors will
be held valid if subsequently challenged or that others will not claim rights
in or ownership of the patents and other proprietary rights held or licensed
by the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that have been or may be issued to the
Company or its licensors. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's and its licensors' pending patent applications, nor can the Company
be certain that it will not infringe any patents that may issue to others on
such applications.
 
  The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose
its rights under the patents held by the University of Michigan and Dr.
Cremonese, which would have a material adverse effect on the Company's
business, financial condition and results of operation. See "--University of
Michigan Research Agreement and License Agreement" and "--License Agreement
with J.G. Cremonese."
 
  The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.
 
  The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party
 
                                      34

<PAGE>
 
proprietary rights, the Company may be subject to infringement actions. In
such event, the Company may challenge the validity of such patents or other
proprietary rights or be required to obtain licenses from such companies in
order to develop, manufacture or market its products. There can be no
assurances that the Company would be able to obtain such licenses or that such
licenses, if available, could be obtained on commercially reasonable terms.
Furthermore, the failure to either develop a commercially viable alternative
or obtain such licenses could result in delays in marketing the Company's
proposed products or the inability to proceed with the development,
manufacture or sale of products requiring such licenses, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company is required to defend itself against
charges of patent infringement or to protect its own proprietary rights
against third parties, substantial costs will be incurred regardless of
whether the Company is successful. Such proceedings are typically protracted
with no certainty of success. An adverse outcome could subject the Company to
significant liabilities to third parties and force the Company to curtail or
cease its development and sale of its products and processes.
 
  Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business
Innovation Research Grant obtained from the Department of Health and Human
Services. As a result of such funding, the United States Government has
certain rights in the technology developed with the funding. These rights
include a non-exclusive, paid-up, worldwide license under such inventions for
any governmental purpose. In addition, the government has the right to require
the Company to grant an exclusive license under any of such inventions to a
third party if the government determines that (i) adequate steps have not been
taken to commercialize such inventions, (ii) such action is necessary to meet
public health or safety needs or (iii) such action is necessary to meet
requirements for public use under federal regulations. Additionally, under the
federal Bayh Dole Act, a party which acquires an exclusive license for an
invention that was partially funded by a federal research grant is subject to
the following government rights: (i) products using the invention which are
sold in the U.S. are to be manufactured substantially in the U.S., unless a
waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. government may use the invention for its
own needs.
 
  UNIVERSITY OF MICHIGAN RESEARCH AGREEMENT AND LICENSE AGREEMENT
 
  In August 1989, the Company entered into a Research Agreement ("Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of Stephen G. Emerson,
M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D.,
and Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to this Research
Agreement, the Company was granted the right to acquire an exclusive,
worldwide license to utilize all inventions, know-how and technology derived
from the research project. By Extension Agreements, the Company and the
University extended the scope and term of Research Agreement through December,
1994.
 
  On March 13, 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, dated March 13, 1992, October
8, 1993 and June 21, 1995. Pursuant to this License Agreement, (i) the Company
acquired exclusive worldwide license rights to the patents and know-how for
the production of blood cells and bone marrow cells as described in the
University's research project or which resulted from certain further research
conducted through December 31, 1994, and (ii) the Company is obligated to pay
to the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.
 
  LICENSE AGREEMENT WITH J. G. CREMONESE
 
  In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
 
                                      35

<PAGE>
 
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to this License Agreement, the
Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under
the terms of the License Agreement, the Company is to pay to Dr. Cremonese a
royalty of 3% of net sales of the products which are covered by said patent,
subject to specified minimum royalty payments ranging from $20,000 to $50,000
per year, commencing in calendar year 1997. Unless it is terminated earlier at
the Company's option or due to default by the Company, the License Agreement
will continue in effect until the latest expiration date of the patents to
which the License Agreement applies.
 
GOVERNMENT REGULATION
 
  The Company's research and development activities and the manufacturing and
marketing of the Company's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the U.S., in addition to meeting
FDA regulations, the Company is also subject to other federal laws, such as
the Occupational Safety and Health Act and the Environmental Protection Act,
as well as certain state laws.
 
  REGULATORY PROCESS IN THE UNITED STATES
 
  To the Company's knowledge, it is the first to develop a culture system for
ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.
 
  The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS product for stem cell therapy as a
Class III medical device through the Center for Biologics Evaluation and
Research. However, there can be no assurance that FDA will ultimately regulate
the Aastrom CPS as a medical device.
 
  Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued a draft document concerning the
regulation of umbilical cord blood stem cell products. If the FDA adopts the
regulatory approach set forth in the draft document, the FDA may require
separate regulatory approval for such cells in some cases. The FDA also
recently proposed a new type of license, called a biologic license application
("BLA"), for autologous cells manipulated ex vivo and intended for structural
repair or reconstruction. This proposal may indicate that the FDA will extend
a similar approval requirement to other types of autologous cellular
therapies, such as autologous cells for stem cell therapy. Any such additional
regulatory or approval requirements could significantly delay the introduction
of the Company's product candidates to the market, and have a material adverse
impact on the Company.
 
  Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that the Company's product
candidates will ultimately receive regulatory approval.
 
  Regardless of how the Company's product candidates are regulated, the
Federal Food, Drug, and Cosmetic Act and other Federal statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, distribution, use, reporting,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in civil penalties, recall, injunction or seizure of
products, refusal of the government to approve or clear product approval
applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.
 
                                      36

<PAGE>
 
  DEVICES
 
  In order to obtain FDA approval of a new medical device sponsors must
generally submit proof of safety and efficacy. In some cases, such proof
entails extensive clinical and preclinical laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing testing and surveillance of approved products, or place
other conditions on the approvals. These requirements could cause it to be
more difficult or expensive to sell the products, and could therefore restrict
the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.
 
  If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of pre-clinical and laboratory testing. If the IDE
application is approved, human clinical trials may commence at a specified
number of investigational sites with the number of patients approved by the
FDA.
 
  The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre-
market notification, and are subject to other general controls. Class II
devices may be subject to additional regulatory controls, including
performance standards and other special controls, such as postmarket
surveillance. Class III devices, which are either invasive or life-sustaining
products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and
Class II devices.
 
  If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported
by extensive data, including preclinical and human clinical trial data, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days
to review a PMA application once it is filed, although PMA application reviews
more often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
 
  Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted and obtained FDA approval for
several IDEs for the Aastrom CPS, and is currently conducting clinical studies
under these IDEs. The Company believes that the Aastrom CPS product will be
regulated by the FDA as a Class III device, although there can be no assurance
that the FDA will not choose to regulate this product in a different manner.
 
  The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of its devices, as well as product malfunctions that
are
 
                                      37

<PAGE>
 
likely to cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits a company form promoting an
approved device for unapproved applications and reviews company labeling for
accuracy.
 
  BIOLOGICAL PRODUCTS
 
  For certain of the Company's new products which may be regulated as
biologics, the FDA requires (i) preclinical laboratory and animal testing,
(ii) submission to the FDA of an investigational new drug ("IND") application
which must be effective prior to the initiation of human clinical studies,
(iii) adequate and well-controlled clinical trials to establish safety and
efficacy of the product for its intended use, (iv) submission to the FDA of a
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.
 
  Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the
IND. Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company
is not notified of objections within that period, clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases.
Phase I represents the initial administration of the drug or biologic to a
small group of humans, either healthy volunteers or patients, to test for
safety and other relevant factors. Phase II involves studies in a small number
of patients to assess the efficacy of the product, to ascertain dose tolerance
and the optimal dose range and to gather additional data relating to safety
and potential adverse effects. Once an investigational drug is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, multi-center Phase III studies are initiated to establish safety
and efficacy in an expanded patient population and multiple clinical study
sites. The FDA reviews both the clinical plans and the results of the trials
and may request the Company to discontinue the trials at any time if there are
significant safety issues.
 
  The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
 
  Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, an ELA must be filed with the FDA. The
ELA describes the facilities, equipment and personnel involved in the
manufacturing process. An establishment license is granted on the basis of
inspections of the applicant's facilities in which the primary focus is on
compliance with GMP and the ability to consistently manufacture the product in
the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.
 
  As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may
also be required for a biological product to be shipped out of state.
 
  REGULATORY PROCESS IN EUROPE
 
  The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies to medical laboratory equipment and
supplies including,
 
                                      38

<PAGE>
 
among other products, many devices that are used for the collection and
processing of blood for patient therapy. Certain ancillary products (e.g.,
biological reagents) used with the Aastrom CPS may be considered Class III
medical devices.
 
  The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private and state organizations
which operate under license from the EU to certify that appropriate quality
assurance standards and compliance procedures are followed by developers and
manufacturers of medical device products or, alternatively, that a
manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.
 
COMPETITION
 
  The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical
and marketing resources significantly greater than those of the Company. In
addition, many biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization
of products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, is
inconclusive as to whether or not cells expanded in the Aastrom CPS will
enable hematopoietic recovery within the time frames currently achieved by the
bone marrow harvest and PBPC collection methods. In addition, the bone marrow
harvest and PBPC collection methods have been widely practiced for a number of
years and, recently, the patient costs associated with these procedures have
begun to decline. There can be no assurance that the Aastrom CPS method, if
approved for marketing, will prove to be competitive with these established
collection methods on the basis of hematopoietic recovery time, cost or
otherwise. The Company is aware of certain other products manufactured or
under development by competitors that are used for the prevention or treatment
of certain diseases and health conditions which the Company has targeted for
product development. In particular, the Company is aware that competitors such
as Amgen, Inc., CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp.
and RPR are in advanced stages of development of technologies and products for
use in stem cell therapy and other market applications currently being pursued
by the Company. In addition, Cobe, a significant stockholder of the Company,
is a market leader in the blood cell processing products industry and,
accordingly, a potential competitor of the Company. There can be no assurance
that developments by others will not render the Company's product candidates
or technologies obsolete or noncompetitive, that the Company will be able to
keep pace with new technological developments or that the Company's product
candidates will be able to supplant established products and methodologies in
the therapeutic areas that are targeted by the Company. The foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company's products are
developed and ultimately approved by regulatory authorities. In addition, the
first product to reach the market in a therapeutic or preventive area is often
at a significant competitive advantage relative to later entrants to the
market. Accordingly, the relative speed with
 
                                      39

<PAGE>
 
which the Company or its corporate partners can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company's competitive position will also depend on its ability to attract and
retain qualified scientific and other personnel, develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. The Company
expects its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and
patent position.
 
FACILITIES
 
  The Company leases approximately 20,000 square feet of office and research
and development space in Ann Arbor, Michigan under a lease agreement expiring
in May 1998. The lease is renewable at the option of the Company for up to an
additional five-year term. The Company believes that its facilities will be
adequate for its currently anticipated needs. Contract manufacturing or
additional facilities will be required in the future to support expansion of
research and development and to manufacture products.
 
EMPLOYEES
 
  As of September 30, 1996, the Company employed approximately 61 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
 
LEGAL PROCEEDINGS
 
  The Company is not party to any material legal proceedings, although from
time to time it may become involved in disputes in connection with the
operation of its business.
 
                                      40

<PAGE>
 

                                  MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
  The following table provides information concerning directors and executive
officers of the Company:
 

<TABLE>
<CAPTION>
              NAME                    AGE     POSITION
              ----                    ---     --------
<S>                                <C>        <C>
Robert J. Kunze(2)(3)............      61     Chairman of the Board; Director
R. Douglas Armstrong, Ph.D.(3)...      43     President and Chief Executive Officer; Director
James Maluta.....................      49     Vice President, Product Development
Todd E. Simpson..................      35     Vice President, Finance & Administration; Chief
                                              Financial Officer; Secretary; and Treasurer
Walter C. Ogier..................      39     Vice President, Marketing
Thomas E. Muller, Ph.D...........      61     Vice President, Regulatory Affairs
Alan K. Smith, Ph.D..............      41     Vice President, Research
Stephen G. Emerson, M.D., Ph.D...      42     Director; Scientific Advisor
Albert B. Deisseroth, M.D.,
 Ph.D.(2)........................      55     Director; Scientific Advisor
G. Bradford Jones(1)(3)..........      41     Director
Horst R. Witzel, Dr.-Ing.........      69     Director
Edward C. Wood, Jr.(1)(3)........      51     Director
</TABLE>

- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Executive Committee.
 
  All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. The Company's
Bylaws provide that the Board of Directors will consist of between five and
nine members, and the number of directors is currently set at seven members.
The Bylaws also provide that the Board of Directors will serve staggered
three-year terms, or until their successors are elected and qualified. The
terms of office of the Company's current directors expire as follows: Mr.
Jones, Dr. Deisseroth and Mr. Wood, 1999; Mr. Kunze and Dr. Emerson, 1998; and
Dr. Armstrong and Dr. Witzel, 1997. Officers are elected by and serve at the
discretion of the Board of Directors. There are no family relationships among
the directors or officers of the Company.
 
  Robert J. Kunze a director of the Company since its inception in 1989, is a
founder of the Company and served as its President and Chief Executive Officer
through May 1991. Since 1987, he has been a General Partner of H&Q Life
Science Venture Partners, a venture capital fund specializing in medical
products and biotechnology investments. Previous to that, Mr. Kunze was
Managing Partner of Hambrecht & Quist Venture Partners. Prior to that he
served as a senior executive with W.R. Grace & Co. and General Electric. Mr.
Kunze also serves on the Board of Directors of Escalon Medical Corporation.
 
  R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director
and as its President and Chief Executive Officer. From 1987 to 1991, Dr.
Armstrong served in different capacities, including as Executive Vice
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
a 250-employee scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
 
  James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with 25 years of experience in the industry,
principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr.
Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for
blood cell processing and apheresis. Mr. Maluta held other engineering
management positions and also was director of Quality Assurance for Cobe BCT.
Mr. Maluta received his degree in electrical engineering from the University
of Wisconsin.
 
                                      41

<PAGE>
 
  Todd E. Simpson joined the Company in January 1996 as Vice President,
Finance and Administration and Chief Financial Officer and is also the
Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of
Integra LifeSciences Corporation ("Integra"), a biotechnology company, which
acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection
with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy
Code. Mr. Simpson served as Vice President of Finance and Chief Financial
Officer of Telios up until its acquisition by Integra and held various other
financial positions at Telios after joining that company in February 1992.
Telios was a publicly-held company engaged in the development of
pharmaceutical products for the treatment of dermal and ophthalmic wounds,
fibrotic disease, vascular disease, and osteoporosis. From August 1983 through
February 1992, Mr. Simpson practiced public accounting with the firm of Ernst
& Young, LLP. Mr. Simpson is a Certified Public Accountant and received his
B.S. degree in Accounting and Computer Science from Oregon State University.
 
  Walter C. Ogier joined the Company in March 1994 as Director of Marketing
and was promoted to Vice President, Marketing during 1995. Prior to that, Mr.
Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he
served as Director, Business Development from 1992 to 1994 and as Manager,
Marketing and Business Development in charge of the company's cell therapy
product lines from 1990 to 1992. Mr. Ogier previously held positions with
Ibbottson Associates and with the Business Intelligence Center at SRI
International (formerly Stanford Research Institute). Mr. Ogier received his
B.A. degree in Chemistry from Williams College in 1979 and his Masters of
Management degree from the Yale School of Management in 1987.
 
  Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President,
Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems
with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr.
Muller was Vice President, Engineering and Director of Research and
Development with the Renal Division of Baxter Healthcare in Deerfield,
Illinois. Dr. Muller has also served as Adjunct Professor at Columbia
University and as Visiting Professor at the University of Gent, Belgium. Dr.
Muller graduated from the Technical University in Budapest, Hungary, in 1956
with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in
1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill
University.
 
  Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Genetic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager
at BioSpecific Technologies, as Director of Biochemistry at HyClone
Laboratories and as a member of the Board of Directors of Dallas Biomedical.
Dr. Smith received his B.S. degree in Chemistry from Southern Utah State
College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983.
 
  Stephen G. Emerson, M.D., Ph.D. a director since the inception of the
Company in 1989, is a scientific founder of the Company and has been an active
advisor of the Company since that time. Dr. Emerson has been a Professor of
Medicine at the University of Pennsylvania since 1994 where he serves as head
of Hematology and Oncology. From 1991 to 1994, Dr. Emerson was an Associate
Professor of Medicine at the University of Michigan. Dr. Emerson received his
doctorate degrees in Medicine and Cell Biology/Immunology from Yale
University. He completed his internship and residency at Massachusetts General
Hospital and his clinical and research fellowship in hematology at the Brigham
and Women's Hospital, the Dana-Farber Cancer Institute and Children's Hospital
Medical Center.
 
  Albert B. Deisseroth, M.D., Ph.D. a director since August 1991, currently
serves as an Ensign Professor of Medicine and the Chief, Section of Medical
Oncology at Yale University and is a professor at both the University of Texas
Graduate School of Biomedical Sciences and the University of Texas Health
Science Center Medical
 
                                      42

<PAGE>
 
School in Houston, Texas. Prior to that, Dr. Deisseroth had been Chairman of
the Department of Hematology and a Professor of Medicine and Cancer Treatment
and Research at the University of Texas, M.D. Anderson Cancer Center in
Houston, Texas. Previous to this, Dr. Deisseroth served as Professor of
Medicine at the University of California, San Francisco, and Chief,
Hematology/Oncology at the San Francisco Veteran's Administration Medical
Center. Dr. Deisseroth received his doctorate degrees in Medicine and
Biochemistry from the University of Rochester. Dr. Deisseroth is currently a
member of the Scientific Advisory Boards of Ingenex, Inc., Genvec, Inc. and
Incell.
 
  G. Bradford Jones a director since April 1992, is a general partner of
Brentwood V Ventures, L.P., the general partner of Brentwood Associates V,
L.P.  Brentwood Associates V, L.P. is a partnership organized by the firm
Brentwood Venture Capital, which Mr. Jones joined in 1981. Mr. Jones was
elected to the Board of Directors of the Company pursuant to the terms of the
Series B Preferred Stock Purchase Agreement dated April 7, 1992 with the
Company, of which Brentwood Associates V, L.P. is a party. Mr. Jones received
a B.A. degree in Chemistry and an M.A. degree in Physics from Harvard
University and M.B.A. and J.D. degrees from Stanford University. Mr. Jones
also serves on the Board of Directors of Interpore International, ISOCOR, Onyx
Acceptance Corporation, Plasma & Materials Technologies, and several
privately-held companies.
 
  Horst R. Witzel, Dr.-Ing. a director since June 1994, served as Chairman of
the Board of Executive Directors of Schering AG in Berlin, Germany from 1986
until his retirement in 1989, whereupon he became a member of the Supervisory
Board of Schering AG until 1994. Prior to that, Dr. Witzel held various
leadership positions in research and development with Schering AG where he was
responsible for worldwide production and technical services. Dr. Witzel
received his doctorate in chemistry from the Technical University of West
Berlin. Dr. Witzel also serves on the Board of Directors of The Liposome
Company, Inc. and Cephalon, Inc. and is a member of the Supervisory Board of
Brau and Brunnen AG.
 
  Edward C. Wood, Jr. a director since August 1994, has served as president of
Cobe BCT, Inc., a division of Cobe Laboratories, Inc., since 1991. Cobe is a
subsidiary of Gambro AB, a Swedish company, a world leader in blood cell
processing products. Prior to that, Mr. Wood held various positions in
manufacturing, research and development, and marketing with Cobe. Mr. Wood
received degrees in chemistry from Harvey Mudd College and in management from
the University of Colorado.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
  The Company has adopted provisions in its Restated Articles of Incorporation
that limit the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors, except under certain
circumstances which include breach of the director's duty of loyalty to the
Company or its shareholders, acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law.
 
  The Company's Bylaws provide that the Company shall indemnify its directors
to the fullest extent authorized or permitted by the Michigan Business
Corporation Act. Additionally, the Company has entered into an Indemnification
Agreement, originally dated as of December 14, 1993 (the "Indemnification
Agreement"), with certain of its directors, officers and other key personnel,
which may, in certain cases, be broader than the specific indemnification
provisions contained under applicable law. The Indemnification Agreement may
require the Company, among other things, to indemnify such officers, directors
and key personnel against certain liabilities that may arise by reason of
their status or service as directors, officers or employees of the Company, to
advance the expenses incurred by such parties as a result of any threatened
claims or proceedings brought against them as to which they could be
indemnified, and to cover such officers, directors and key employees under the
Company's directors' and officers' liability insurance policies to the maximum
extent that insurance coverage is maintained.
 
  At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification by
the Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
 
                                      43

<PAGE>
 

EXECUTIVE COMPENSATION
 
  The following table summarizes the compensation paid to or earned by the
Company's Chief Executive Officer and all other executive officers of the
Company whose salary and bonus for services rendered in all capacities to the
Company during the fiscal year ended June 30, 1996 exceeded $100,000 (the
"named executive officers"):
 
                          SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                        ANNUAL COMPENSATION
                               -------------------------------------
     NAME AND 1996                                    OTHER ANNUAL      ALL OTHER
   PRINCIPAL POSITION     YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)
   ------------------     ---- ---------- --------- ---------------- ----------------
<S>                       <C>  <C>        <C>       <C>              <C>
R. Douglas Armstrong,     1996  $156,962   $55,000         --             $8,885(1)
 Ph.D...................
 President and Chief Ex-
 ecutive Officer
James Maluta............  1996  $118,942   $10,000         --                 --
 Vice President, Product
 Development
Thomas E. Muller, Ph.D..  1996  $118,560        --         --                 --
 Vice President, Regula-
 tory Affairs
Walter C. Ogier.........  1996  $106,250   $ 7,500         --                 --
 Vice President, Market-
 ing
</TABLE>

- --------
(1) Consists of vacation pay to Dr. Armstrong in 1996.
 
  1996 Option Grants
 
  The following table contains information about the stock option grants to
the named executive officers in 1996:
 
                       OPTION GRANTS IN LAST FISCAL YEAR
 

<TABLE>
<CAPTION>
                                                                                       POTENTIAL REALIZED
                                                                                        VALUE AT ASSUMED
                                                                                        ANNUAL RATES OF
                                                                                          STOCK PRICE
                                                                                          APPRECIATION
                                               INDIVIDUAL GRANTS                       FOR OPTION TERM(1)
                          ------------------------------------------------------------ -------------------
                              NUMBER OF          % OF TOTAL
                              SECURITIES     OPTIONS GRANTED TO EXERCISE OR
                          UNDERLYING OPTIONS    EMPLOYEES IN    BASE PRICE  EXPIRATION
   NAME                      GRANTED (#)        FISCAL YEAR       ($/SH)       DATE     5% ($)    10% ($)
   ----                   ------------------ ------------------ ----------- ---------- --------  ---------
<S>                       <C>                <C>                <C>         <C>        <C>       <C>
R. Douglas Armstrong,
 Ph.D. .................          --                 --             --            --        --         --
James Maluta............          --                 --             --            --        --         --
Thomas E. Muller, Ph.D..        6,667               4.3%           1.20      02/14/06     5,000     12,734
Walter C. Ogier.........        6,667               4.3%           1.20      02/14/06     5,000     12,734
</TABLE>

- --------

<TABLE>
<S>  <C>
</TABLE>

(1) The 5% and the 10% assumed rates of appreciation are established by the
    rules of the Securities and Exchange Commission and do not represent the
    Company's estimate or projection of the future Common Stock price. If the
    Common Stock price of $1.20 on the date of grant for the options granted
    in 1996 were to appreciate at the rates indicated, it would be $1.95 per
    share (at a 5% compounded appreciation) and $3.11 per share (at a 10%
    compounded appreciation) on the date of expiration of those options.
 
                                      44

<PAGE>
 
  Option Exercises and Year-End Values
 
  The following table provides information about the number of shares issued
upon option exercise by the named executive officers during 1996, and the
value realized by the named executive officers. The table also provides
information about the number and value of options held by the named executive
officers at June 30, 1996:
 
                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                           AND FY-END OPTION VALUES
 

<TABLE>
<CAPTION>
                                                     NUMBER OF SECURITIES      VALUE OF UNEXERCISED
                                                    UNDERLYING UNEXERCISED         IN-THE-MONEY
                                                     OPTIONS AT FY-END (#)   OPTIONS AT FY-END ($)(1)
                                                   ------------------------- -------------------------
                             SHARES
                          ACQUIRED ON     VALUE
   NAME                   EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
   ----                   ------------ ----------- ----------- ------------- ----------- -------------
<S>                       <C>          <C>         <C>         <C>           <C>         <C>
R. Douglas Armstrong,
 Ph.D...................        --          --          --           --            --           --
James Maluta............     29,999      86,847      16,668          --        $48,254          --
Thomas E. Muller, Ph.D..        --          --       15,000       18,334        29,925      $36,576
Walter C. Ogier.........      5,000       9,975      13,750       21,250        27,431       42,394
</TABLE>

- --------
(1) The option value represents fair market value of the underlying securities
    on the exercise date minus the aggregate exercise price of such options,
    multiplied by the number of shares of Common Stock subject to the option.
    For purposes of this calculation, a fair market value of $3.20 per share
    was used, the fair market value of the securities as determined by the
    Board of Directors on June 30, 1996.
 
  No compensation intended to serve as incentive for performance to occur over
a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the persons named in the
Summary Compensation Table. The Company does not have any defined benefit or
actuarial plan with any of the persons named in the Summary Compensation Table
under which benefits are determined primarily by final compensation or average
final compensation and years of service.
 
EMPLOYMENT AGREEMENTS
 
  The Company has a policy of entering into employment agreements with all of
its employees, and has entered into such agreements with all of its executive
officers other than Dr. Armstrong. Such employment agreements generally
establish salary levels (which are subject to periodic review) and provide for
customary fringe benefits such as vacation leave, sick leave and health
insurance. The agreements also generally provide for the protection of
confidential information and the assignment to the Company of inventions
conceived by the employee during his or her employment and permit the
termination of the employment relationship by either party upon fourteen days
prior written notice. The following is a summary of the employment agreements
between the Company and its executive officers.
 
  The Company entered into employment agreements with no defined terms with
James Maluta, Walter C. Ogier, Thomas E. Muller, Ph.D., Alan K. Smith, Ph.D.
and Todd E. Simpson in June 1992, February 1994, April 1994, October 1995 and
December 1995, respectively. Pursuant to these agreements, the Company agreed
to pay Messrs. Maluta, Ogier, Muller, Smith and Simpson annual base salaries
of $90,000, $87,500, $110,000, $122,500 and $122,500, certain of which base
salaries have been increased by the Board of Directors and are subject to
annual review and adjustment. Pursuant to the terms of the foregoing
employment agreements, either party may generally terminate the employment
relationship without cause at any time upon 14 days prior written notice to
the other party or immediately with cause upon notice.
 
 
                                      45

<PAGE>
 
STOCK OPTION AND EMPLOYEE BENEFIT PLANS
 
  1989 STOCK OPTION PLAN
 
  In 1989, the Company established the 1989 Stock Option Plan. As of September
30, 1996, options to purchase an aggregate of 932,266 shares of Common Stock
have been exercised at $0.15 per share. Options to purchase 13,127 shares of
Common Stock at $0.15 per share were cancelled unexercised. No additional
shares remain available for grant under the 1989 Stock Option Plan.
 
  ANCILLARY PLAN
 
  In 1991, the Company established an Ancillary Plan to grant options to
individuals who were not eligible to receive options under the 1989 Stock
Option Plan. Options to purchase an aggregate of 7,498 shares of the Company's
Common Stock were granted under the Ancillary Plan, of which options to
purchase 4,328 shares have been exercised at $0.15 per share and the remaining
options to purchase 3,170 shares have been cancelled. No additional shares
remain available for grant under the Ancillary Plan.
 
  AMENDED AND RESTATED 1992 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
 
  In 1992, the Company adopted the 1992 Incentive and Non-Qualified Stock
Option Plan (the "1992 Plan"), providing for the grant of options to purchase
666,667 shares of Common Stock. The Company allocated an additional 100,000
shares of Common Stock during 1992, an additional 333,333 shares of Common
Stock in 1994 and an additional 800,000 shares of Common Stock in 1996 to the
1992 Plan, resulting in a total share reserve of 1,900,000 shares. The 1992
Plan was amended and restated to its current form in 1996. Options under the
1992 Plan for a total of 462,840 shares have been exercised as of September
30, 1996. As of September 30, 1996, options to purchase 336,254 shares of
Common Stock were outstanding with a weighted average exercise price of $1.27
per share.
 
  The 1992 Plan provides for grants to employees and officers of "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, provided that such employee or officer is an employee on
the date of grant. The 1992 Plan also provides for grants to employees,
officers, consultants or service providers of nonqualified stock options. The
1992 Plan previously has been administered by the Board of Directors, but is
currently administered by the Compensation Committee of the Board of Directors
(the "Committee"). Each option granted pursuant to the 1992 Plan is authorized
by the Committee and evidenced by a notice in such form as the Committee may
from time to time determine.
 
  The exercise price of each incentive stock option granted under the 1992
Plan must be at least equal to the fair market value of a share of Common
Stock on the date of grant, except for incentive stock options granted to
individuals who, at the time of grant, own stock possessing more than 10% of
the total combined voting power of the Company, which options must have an
exercise price of at least 110% of the fair market value of a share of Common
Stock on the date of grant and must expire five years from the date of grant.
The exercise price of each nonqualified stock option granted under the 1992
Plan must be at least 85% of the fair market value of the shares on the date
of grant. No option shall be treated as an incentive stock option to the
extent that such option would cause the aggregate fair market value
(determined as of the date of grant of such option) of the shares with respect
to which incentive stock options are exercisable by such optionee for the
first time during any calendar year to exceed $100,000. The terms of all
incentive stock options and nonqualified stock options granted under the 1992
Plan may not exceed ten years. The exercise price may be paid in cash or, at
the Committee's discretion, by delivery of previously owned shares of the
Company's Common Stock, by a combination of cash and shares, or any other form
of legal consideration acceptable to the Committee. Options under the 1992
Plan generally may not be granted after April 2006.
 
                                      46

<PAGE>
 
  The 1992 Plan provides that if the Company is a party to any merger in which
the Company is not the surviving entity, any consolidation or dissolution
(other than the merger or consolidation of the Company with one or more of its
wholly-owned subsidiaries), the Company must cause any successor corporation
to assume the options or substitute similar options for outstanding option or
continue such options in effect. In the event that any successor to the
Company in a merger, consolidation or dissolution will not assume the options
or substitute similar options, then with respect to options held by optionees
performing services for the Company, the time for exercising such options will
be accelerated and such options will be terminated if not exercised prior to
such merger, consolidation or dissolution.
 
  1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
 
  A total of 150,000 shares of Common Stock have been reserved for issuance
under the Company's 1996 Outside Directors Stock Option Plan (the "Directors
Plan"). As of the effective date of this offering, no options have been
granted under the Directors Plan. The Directors Plan provides for the
automatic granting of non-qualified stock options to directors of the Company
who are not employees of the Company ("Outside Directors"). Under the
Directors Plan, each Outside Director serving on the effective date of this
Offering or elected after the date of this offering will automatically be
granted an option to purchase 5,000 shares of Common Stock on the effective
date of this offering or on the date of his or her election or appointment. In
addition, each serving Outside Director will thereafter automatically be
granted an option to purchase 5,000 shares of Common Stock following each
annual meeting of stockholders after their election, provided that the Outside
Director continues to serve in such capacity and that the Outside Director has
served continuously as a director for at least six months. The exercise price
of the options in all cases will be equal to the fair market value of the
Common Stock on the date of grant. Options granted under the Directors Plan
generally vest over a one-year period in equal monthly installments and must
be exercised within ten years from the date of grant.
 
  1996 EMPLOYEE STOCK PURCHASE PLAN
 
  A total of 250,000 shares of the Company's Common Stock have been reserved
for issuance under the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have been issued. The Purchase Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions, during sequential 24-month offering periods. Each offering period
is divided into four consecutive six-month purchase periods. Unless otherwise
provided by the Board of Directors prior to the commencement of an offering
period, the price at which stock is purchased under the Purchase Plan for such
offering period is equal to 85% of the lesser of the fair market value of the
Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period. The initial offering period will
commence on the effective date of this offering.
 
SECTION 401(K) PLAN
 
  Effective January 1, 1994, the Company adopted the Aastrom Biosciences, Inc.
401(k) Plan (the "Plan"). The Plan is intended to be a qualified retirement
plan under the Internal Revenue Code. Employees of the Company are eligible to
participate in the Plan upon the completion of three consecutive months of
employment. Participants may make salary deferral contributions to the Plan of
up to 15% of compensation, subject to the limitations imposed under the
Internal Revenue Code. The Company may, but is not required to, make matching
contributions to the Plan based on the participants' salary-defined
contributions. Employer contributions are subject to a graduated vesting
schedule based upon an employee's years of service with the Company. It is not
anticipated that the Company will make any contributions to the Plan for the
1997 Plan Year. All contributions to the Plan are held in a trust which is
intended to be exempt from income tax under Section 501(a) of the Internal
Revenue Code. The Plan's trustees are R. Douglas Armstrong and Todd E.
Simpson. Participants may direct the investment of their contributions among
specified Merrill Lynch investment funds. The Plan may be amended or
terminated by the Company at any time, subject to certain restrictions imposed
by the Internal Revenue Code and the Employee Retirement Income Security Act
of 1974.
 
                                      47

<PAGE>
 
COMPENSATION OF DIRECTORS
 
  Directors of the Company do not receive cash for services provided as a
director, however, directors who are not employees of the Company will receive
annual grants of options to purchase Common Stock in accordance with the
Directors Plan. No stock options nor any other form of non-cash compensation
was granted to directors of the Company during the Company's fiscal year
ending June 30, 1996. See "Stock Option and Employee Benefit Plans--1996
Outside Directors Stock Option Plan."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
 
  During the fiscal year ended June 30, 1996, Robert J. Kunze, formerly an
officer of the Company until 1991, R. Douglas Armstrong, President and Chief
Executive Officer of the Company, and G. Bradford Jones were the members of
the Compensation Committee of the Board of Directors. Dr. Armstrong resigned
from the Compensation Committee and was replaced by Albert B. Deisseroth,
M.D., Ph.D. on April 30, 1996, however, Mr. Kunze continues to be a member of
this committee.
 
                                      48

<PAGE>
 

                             CERTAIN TRANSACTIONS
 
  During the last three fiscal years, the Company sold Preferred Stock to
certain holders of more than 5% of the outstanding shares of the Company, or
to their affiliates, as described below.
 
  In April 1995, the Company sold 775,001 shares of Series D Preferred Stock
at a price per share of $4.00 to the following investors: (i) H&Q Life Science
Technology Fund I purchased 167,001 shares for a purchase price of $668,004,
(ii) H&Q London Ventures purchased 100,000 shares for a purchase price of
$400,000, (iii) Brentwood Associates V, L.P. ("Brentwood") purchased 231,250
shares for a purchase price of $925,000, (iv) Windpoint Partners II, L.P.
purchased 89,250 shares for a purchase price of $357,000, and (v) the State
Treasurer of the State of Michigan ("Michigan") purchased 187,500 shares for a
purchase price of $750,000. In May 1995, Cobe purchased 1,250,000 shares of
Series D Preferred Stock for a purchase price of $5,000,000. Upon the closing
of this offering, each outstanding share of Series D Preferred Stock will be
converted into two-thirds of a share of Common Stock.
 
  In April 1995, Dr. Armstrong and Dr. Emerson agreed to grant to Brentwood an
option to purchase up to 28,000 shares and 14,667 shares of Common Stock,
respectively, and, together with two other shareholders of the Company, an
aggregate of up to 66,667 shares of Common Stock at a purchase price of
$100,000. Brentwood exercised this option in April, 1996 purchasing an
aggregate of 66,667 shares of Common Stock at a purchase price of $100,000
from such shareholders.
 
  In September 1995, the Company and RPR entered into a collaborative
relationship for use of the Aastrom CPS as a component of its lymphoid cell
therapy program. On September 6, 1996, RPR notified the Company that it would
not exercise its option to continue the collaboration. As a result, $3,500,000
million of option payments previously paid to the Company by RPR were
converted into 205,882 shares of the Company's Series E Preferred Stock.
 
  In October 1995, the Company repurchased 62,500 shares of Series D Preferred
Stock from Brentwood at the original purchase price of $250,000 and in
December 1995 resold these shares to Northwest Ohio Venture Fund, a
shareholder of the Company, for a total purchase price of $250,000.
 
  In January 1996, the Company sold 1,411,765 shares of Series E Preferred
Stock at a price per share of $4.25 to the following investors: (i) Michigan
purchased 470,588 shares for a total purchase price of $1,999,999, and (ii)
SBIC Partners, L.P. purchased 941,777 shares for a total purchase price of
$4,000,002. Upon the closing of this offering, each share of Series E
Preferred Stock will be converted into two-thirds of a share of Common Stock.
 
  On November 18, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to R. Douglas Armstrong under the 1989 Stock
Option Plan, the Company loaned to Dr. Armstrong $120,000 at an interest rate
of 4% per annum pursuant to a full recourse promissory note. Interest on the
note is payable on an annual basis and principal and accrued but unpaid
interest is due on June 30, 1997. Dr. Armstrong is the President and Chief
Executive Officer and is a director of the Company.
 
  On October 20, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to Stephen G. Emerson under the 1989 Stock
Option Plan, the Company loaned to Dr. Emerson $47,303 at an interest rate of
6% per annum pursuant to a full recourse promissory note. Interest on the note
is payable on an annual basis and principal and accrued but unpaid interest is
due June 30, 1997. The loan is secured by 258,687 shares of Common Stock held
by Dr. Emerson. Dr. Emerson is a director of the Company.
 
  In October 1996, the Company executed a financing commitment with Cobe to
provide the Company with up to $5,000,000 (the "Equity Commitment") and up to
$5,000,000 in funding from Michigan under a convertible loan commitment
agreement ("Convertible Loan Commitment"). As of the date of this Prospectus,
the Company has not obtained any financing under these commitments. Both the
Equity Commitment and the Convertible Loan Commitment will terminate upon the
consummation of this offering.
 
                                      49

<PAGE>
 
  Under the terms of the Equity Commitment, the Company has an option to sell
up to $5,000,000 of Series F Preferred Stock at a price of $6.00 per share to
Cobe upon at least ninety days notice, which notice may be given at any time
until September 1, 1997. Cobe's obligation to purchase such shares will
terminate upon the closing of this offering. Although no shares of Series F
Preferred Stock are outstanding, any outstanding shares of Series F Preferred
Stock would convert upon the closing of this offering into Common Stock based
upon a conversion price of 80% of the price of two-thirds of a share of Common
Stock sold in this offering. To the extent shares are sold to Cobe under the
Equity Commitment, Cobe's preemptive right in the Company's next financing and
the Company's Put Option to Cobe would be reduced.
 
  Upon the sale of $5,000,000 of Series F Preferred Stock under the Equity
Commitment, the Company becomes entitled to borrow funds from Michigan under
the Convertible Loan Commitment. The Company may borrow such funds upon at
least 45 days notice, which notice may be given during a period commencing on
October 15, 1996 and ending on November 1, 1997. Upon the completion by the
Company of a Qualifying Financing (as defined in the Convertible Loan
Commitment), the Company has the option to repay outstanding principal and
interest under the Convertible Loan Commitment in cash or to convert such
borrowings into convertible Preferred Stock at a conversion price equivalent
to 90% of the price per share in such financing. Under certain circumstances,
the Convertible Loan Commitment converts or is convertible into Series G
Preferred Stock. Interest accrues at an annual rate of 10% under the
Convertible Loan Commitment, and the Company may repay such principal and
interest at any time without penalty.
 
  The Company has issued warrants to Michigan to purchase 69,444 shares of
Common Stock as consideration for securing the Convertible Loan Commitment and
has agreed to issue additional warrants to purchase 8,333 shares of Common
Stock for each $1,000,000 borrowed under the Convertible Loan Commitment, as
adjusted to the level of borrowing. The warrants become exercisable 90 days
after the closing of this offering. The warrants expire on October 15, 2000 if
not exercised, and may be exercised, in whole or in part, at a price equal to
the lesser of (a) $9.00 per share, which price increases by $3.00 per share
upon each anniversary of the closing of the offering made hereby; and (b) 85%
of the fair market value of the Company's Common Stock at the time of
exercise.
 
                                      50

<PAGE>
 
                            PRINCIPAL STOCKHOLDERS
 
  The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of September 30,
1996, and as adjusted to give effect to the sale of 3,250,000 shares of Common
Stock in this offering assuming (a) conversion of all of the Company's
outstanding shares of Preferred Stock into Common Stock and (b) no exercise of
the Underwriters' over-allotment option, and as adjusted to reflect the sale
of shares offered in this offering, (i) by each person the Company knows to be
the beneficial owner of 5% or more of the outstanding shares of Common Stock,
(ii) each named executive officer listed in the Summary Compensation Table,
(iii) each director of the Company, and (iv) all executive officers and
directors of the Company as a group.
 

<TABLE>
<CAPTION>
                                                  PERCENTAGE BENEFICIALLY
                                                          OWNED(1)
                                                  ---------------------------
                              SHARES BENEFICIALLY  BEFORE THE      AFTER THE
BENEFICIAL OWNER                   OWNED(1)         OFFERING       OFFERING
- ----------------              ------------------- ------------    -----------
<S>                           <C>                 <C>             <C>
H&Q Life Science(2).........       1,061,334                10.6%           8.0%
 Technology Fund I
 One Bush Street, 18th Floor
 San Francisco, CA 94104
H&Q London Ventures.........         816,666                 8.2%           6.2%
 One Bush Street, 18th Floor
 San Francisco, CA 94104
State Treasurer of the State       1,338,724                13.4%          10.1%
 of Michigan,(3)............
 Custodian of certain re-
 tirement systems
 c/o Venture Capital Divi-
 sion
 430 West Allegan
 Lansing, MI 48992
SBIC Partners, L.P..........         627,451                 6.3%           4.7%
 201 Main Street, Suite 2302
 Fort Worth, TX 76102
Brentwood Associates V,              745,831                 7.5%           5.6%
 L.P.(4)....................
 11150 Santa Monica Blvd.,
 Suite 1200
 Los Angeles, CA 90025
Wind Point Partners II,              559,500                 5.6%           4.2%
 L.P........................
 676 N. Michigan Ave., Suite
 3300
 Chicago, IL 60611
Cobe Laboratories, Inc.(5)..       2,499,999                25.0%          18.9%
 1185 Oak Street
 Lakewood, CO 80215
R. Douglas Armstrong,                501,555                 5.0%           3.8%
 Ph.D.(6)...................
Albert B. Deisseroth, M.D.,           25,000                   *              *
 Ph.D. .....................
Stephen G. Emerson, M.D.,            256,789                 2.6%           1.9%
 Ph.D. .....................
G. Bradford Jones(7)........         745,831                 7.5%           5.6%
Robert J. Kunze(8)..........       1,061,334                10.6%           8.0%
James Maluta(9).............          83,333                   *              *
Thomas E. Muller, Ph.D.(10).          15,000                   *              *
Walter C. Ogier(11).........          20,833                   *              *
Horst R. Witzel, Dr.-                  8,237                   *              *
 Ing.(12)...................
Edward C. Wood, Jr.(13).....       2,499,999                25.0%          18.9%
All officers and directors         5,237,911                52.1%          39.4%
 as a group (12 per-
 sons)(14)..................
</TABLE>

- --------
*  Represents less than 1% of outstanding Common Stock or voting power.
 
                                      51

<PAGE>
 
(1) Shares beneficially owned and percentage of ownership are based on
    9,985,734 shares of Common Stock outstanding before this offering and
    13,235,734 shares of Common Stock outstanding after the closing,
    Beneficial ownership is determined in accordance with the rules of the SEC
    and generally includes voting or disposition power with respect to
    securities.
(2) Robert J. Kunze, Chairman of the Board of the Company, is a general
    partner of H&Q Life Science Venture Partners. See footnote 8, below.
(3) Does not include 69,444 shares issuable upon exercise of warrants held by
    Michigan that are exercisable 90 days after the closing of this offering.
(4) G. Bradford Jones, a director of the Company, is a general partner of
    Brentwood Associates V Ventures, L.P., which is the general partner of
    Brentwood Associates V, L.P. See footnote 7, below.
(5) In addition, pursuant to a Stock Purchase Agreement dated October 22, 1993
    between Cobe and the Company, Cobe has an option to purchase from the
    Company an amount of Common Stock equal to 30% of the Company's fully
    diluted shares after the exercise of such option, at a purchase price
    equal to 120% of the public market trading price of the Company's Common
    Stock for a three-year period following the closing of this offering. Cobe
    also has a right of first negotiation in the event the Company receives
    any proposal concerning, or otherwise decides to pursue, a merger,
    consolidation or other transaction in which all or a majority of the
    Company's equity securities or all or substantially all of the Company's
    assets, or any material portion of the assets of the Company used by the
    Company in performing its obligations under the Distribution Agreement
    would be acquired by a third party outside of the ordinary course of
    business. Edward C. Wood, Jr., a director of the Company, is the President
    of Cobe BCT, Inc., an affiliate of Cobe. See footnote 13, below.
(6) Does not include 333,333 shares issuable upon exercise of options held by
    Dr. Armstrong that are exercisable upon the effective date of this
    offering.
(7) Consists of 745,831 shares held by Brentwood Associates V, L.P. See
    footnote 4, above. Mr. Jones, as a general partner of Brentwood Associates
    V Ventures, L.P., which is the general partner of Brentwood Associates V,
    L.P., may be deemed to beneficially own such shares, but Mr. Jones
    disclaims beneficial ownership of all such shares except to the extent of
    his pecuniary interest therein.
(8) Consists of 1,061,334 shares held by H&Q Life Science Technology Fund I.
    See footnote 2, above. Mr. Kunze, as a general partner of H&Q Life Science
    Venture Partners, may be deemed to beneficially own such shares, but Mr.
    Kunze disclaims beneficial ownership of all such shares except to the
    extent of his pecuniary interest therein.
(9) Includes 16,668 shares issuable upon exercise of options held by Mr.
    Maluta that are exercisable within the 60-day period following September
    30, 1996. Also includes 66,665 shares held of record by James Maluta and
    Deborah Vincent, as Trustees, with shared voting and investment power, of
    the James Maluta and Deborah Vincent Living Trust dated October 26, 1993.
(10) Consists of 15,000 shares issuable upon exercise of options held by Dr.
     Muller that are exercisable within the 60-day period following September
     30, 1996.
(11) Includes 15,833 shares issuable upon exercise of options held by Mr.
     Ogier that are exercisable within the 60-day period following September
     30, 1996.
(12) Includes 2,237 shares issuable upon exercise of options held by Dr.
     Witzel that are exercisable within the 60-day period following September
     30, 1996.
(13) Consists of 2,499,999 shares held by Cobe. See footnote 5, above. Mr.
     Wood, as the President of Cobe BCT, Inc., an affiliate of Cobe, may be
     deemed to beneficially own such shares, but Mr. Wood disclaims beneficial
     ownership of all such shares.
(14) Includes 69,738 shares issuable upon exercise of options that are
     exercisable within the 60-day period following September 30, 1996. Does
     not include 333,333 shares issuable upon exercise of options that are
     exercisable upon the effective date of this offering.
 
                                      52

<PAGE>
 

                         DESCRIPTION OF CAPITAL STOCK
 
  Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, no par value per
share, and 5,000,000 shares of Preferred Stock, no par value per share.
 
COMMON STOCK
 
  As of September 30, 1996, without giving effect to the conversion of each
share of Preferred Stock into Common Stock upon the closing of this offering,
there were 1,887,312 shares of Common Stock outstanding held of record by 32
shareholders.
 
  The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to outstanding shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of holders of Preferred Stock
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of any shares of any Preferred Stock which the Company
may designate and issue in the future.
 
PREFERRED STOCK
 
  As of the closing of the offering, no shares of Preferred Stock will be
outstanding. Thereafter, the Board of Directors will be authorized, without
further shareholder approval, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted or imposed upon any unissued shares of Preferred Stock
and to fix the number of shares constituting any series and the designations
of such series.
 
  The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. The Company currently has no plans to issue any
shares of Preferred Stock.
 
MICHIGAN LAW AND CERTAIN CHARTER PROVISIONS
 
  The Company is a Michigan corporation and is subject to certain anti-
takeover provisions of the Michigan Business Corporation Act (the "MBCA")
which could delay or make more difficult a merger or tender offer involving
the Company. Chapter 7A of the MBCA prevents, in general, an "interested
shareholder" (defined generally as a person owning 10% or more of a
corporation's outstanding voting shares) from engaging in a "business
combination" (as defined therein) with a Michigan corporation unless: (a) the
Board of Directors issues an advisory statement, holders of 90% of the shares
of each class of stock entitled to vote approve the transaction, and holders
of two-thirds of the "disinterested" shares of each class of stock approve the
transaction; or (b) the interested shareholder has been an interested
shareholder for at least five years and has not acquired beneficial ownership
of any additional shares of the corporation subsequent to the transaction
which resulted in such shareholder being classified as an interested
shareholder, and meets certain requirements, including, but not limited to,
provisions relating to the fairness of the price and the form of consideration
paid; or (c) the Board of Directors, by resolution, exempts a particular
interested shareholder from these provisions prior to the interested
 
                                      53

<PAGE>
 
shareholder becoming an interested shareholder. The MBCA also contains certain
other provisions which could have anti-takeover effects, including, but not
limited to, Section 368, which pertains to "greenmail."
 
  The Company's Bylaws provide that the Board of Directors is divided into
three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for shareholders to replace
a majority of the directors. The Company's Restated Articles of Incorporation
eliminate the right of shareholders to act without a meeting and do not
provide for cumulative voting in the election of directors. The amendment of
any of these provisions would require approval by holders of at least two-
thirds of the shares of outstanding Common Stock.
 
  The foregoing and other statutory provisions and provisions of the Company's
Restated Articles of Incorporation could have the effect of deterring certain
takeovers or delaying or preventing certain changes in control or management
of the Company, including transactions in which shareholders might otherwise
receive a premium for their shares over then-current market prices.
 
REGISTRATION RIGHTS
 
  Pursuant to the Amended and Restated Investors Rights Agreement, dated as of
April 7, 1992, as amended (the "Investors Agreement"), certain holders of
outstanding shares of Common Stock, including shares of Common Stock issuable
upon conversion of the Preferred Stock (the "Registrable Securities"), are
entitled to certain demand and incidental registration rights with respect to
such shares, subject to certain customary limitations. Under the Investors
Agreement, subject to certain exceptions, the holders of at least 50% of the
Registrable Securities may require the Company to use its diligent best
efforts to register Registrable Securities for public resale on one occasion
(so long as such registration includes at least 20% of the Registrable
Securities or a lesser percentage if the anticipated aggregate offering price
net of underwriting discounts and commissions would exceed $2 million). In
addition, whenever the Company proposes to register any of its securities
under the Act, holders of Registrable Securities are entitled, subject to
certain restrictions (including customary underwriters "cut back"
limitations), to include their Registrable Securities in such registration.
Subject to certain limitations, the holders of Registrable Securities may also
require the Company to register such shares on Form S-3 no more than once
every twelve months, provided that the anticipated aggregate proceeds would
exceed $500,000. The Company is required to bear all registration and selling
expenses (other than underwriter's discounts and commissions and more than a
single special counsel to the selling shareholders) in connection with the
registration of Registrable Securities in one demand registration and two
piggy-back registrations. The participating investors are required to bear all
expenses in connection with the registration of Registrable Securities on Form
S-3.
 
  Registration rights may be transferred to an assignee or transferee provided
that such assignee or transferee acquires at least 66,667 shares of the
Registrable Securities held by the transferring holder (13,333 shares in the
case of a transfer from the holder of certain stock options). These
registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding.
 
  The registration rights granted under the Investors Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
 
  Pursuant to the Stock Purchase Agreement between the Company and Cobe, dated
October 22, 1993 (the "Cobe Stock Agreement"), the Company granted to Cobe
certain stock registration rights for any and all of the Company's Common
Stock which Cobe acquires by conversion or otherwise. Cobe's stock
registration rights commence 30 months following an initial public offering,
or earlier in the event of any termination of the Distribution Agreement.
Pursuant to Cobe's registration rights, Cobe is entitled to two demand
registration rights, and an unlimited number of piggyback registration rights.
Cobe's stock registration rights are subject to
 
                                      54

<PAGE>
 
customary underwriter's "cut back" requirements. The registration rights
granted to Cobe shall not be exercisable during the period in which Cobe has
the ability to sell all of its shares pursuant to Rule 144 during a single
ninety-day period. Subject to certain conditions, these registration rights
may be transferred with the transfer of stock to certain affiliates of the
transferor or to a transferee who acquires the greater of 66,667 shares or 20%
of the transferor's registrable stock.
 
RIGHTS OF COBE
 
  Pursuant to the Cobe Stock Agreement, Cobe purchased an aggregate of
$10,000,000 of shares of the Company's Series C Preferred Stock. Such shares
of Series C Preferred Stock will automatically convert into 1,666,666 shares
of Common Stock upon consummation of the offering.
 
  Pursuant to the Cobe Stock Agreement, Cobe also has certain preemptive
rights to purchase a portion of any new stock issued by the Company, subject
to certain exceptions, so as to enable Cobe to maintain its relative
percentage ownership and voting power interests in the Company. Under the
terms of the Cobe Stock Agreement, the Company also has the right to require
Cobe to purchase stock issued by the Company in certain qualifying offerings,
under certain circumstances (the "Put Option"). The Put Option may generally
require Cobe to purchase up to 25% of the stock issued by the Company in a
qualifying offering upon the same terms and conditions as the underwriters or
other purchasers participating in the offering provided that Cobe shall not be
required to purchase stock having an aggregate purchase price of more than $5
million. If the Company exercises its Put Option with respect to any such
qualifying offering, Cobe has the option to purchase the greater of up to 40%
of the number of shares to be offered in the qualifying offering or the number
of shares necessary to maintain its percentage ownership interest in the
Company.
 
  Additionally, for a three-year period following the Company's completion of
its initial public offering of stock, Cobe will have an option to purchase
from the Company a quantity of new shares of the Company's Common Stock at a
price equal to 120% of the public market trading price for the Company's
Common Stock. The quantity of Common Stock to be purchased if Cobe exercises
this option shall be equal to 30% of the Company's fully diluted shares after
the exercise of this option.
 
  In the Cobe Stock Agreement, the Company also granted to Cobe a "right of
first negotiation" in the event the Company receives any proposal concerning,
or otherwise decides to pursue, a merger, consolidation or other transaction
in which all or a majority of the Company's equity securities or all or
substantially all of the Company's assets, or any material portion of the
assets of the Company used by the Company in performing its obligations under
the Distribution Agreement would be acquired by a third party outside of the
ordinary course of business.
 
  Pursuant to the Stock Purchase Commitment Agreement with Cobe, dated October
29, 1996, the Company agreed to use reasonable and good faith efforts to cause
a nominee of Cobe, who must be deemed by the Board of Directors to be
qualified to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding Common Stock.
 
                                      55

<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering, the Company will have 13,235,734 shares of
Common Stock outstanding, assuming no exercise of any outstanding options
under any of the Company's option plans after September 30, 1996. Of these
shares, the 3,250,000 shares of Common Stock sold in this offering will be
freely transferable without restriction under the Securities Act unless they
are held by the Company's affiliates as that term is used in Rule 144 under
the Securities Act.
 
  The remaining 9,985,734 shares (the "Restricted Shares") were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration contained in the Act. A total of 6,873 Restricted Shares held for
more than three years by shareholders who are not affiliates of the Company
and who are not subject to the lock-up agreements described below will be
eligible for sale in the public market in reliance upon Rule 144(k)
immediately following the commencement of this offering. A total of 8,735,744
additional outstanding shares will be eligible for sale in the public market
commencing 180 days from the date of this Prospectus without restriction,
other than volume limitations in certain instances, upon the expiration of
certain lock-up agreements referred to below. As of the date 90 days after the
date of this Prospectus, 31,014 additional shares will be available for sale
pursuant to Rule 144 or 701 under the Act, and 1,212,103 Restricted Shares
will have been held for less than two years and will not be eligible for sale
in the market until they have met the two-year holding period requirements of
Rule 144. The executive officers and directors of the Company, and certain
other stockholders and optionholders of the Company, have executed 180-day
lock-up agreements. Cowen & Company may release some or all of the shares
subject to lock-up agreements at any time without notice.
 
  In general, under Rule 144, a person (or persons whose shares are
aggregated), stockholders, including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell in broker transactions,
within any three-month period, commencing 90 days after this offering, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding Common Stock (approximately 132,357 shares immediately after this
offering assuming no exercise of the Underwriters' over-allotment option) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the sale, subject to the filing of a Form 144 with
respect to the sale and other limitations. In general, shares issued in
compliance with Rule 701 may be sold by non-affiliates subject to the manner
of sale requirements of Rule 144, but without compliance with the other
requirements of Rule 144. Affiliates may sell shares they acquired under Rule
701 in compliance with the provisions of Rule 144, except that there is no
required holding period. A person who is not an affiliate, has not been an
affiliate within three months prior to sale and has beneficially owned the
Restricted Shares for at least three years, is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
 
  The Company intends to file a registration statement under the Securities
Act to register Common Stock reserved for issuance under its 1992 Plan,
Directors Plan and Purchase Plan. Such registration statement is expected to
become effective approximately 90 days after the date of this Prospectus.
Shares issued upon exercise of outstanding stock options under such plan after
the effective date of such registration statement generally will be available
for sale in the public market. As of September 30, 1996, options to purchase a
total of 336,254 shares of Common Stock were outstanding and 1,100,906 options
remained available for grant under the 1992 Plan. No options have been granted
under the Directors Plan.
 
  The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the date of this Prospectus,
without the prior written consent of the Underwriters, subject to certain
limited exceptions (including exercises of stock options).
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. No prediction can be made regarding the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will
have on the market price of the Common Stock. Nevertheless, sales of
substantial numbers of shares by existing stockholders or by stockholders
purchasing in their offering could have a negative effect on the market price
of the Common Stock.
 
                                      56

<PAGE>
 

                                 UNDERWRITING
 
  Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Cowen & Company and J.P. Morgan Securities Inc., have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
                                                                    NUMBER OF
                                                                    SHARES OF
     UNDERWRITER                                                   COMMON STOCK
     -----------                                                   ------------
   <S>                                                             <C>
   Cowen & Company................................................
   J.P. Morgan Securities Inc.....................................
                                                                    ---------
     Total........................................................  3,250,000
                                                                    =========
</TABLE>

 
  The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Common Stock offered hereby if any of such shares are
purchased.
 
  The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $    per share. The Underwriters may allow, and such dealers may
reallot, a concession not in excess of $    per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
 
  The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 487,500
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 3,250,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,250,000 shares are being offered.
 
  The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
 
  The Company and its directors and officers, and certain of its other
stockholders and optionholders, have entered into agreements providing that,
for a period of 180 days after the date of this Prospectus, they will not,
without the prior written consent of Cowen & Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exchangeable for, or warrants to purchase, any shares of
Common Stock, or grant any option to purchase or right to acquire or acquire
any option to dispose of any shares of Common Stock, except in certain limited
circumstances. See "Shares Eligible for Future Sale."
 
  The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
 
 
                                      57

<PAGE>
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies that the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, and other factors deemed relevant.
 
TRANSFER AGENT AND REGISTRAR
 
  The Transfer Agent and Registrar for the Common Stock is               . Its
telephone number in              ,                  is                 .
 

                                 LEGAL MATTERS
 
  The validity of the Common Stock offered hereby will be passed upon for the
Company by Pepper, Hamilton & Scheetz, Detroit, Michigan. Michael B. Staebler,
a partner at Pepper, Hamilton & Scheetz, is the beneficial owner of 3,333
shares of Common Stock. Gray Cary Ware & Freidenrich, A Professional
Corporation, San Diego, California, has acted as special counsel to the
Company in connection with the offering. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Brobeck Phleger
& Harrison LLP, New York, New York.
 

                                    EXPERTS
 
  The balance sheets of the Company as of June 30, 1995 and 1996, and the
statements of operations, stockholders' equity, and cash flows for the years
ended June 30, 1994, 1995 and 1996 and the cumulative period from March 24,
1989 (inception) to June 30, 1996 included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, if such contract or document is filed as an exhibit,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.
 
  The Company intends to furnish to its shareholders annual reports containing
financial statements audited by its independent certified public accountants
and make available to its stockholders quarterly reports containing unaudited
financial data for the first three quarters of each fiscal year.
 
                                      58

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 

                         INDEX TO FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................ F-2
Balance Sheets as of June 30, 1995 and 1996 and September 30, 1996
 (Unaudited)............................................................. F-3
Statements of Operations for the years ended June 30, 1994, 1995 and
 1996, for the period from March 24, 1989 (Inception) to June 30, 1996,
 for the three months ended September 30, 1995 and 1996 (Unaudited) and
 for the period from March 24, 1989 (Inception) to September 30, 1996
 (Unaudited)............................................................. F-4
Statements of Stockholders' Equity from March 24, 1989 (Inception) to
 June 30, 1996 and for the three months ended September 30, 1996
 (Unaudited)............................................................. F-5
Statements of Cash Flows for the years ended June 30, 1994, 1995 and
 1996, for the period from March 24, 1989 (Inception) to June 30, 1996,
 for the three months ended September 30, 1995 and 1996 (Unaudited) and
 for the period from March 24, 1989 (Inception) to September 30, 1996
 (Unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7

</TABLE>

 
                                      F-1

<PAGE>
 

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of
Aastrom Biosciences, Inc.:
 
  We have audited the accompanying balance sheets of Aastrom Biosciences, Inc.
(a Michigan corporation in the development stage) as of June 30, 1995 and
1996, and the related statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 1994, 1995 and 1996, and the cumulative
period from March 24, 1989 (inception) to June 30, 1996. 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 Aastrom Biosciences, Inc.
as of June 30, 1995 and 1996, and the results of its operations and its cash
flows for the years ended June 30, 1994, 1995 and 1996, and the cumulative
period from March 24, 1989 (inception) to June 30, 1996, in conformity with
generally accepted accounting principles.
 
Detroit, Michigan
August 9, 1996

 

To the Board of Directors of
Aastrom Biosciences, Inc.:
 
  The financial statements herein have been adjusted to give effect to the 2
for 3 reverse stock split of the Company's outstanding Common Shares as
described more fully in Note 1 to the financial statements. The above report
is in the form that will be signed by Coopers & Lybrand L.L.P. upon the
effectiveness of such split assuming that, from October 31, 1996 to the
effective date of such split, no other events shall have occurred that would
affect the accompanying financial statements or notes thereto.
 
                                          Coopers & Lybrand L.L.P.
 
Detroit, Michigan
October 31, 1996

 
                                      F-2

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                                 BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                                                     PRO FORMA
                                                                   STOCKHOLDERS'
                                  JUNE 30,                           EQUITY AT
                          -------------------------  SEPTEMBER 30, SEPTEMBER 30,
                              1995         1996          1996          1996
                          -------------------------  ------------- -------------
                                                      (UNAUDITED)   (UNAUDITED)
<S>                       <C>           <C>          <C>           <C>
ASSETS
CURRENT ASSETS:
  Cash and cash
   equivalents........... $  2,680,000  $10,967,000   $ 5,908,000
  Short-term investments.    8,388,000           --     1,200,000
  Receivables............       99,000       81,000       220,000
  Prepaid expenses.......      105,000      437,000       378,000
                          ------------  -----------   -----------
    Total current assets.   11,272,000   11,485,000     7,706,000
PROPERTY, NET............    1,279,000    1,188,000     1,225,000
                          ------------  -----------   -----------
    Total assets......... $ 12,551,000  $12,673,000   $ 8,931,000
                          ============  ===========   ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Accounts payable and
   accrued expenses...... $    328,000  $ 1,192,000   $   841,000
  Accrued employee
   expenses..............      130,000       97,000        80,000
  Current portion of
   capital lease
   obligations...........      270,000      223,000       192,000
  Deferred revenue.......      225,000      122,000        53,000
                          ------------  -----------   -----------
    Total current
     liabilities.........      953,000    1,634,000     1,166,000
CAPITAL LEASE
 OBLIGATIONS.............      412,000      189,000       147,000
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, no par
 value, shares
 authorized--8,540,000,
 9,951,765 and
 10,157,647,
 respectively, issued and
 outstanding--8,040,001,
 9,451,766 and 9,657,648,
 respectively (none--pro
 forma), (liquidation
 preference of
 $34,560,000 and
 $35,375,000 at June 30,
 1996 and September 30,
 1996, respectively).....   28,253,000   34,218,000    37,718,000   $        --
Common Stock, no par
 value, shares
 authorized--17,000,000,
 18,500,000 and
 18,500,000,
 respectively, issued and
 outstanding--1,731,463,
 1,886,479 and 1,887,312,
 respectively
 (9,985,734--pro forma)..      241,000      324,000       365,000    38,083,000
Deficit accumulated
 during the development
 stage...................  (17,108,000) (27,025,000)  (30,298,000)  (30,298,000)
Stockholder notes
 receivable..............     (198,000)    (167,000)     (167,000)     (167,000)
Stock purchase rights....           --    3,500,000            --            --
Unrealized losses on
 investments.............       (2,000)          --            --            --
                          ------------  -----------   -----------   -----------
  Total stockholders'
   equity................   11,186,000   10,850,000     7,618,000   $ 7,618,000
                          ------------  -----------   -----------   ===========
    Total liabilities and
     stockholders'
     equity.............. $ 12,551,000  $12,673,000   $ 8,931,000
                          ============  ===========   ===========
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-3

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                                                                                            MARCH 24,
                                                                   MARCH 24,                                  1989
                                                                      1989        THREE MONTHS ENDED      (INCEPTION)
                                  YEAR ENDED JUNE 30,             (INCEPTION)        SEPTEMBER 30,             TO
                          --------------------------------------  TO JUNE 30,   ------------------------  SEPTEMBER 30,
                             1994         1995          1996          1996         1995         1996          1996
                          -----------  -----------  ------------  ------------  -----------  -----------  -------------
                                                                                      (UNAUDITED)          (UNAUDITED)
<S>                       <C>          <C>          <C>           <C>           <C>          <C>          <C>
REVENUES:
 Research and
  development
  agreements............  $    49,000  $   396,000  $  1,342,000  $  1,787,000  $   172,000  $   195,000  $  1,982,000
 Grants.................      823,000      121,000       267,000     1,995,000       39,000       29,000     2,024,000
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
   Total revenues.......      872,000      517,000     1,609,000     3,782,000      211,000      224,000     4,006,000
COSTS AND EXPENSES:
 Research and
  development...........    5,627,000    4,889,000    10,075,000    25,075,000    1,195,000    3,160,000    28,235,000
 General and
  administrative........    1,565,000    1,558,000     2,067,000     7,089,000      446,000      452,000     7,541,000
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
   Total costs and
    expenses............    7,192,000    6,447,000    12,142,000    32,164,000    1,641,000    3,612,000    35,776,000
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
LOSS BEFORE OTHER INCOME
 AND EXPENSE............   (6,320,000)  (5,930,000)  (10,533,000)  (28,382,000)  (1,430,000)  (3,388,000)  (31,770,000)
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
OTHER INCOME (EXPENSE):
 Interest income........      245,000      279,000       678,000     1,576,000      149,000      126,000     1,702,000
 Interest expense.......      (65,000)     (66,000)      (62,000)     (219,000)     (18,000)     (11,000)     (230,000)
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
   Other income.........      180,000      213,000       616,000     1,357,000      131,000      115,000     1,472,000
                          -----------  -----------  ------------  ------------  -----------  -----------  ------------
NET LOSS................  $(6,140,000) $(5,717,000) $ (9,917,000) $(27,025,000) $(1,299,000) $(3,273,000) $(30,298,000)
                          ===========  ===========  ============  ============  ===========  ===========  ============
PRO FORMA NET LOSS PER
 SHARE..................  $      (.82) $      (.66) $       (.98)               $      (.13) $      (.32)
                          ===========  ===========  ============                ===========  ===========
Pro forma weighted
 average number of
 common and common
 equivalent shares
 outstanding............    7,461,000    8,644,000    10,103,000                 10,094,000   10,107,000
                          ===========  ===========  ============                ===========  ===========
</TABLE>

 
 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-4

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 

<TABLE>
<CAPTION>
                                                                   DEFICIT
                                                                 ACCUMULATED
                       PREFERRED STOCK         COMMON STOCK       DURING THE   STOCKHOLDER   STOCK       UNREALIZED
                    ----------------------  -------------------  DEVELOPMENT      NOTES     PURCHASE   GAINS (LOSSES)
                     SHARES      AMOUNT      SHARES     AMOUNT      STAGE      RECEIVABLE    RIGHTS    ON INVESTMENTS
                    ---------  -----------  ---------  --------  ------------  ----------- ----------  --------------
 <S>                <C>        <C>          <C>        <C>       <C>           <C>         <C>         <C>
 Balance, March
  24, 1989
  (Inception)....          --  $        --         --  $     --  $         --   $      --  $       --    $      --
 Non-cash
  issuance of
  Common Stock...                             454,545        --
 Issuance of
  Series A
  Preferred Stock
  at $1.00 per
  share in August
  1989...........   1,500,000    1,500,000
 Net loss........                                                    (500,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1990.......   1,500,000    1,500,000    454,545        --      (500,000)         --          --           --
 Issuance of
  Series A
  Preferred Stock
  in March 1991
  at $1.00 per
  share, net of
  issuance costs
  of $5,000......   1,000,000      995,000
 Net loss........                                                    (636,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1991.......   2,500,000    2,495,000    454,545        --    (1,136,000)         --          --           --
 Issuance of
  Series B
  Preferred Stock
  in April 1992
  at $2.00 per
  share, net of
  issuance costs
  of $46,000.....   3,030,000    6,014,000
 Net loss........                                                  (1,268,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1992.......   5,530,000    8,509,000    454,545        --    (2,404,000)         --          --           --
 Issuance of
  Common Stock
  for services...                              33,333    10,000
 Exercise of
  stock option...                               6,873     1,000
 Net loss........                                                  (2,847,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1993.......   5,530,000    8,509,000    494,751    11,000    (5,251,000)         --          --           --
 Issuance of
  Series C
  Preferred Stock
  in October 1993
  at $1,000 per
  share, net of
  issuance costs
  of $175,000....      10,000    9,825,000
 Exercise of
  stock options..                           1,222,609   229,000                  (198,000)
 Net loss........                                                  (6,140,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1994.......   5,540,000   18,334,000  1,717,360   240,000   (11,391,000)   (198,000)         --           --
 Issuance of
  Series D
  Preferred Stock
  in April and
  May 1995 at
  $4.00 per
  share, net of
  issuance costs
  of $81,000.....   2,500,001    9,919,000
 Exercise of
  stock options..                              39,103     8,000
 Retirement of
  Common Shares
  outstanding....                             (25,000)   (7,000)
 Unrealized loss
  on investments.                                                                                           (2,000)
 Net loss........                                                  (5,717,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1995.......   8,040,001   28,253,000  1,731,463   241,000   (17,108,000)   (198,000)         --       (2,000)
 Issuance of
  Series E
  Preferred Stock
  in January 1996
  at $4.25 per
  share, net of
  issuance costs
  of $35,000.....   1,411,765    5,965,000
 Exercise of
  stock options..                             130,016    53,000
 Issuance of
  Common Stock at
  $1.20 per
  share..........                              25,000    30,000
 Issuance of
  Stock Purchase
  Rights for cash
  in September
  1995 and March
  1996...........                                                                           3,500,000
 Repurchase of
  Series D
  Preferred Stock
  at $4.00 per
  share..........     (62,500)    (250,000)
 Sale of Series D
  Preferred Stock
  at $4.00 per
  share..........      62,500      250,000
 Principal
  payment
  received under
  stockholder
  note
  receivable.....                                                                  31,000
 Unrealized gain
  on investments.                                                                                            2,000
 Net loss........                                                  (9,917,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance, June
  30, 1996.......   9,451,766   34,218,000  1,886,479   324,000   (27,025,000)   (167,000)  3,500,000           --
 Unaudited:
 Exercise of
  stock options..                                 833     1,000
 Issuance of
  Series E
  Preferred Stock
  to RPR at
  $17.00 per
  share..........     205,882    3,500,000                                                 (3,500,000)
 Compensation
  expense related
  to stock
  options
  granted........                                        40,000
 Net loss........                                                  (3,273,000)
                    ---------  -----------  ---------  --------  ------------   ---------  ----------    ---------
 Balance,
  September 30,
  1996
  (Unaudited)....   9,657,648  $37,718,000  1,887,312  $365,000  $(30,298,000)  $(167,000) $       --    $      --
                    =========  ===========  =========  ========  ============   =========  ==========    =========
<CAPTION>
                        TOTAL
                    STOCKHOLDERS'
                       EQUITY
                    -------------
 <S>                <C>
 Balance, March
  24, 1989
  (Inception)....    $       --
 Non-cash
  issuance of
  Common Stock...            --
 Issuance of
  Series A
  Preferred Stock
  at $1.00 per
  share in August
  1989...........     1,500,000
 Net loss........      (500,000)
                    -------------
 Balance, June
  30, 1990.......     1,000,000
 Issuance of
  Series A
  Preferred Stock
  in March 1991
  at $1.00 per
  share, net of
  issuance costs
  of $5,000......       995,000
 Net loss........      (636,000)
                    -------------
 Balance, June
  30, 1991.......     1,359,000
 Issuance of
  Series B
  Preferred Stock
  in April 1992
  at $2.00 per
  share, net of
  issuance costs
  of $46,000.....     6,014,000
 Net loss........    (1,268,000)
                    -------------
 Balance, June
  30, 1992.......     6,105,000
 Issuance of
  Common Stock
  for services...        10,000
 Exercise of
  stock option...         1,000
 Net loss........    (2,847,000)
                    -------------
 Balance, June
  30, 1993.......     3,269,000
 Issuance of
  Series C
  Preferred Stock
  in October 1993
  at $1,000 per
  share, net of
  issuance costs
  of $175,000....     9,825,000
 Exercise of
  stock options..        31,000
 Net loss........    (6,140,000)
                    -------------
 Balance, June
  30, 1994.......     6,985,000
 Issuance of
  Series D
  Preferred Stock
  in April and
  May 1995 at
  $4.00 per
  share, net of
  issuance costs
  of $81,000.....     9,919,000
 Exercise of
  stock options..         8,000
 Retirement of
  Common Shares
  outstanding....        (7,000)
 Unrealized loss
  on investments.        (2,000)
 Net loss........    (5,717,000)
                    -------------
 Balance, June
  30, 1995.......    11,186,000
 Issuance of
  Series E
  Preferred Stock
  in January 1996
  at $4.25 per
  share, net of
  issuance costs
  of $35,000.....     5,965,000
 Exercise of
  stock options..        53,000
 Issuance of
  Common Stock at
  $1.20 per
  share..........        30,000
 Issuance of
  Stock Purchase
  Rights for cash
  in September
  1995 and March
  1996...........     3,500,000
 Repurchase of
  Series D
  Preferred Stock
  at $4.00 per
  share..........      (250,000)
 Sale of Series D
  Preferred Stock
  at $4.00 per
  share..........       250,000
 Principal
  payment
  received under
  stockholder
  note
  receivable.....        31,000
 Unrealized gain
  on investments.         2,000
 Net loss........    (9,917,000)
                    -------------
 Balance, June
  30, 1996.......    10,850,000
 Unaudited:
 Exercise of
  stock options..         1,000
 Issuance of
  Series E
  Preferred Stock
  to RPR at
  $17.00 per
  share..........            --
 Compensation
  expense related
  to stock
  options
  granted........        40,000
 Net loss........    (3,273,000)
                    -------------
 Balance,
  September 30,
  1996
  (Unaudited)....    $7,618,000
                    =============
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-5

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                                                                                           MARCH 24,
                                                                  MARCH 24,                                  1989
                                                                     1989        THREE MONTHS ENDED       (INCEPTION)
                                  YEAR ENDED JUNE 30,            (INCEPTION)        SEPTEMBER 30,             TO
                          -------------------------------------  TO JUNE 30,   ------------------------  SEPTEMBER 30,
                             1994         1995         1996          1996         1995         1996          1996
                          -----------  -----------  -----------  ------------  -----------  -----------  -------------
                                                                                     (UNAUDITED)          (UNAUDITED)
<S>                       <C>          <C>          <C>          <C>           <C>          <C>          <C>
OPERATING ACTIVITIES:
 Net loss...............  $(6,140,000) $(5,717,000) $(9,917,000) $(27,025,000) $(1,299,000) $(3,273,000) $(30,298,000)
 Adjustments to
  reconcile net loss to
  net cash used for
  operating activities:
   Depreciation and
    amortization........      248,000      329,000      536,000     1,267,000       91,000      136,000     1,403,000
   Loss on property held
    for resale..........           --           --           --       110,000           --           --       110,000
   Amortization of
    discounts and
    premiums on
    investments.........           --       (9,000)    (110,000)     (119,000)     (48,000)          --      (119,000)
   Expense related to
    stock and stock
    options granted.....           --           --           --        10,000           --       40,000        50,000
   Changes in assets and
    liabilities:
     Receivables........       11,000      132,000       18,000       (81,000)       4,000     (139,000)     (220,000)
     Prepaid expenses...      (17,000)     (59,000)    (332,000)     (437,000)      27,000       59,000      (378,000)
     Accounts payable
      and accrued
      expenses..........      (45,000)     (40,000)     864,000     1,192,000      (35,000)    (351,000)      841,000
     Accrued employee
      expenses..........       53,000       28,000      (33,000)       97,000      (58,000)     (17,000)       80,000
     Deferred revenue...      146,000       79,000     (103,000)      122,000     (172,000)     (69,000)       53,000
                          -----------  -----------  -----------  ------------  -----------  -----------  ------------
 Net cash used for
  operating activities..   (5,744,000)  (5,257,000)  (9,077,000)  (24,864,000)  (1,490,000)  (3,614,000)  (28,478,000)
INVESTING ACTIVITIES:
 Organizational costs...           --           --           --       (73,000)          --           --       (73,000)
 Purchase of short-term
  investments...........     (967,000) (10,981,000)          --   (11,948,000)          --   (1,200,000)  (13,148,000)
 Maturities of short-
  term investments......           --    3,567,000    8,500,000    12,067,000    2,500,000           --    12,067,000
 Capital purchases......     (320,000)    (118,000)    (445,000)   (1,718,000)     (15,000)    (173,000)   (1,891,000)
 Proceeds from sale of
  property held for
  resale................           --           --           --       400,000           --           --       400,000
                          -----------  -----------  -----------  ------------  -----------  -----------  ------------
 Net cash provided by
  (used for) investing
  activities............   (1,287,000)  (7,532,000)   8,055,000    (1,272,000)   2,485,000   (1,373,000)   (2,645,000)
FINANCING ACTIVITIES:
 Issuance of Preferred
  Stock.................    9,825,000    9,919,000    5,965,000    34,218,000           --           --    34,218,000
 Issuance of Common
  Stock.................       31,000        1,000       83,000       116,000        3,000        1,000       117,000
 Payments received for
  stock purchase rights.           --           --    3,500,000     3,500,000    1,500,000           --     3,500,000
 Payments received under
  stockholder notes.....           --           --       31,000        31,000           --           --        31,000
 Principal payments
  under capital lease
  obligations...........     (147,000)    (214,000)    (270,000)     (762,000)     (65,000)     (73,000)     (835,000)
                          -----------  -----------  -----------  ------------  -----------  -----------  ------------
 Net cash provided by
  (used for) financing
  activities............    9,709,000    9,706,000    9,309,000    37,103,000    1,438,000      (72,000)   37,031,000
                          -----------  -----------  -----------  ------------  -----------  -----------  ------------
NET INCREASE (DECREASE)
 IN CASH AND CASH
 EQUIVALENTS............    2,678,000   (3,083,000)   8,287,000    10,967,000    2,433,000   (5,059,000)    5,908,000
CASH AND CASH
 EQUIVALENTS AT
 BEGINNING OF PERIOD....    3,085,000    5,763,000    2,680,000            --    2,680,000   10,967,000            --
                          -----------  -----------  -----------  ------------  -----------  -----------  ------------
CASH AND CASH
 EQUIVALENTS AT END OF
 PERIOD.................  $ 5,763,000  $ 2,680,000  $10,967,000  $ 10,967,000  $ 5,113,000  $ 5,908,000  $  5,908,000
                          ===========  ===========  ===========  ============  ===========  ===========  ============
SUPPLEMENTAL DISCLOSURES
 OF CASH FLOW
 INFORMATION:
 Interest paid..........  $    65,000  $    66,000  $    62,000  $    219,000  $    18,000  $    11,000  $    230,000
                          ===========  ===========  ===========  ============  ===========  ===========  ============
SUPPLEMENTAL DISCLOSURES
 OF NON-CASH INVESTING
 AND FINANCING
 ACTIVITIES:
 Additions to capital
  lease obligations.....  $   348,000  $   270,000  $        --  $  1,174,000  $        --  $        --  $  1,174,000
                          ===========  ===========  ===========  ============  ===========  ===========  ============
</TABLE>

 
   The accompanying notes are an integral part of these financial statements.
 
                                      F-6

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                         NOTES TO FINANCIAL STATEMENTS
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Overview--Aastrom Biosciences, Inc. (the "Company") was incorporated in
March 1989 ("Inception") under the name Ann Arbor Stromal, Inc. The Company
changed its name in 1991 concurrent with the commencement of employee-based
operations. The Company is in the development stage with its principal
business activities being research and product development, conducted both on
its own behalf and in connection with various collaborative research and
development agreements with other companies, involving the development of
processes and instrumentation for the ex-vivo production of human stem cells
and their progeny, and hematopoetic and other tissues. Successful future
operations are subject to several technical and business risks, including
satisfactory product development and obtaining regulatory approval and market
acceptance for its products.
 
  Significant Revenue Relationships--Two companies accounted for 77% of total
revenues for the year ended June 30, 1995 and one company accounted for 83% of
total revenues for the year ended June 30, 1996. These two companies have
accounted for 47% of total revenues for the period from Inception to June 30,
1996. One company accounted for 82% and 87% of total revenues for the three
months ended September 30, 1995 and 1996, respectively, and two companies
accounted for 49% of total revenues for the period from Inception to September
30, 1996. Grant revenues consist of grants sponsored by the U.S. government.
 
  Cash and Cash Equivalents--Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
 
  Short-Term Investments--Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
but less than one year. Short-term investments are classified as available-
for-sale, and are carried at market value, in accordance with Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which was adopted July 1, 1994.
Application of this pronouncement results in the inclusion of unrealized gains
and losses on investments in stockholders' equity. Application of this
accounting treatment in prior periods would not have materially changed the
amounts as presented.
 
  Diversity of Credit Risk--The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. The Company plans to
continue to invest its excess funds in short-term, investment grade, interest-
bearing instruments. These guidelines are periodically reviewed and modified
to take advantage of trends in yields and interest rates. The Company has not
experienced any significant losses on its cash equivalents or short-term
investments.
 
  Property--Property is recorded at cost and depreciated or amortized using
the straight-line method over the estimated useful life of the asset
(primarily five years) or the remaining lease term, if shorter, with respect
to leasehold improvements and certain capital lease assets.
 
  Revenue Recognition--Revenue from grants and research agreements is
recognized on a cost reimbursement basis consistent with the performance
requirements of the related agreement. Funding received in advance of costs
incurred is presented as deferred revenue in the accompanying financial
statements.
 
  Research and Development Costs--Research and development costs are expensed
as incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $49,000, $146,000 and $1,294,000 for
the years ended June 30, 1994, 1995 and 1996, respectively, and $1,489,000 for
the period from Inception to June 30, 1996 and $158,000, $117,000 and
$1,606,000 for the three months ended September 30, 1995 and 1996 and for the
period from Inception to September 30, 1996, respectively.
 
                                      F-7

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
  Restatement of Common Stock Information--The Company's Board of Directors
authorized a two-for-three reverse stock split of the Company's Common Stock
("Reverse Stock Split") to be effected prior to the closing of the proposed
IPO. Accordingly, all references in the accompanying financial statements to
common share or per common share information have been restated to reflect the
Reverse Stock Split.
 
  Pro Forma Information (Unaudited)--Pro forma net loss per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period. Common equivalent shares are not included in
the per-share calculation where the effect of their inclusion would be anti-
dilutive, except that common and common equivalent shares issued during the 12
month period preceding the filing of the registration statement for the
proposed initial public offering ("IPO"), contemplated in the Prospectus in
which these financial statements are included, at a price below $8.00 per
share (the lowest expected selling price in the proposed IPO) are considered
to be cheap stock and have been included in the calculation as if they were
outstanding for all periods using the treasury stock method, if applicable,
even though their inclusion is anti-dilutive. Upon the completion of the
Company's proposed IPO, all 9,657,648 shares of the Company's outstanding
Preferred Stock will automatically convert into 8,098,422 shares of Common
Stock. As a result, all outstanding shares of Preferred Stock are assumed to
have been converted to Common Stock at the time of issuance, except for those
shares considered to be cheap stock which are treated as outstanding for all
periods presented. The pro forma effect of these conversions has been
reflected in the accompanying balance sheet assuming the conversion had
occurred on September 30, 1996.
 
  Historical net loss per share information is not considered meaningful due
to the significant changes in the Company's capital structure which will occur
upon the closing of the proposed IPO; accordingly, such per-share data
information is not presented.
 
  Use of Estimates--The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported in the financial statements and disclosures
made in the accompanying notes to financial statements. Actual results could
differ from those estimates.
 
  Financial Instruments--Management evaluates the fair value of those assets
and liabilities identified as financial instruments under Statement of
Financial Accounting Standards No. 107 and estimates that the fair value of
such financial instruments generally approximates the carrying value in the
accompanying financial statements. Fair values have been determined through
information obtained from market sources and management estimates.
 
  Recent Pronouncements--During October 1995, the Financial Accounting
Standards Board issued Statement No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based compensation and incentive plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. Adoption of this pronouncement is required for the Company's
fiscal year beginning July 1, 1996 and the Company intends to provide the
additional disclosures required by the pronouncement in its financial
statements for the year ended June 30, 1997.
 
  During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires the Company to review
for impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset
 
                                      F-8

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
might not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS 121 will become effective for the Company's fiscal year
beginning July 1, 1996. Management has studied the effect of implementing SFAS
121 and, based upon its initial evaluation, does not expect it to have a
significant impact on the Company's financial condition or results of
operations.
 
  Unaudited Financial Information--The financial information as of September
30, 1996, and for the three-month periods ended September 30, 1995 and 1996,
and for the period from Inception to September 30, 1996, is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the
results of operations for the interim periods. The results of operations for
the three months ended September 30, 1996, are not necessarily indicative of
the results to be expected for the full year.
 
2. SHORT-TERM INVESTMENTS
 
  All short-term investments are available-for-sale, and have maturities of
one year or less and are summarized as follows:
 

<TABLE>
<CAPTION>
                                                 GROSS      GROSS
                                               UNREALIZED UNREALIZED ESTIMATED
                                       COST      GAINS      LOSSES   FAIR VALUE
                                    ---------- ---------- ---------- ----------
   <S>                              <C>        <C>        <C>        <C>
   June 30, 1995:
     U.S. Government Securities.... $4,890,000  $     --   $ (2,000) $4,888,000
     Commercial Paper..............  3,500,000        --         --   3,500,000
                                    ----------  --------   --------  ----------
                                    $8,390,000  $     --   $ (2,000) $8,388,000
                                    ==========  ========   ========  ==========
<CAPTION>
                                                 GROSS      GROSS
                                               UNREALIZED UNREALIZED ESTIMATED
                                       COST      GAINS      LOSSES   FAIR VALUE
                                    ---------- ---------- ---------- ----------
   <S>                              <C>        <C>        <C>        <C>
   September 30, 1996 (Unaudited):
     U.S. Government Securities.... $1,200,000  $     --   $     --  $1,200,000
                                    ==========  ========   ========  ==========
</TABLE>

 
3. PROPERTY
 
  Property consists of the following:
 

<TABLE>
<CAPTION>
                                                JUNE 30,
                                          ----------------------  SEPTEMBER 30,
                                             1995        1996         1996
                                          ----------  ----------  -------------
                                                                   (UNAUDITED)
   <S>                                    <C>         <C>         <C>
   Machinery and equipment............... $1,140,000  $1,337,000   $1,341,000
   Office equipment......................    405,000     482,000      604,000
   Leasehold improvements................    380,000     520,000      567,000
                                          ----------  ----------   ----------
                                           1,925,000   2,339,000    2,512,000
   Less accumulated depreciation and
    amortization.........................   (646,000) (1,151,000)  (1,287,000)
                                          ----------  ----------   ----------
                                          $1,279,000  $1,188,000   $1,225,000
                                          ==========  ==========   ==========
</TABLE>

 
  Equipment under capital leases totaled $1,162,000, $1,131,000 and $1,131,000
at June 30, 1995 and 1996 and September 30, 1996, respectively, with related
accumulated amortization of $407,000, $622,000 and $679,000, respectively
(Note 7).
 
                                      F-9

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
4. STOCKHOLDERS' EQUITY:
 
  Preferred Stock--The Company has the following outstanding Convertible
Preferred Stock:
 

<TABLE>
<CAPTION>
                            SHARES       SHARES ISSUED AND OUTSTANDING   LIQUIDATION PREFERENCE AT
                          AUTHORIZED   --------------------------------- -------------------------
                         SEPTEMBER 30, JUNE 30,  JUNE 30,  SEPTEMBER 30,  JUNE 30,   SEPTEMBER 30,
                             1996        1995      1996        1996         1996         1996
                         ------------- --------- --------- ------------- ----------- -------------
                          (Unaudited)                       (Unaudited)               (Unaudited)
<S>                      <C>           <C>       <C>       <C>           <C>         <C>
Series A................   2,500,000   2,500,000 2,500,000   2,500,000   $ 2,500,000  $ 2,500,000
Series B................   3,030,000   3,030,000 3,030,000   3,030,000     6,060,000    6,000,000
Series C................      10,000      10,000    10,000      10,000    10,000,000   10,000,000
Series D................   3,000,000   2,500,001 2,500,001   2,500,001    10,000,000   10,000,000
Series E................   1,617,647          -- 1,411,765   1,617,647     6,000,000    6,875,000
                          ----------   --------- ---------   ---------   -----------  -----------
                          10,157,647   8,040,001 9,451,766   9,657,648   $34,560,000  $35,375,000
                          ==========   ========= =========   =========   ===========  ===========
</TABLE>

 
  All preferred shares have voting rights equal to the equivalent number of
common shares into which they are convertible. Conversion rights on all
outstanding classes of preferred stock are on a two-for-three basis to give
effect for the Reverse Stock Split, except for the Series C Preferred Stock,
each share of which is convertible into approximately 250 shares of Common
Stock. Conversion rights on certain classes of preferred stock are subject to
anti-dilution adjustments. Dividends accrue annually at 8% on all series of
Preferred Stock, but do not accumulate. No cash dividends have been declared
or paid through September 30, 1996. Dividends and liquidation preferences on
the Series B, Series C and Series D Preferred Stock are senior to those of the
Series A Preferred Stock. Dividends and liquidation preferences on the Series
E Preferred Stock are senior to those of all other outstanding series of
preferred stock. Conversion of preferred stock is automatic in the event of
the closing of an underwritten public stock offering meeting certain minimum
requirements such as the offering contemplated by the Prospectus in which
these financial statements are included.
 
  Cobe Laboratories, Inc. Stock Purchase Rights--In connection with the
purchase of the Series C Preferred Stock by Cobe Laboratories, Inc. ("Cobe")
in October 1993, Cobe received a preemptive right to purchase a pro-rata
portion of any newly issued shares of stock by the Company in order to
maintain its then current percentage ownership interest. Any such purchase of
newly issued shares shall be at the net price to the Company after deducting
underwriters' discounts and commissions, if any. Cobe has waived its right to
such discount on its intended purchase of shares in the proposed IPO. The
Company has an option ("Put Option") to require Cobe to purchase the lesser of
20%, or $5,000,000, in an offering of equity securities meeting certain
minimum requirements. In the event that the Company exercises the Put Option,
Cobe then has the option to purchase up to 40% of that offering.
 
  During the three-year period following the completion of an initial public
offering of Common Stock by the Company, Cobe has an option to purchase
additional shares from the Company equal to 30% of the total number of shares
outstanding assuming exercise of the option. Such option, if exercised, must
be exercised in full with the purchase price of the shares being established
at 120% of the public market trading price as determined by the 30-day average
market price preceding the date of exercise of the option.
 
  The Company has granted Cobe a right of first negotiation in the event the
Company receives any proposal concerning, or otherwise decides to pursue, a
merger, consolidation or other transaction in which all or a majority
 
                                     F-10

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
of the Company's equity securities or all or substantially all of the
Company's assets, or any material portion of the assets of the Company used by
the Company in performing its obligations under the Distribution Agreement
(Note 6) would be acquired by a third party outside of the ordinary course of
business.
 
  Stock Option Plans--The Company has various stock option plans which provide
for the issuance of nonqualified and incentive stock options to acquire up to
2,836,594 shares of Common Stock. Such options may be granted by the Company's
Board of Directors to certain of the Company's founders, employees, directors
and consultants. The exercise price of incentive stock options shall not be
less than the fair market value of the shares on the date of grant. In the
case of individuals who are also holders of 10% or more of the outstanding
shares of Common Stock, the exercise price of incentive stock options shall
not be less than 110% of the fair market value of the shares on the date of
grant. The exercise price of non-qualified stock options shall not be less
than 85% of the fair market value on the date of grant. Options granted under
these plans expire no later than ten years from the date of grant and
generally become exercisable ratably over a four-year period following the
date of grant.
 
  For certain options granted, the Company recognizes compensation expense for
the difference between the deemed value for accounting purposes and the option
exercise price on the date of grant. During the three-month period ended
September 30, 1996, compensation expense totaling approximately $40,000 has
been charged with respect to these options. Additional future compensation
expense with respect to the issuance of such options totals approximately
$130,000 and will be recognized through October 2000.
 
 
                                     F-11

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
  The following table summarizes option activity under the Company's stock
option plans:
 

<TABLE>
<CAPTION>
                                                       OPTIONS
                                           OPTIONS    AVAILABLE   EXERCISE PRICE
                                         OUTSTANDING  FOR GRANT     PER SHARE
                                         -----------  ----------  --------------
   <S>                                   <C>          <C>         <C>
   March 24, 1989(Inception)
     Options authorized.................         --    1,703,261
     Options granted....................  1,528,778   (1,528,778) $  .15 - $ .30
     Options exercised..................     (6,873)          --  $  .15 - $ .15
     Options canceled...................    (13,793)      13,793  $  .15 - $ .15
                                         ----------   ----------
   Balance, June 30, 1993...............  1,508,112      188,276  $  .15 - $ .30
     Options granted....................    198,333     (198,333) $  .30 - $1.20
     Options exercised.................. (1,222,609)          --  $  .15 - $ .30
     Options canceled...................    (90,171)      90,171  $  .15 - $1.20
                                         ----------   ----------
   Balance, June 30, 1994...............    393,665       80,114  $  .15 - $1.20
     Options authorized.................         --      333,333
     Options granted....................     55,333      (55,333) $ 1.20 - $1.20
     Options exercised..................    (39,103)          --  $  .30 - $ .30
     Options canceled...................    (60,230)      60,230  $  .30 - $1.20
                                         ----------   ----------
   Balance, June 30, 1995...............    349,665      418,344  $  .15 - $1.20
     Options authorized.................         --      800,000
     Options granted....................    155,337     (155,337) $ 1.20 - $3.20
     Options exercised..................   (130,016)          --  $  .15 - $1.20
     Options canceled...................    (44,690)      44,690  $  .30 - $1.20
                                         ----------   ----------
   Balance, June 30, 1996...............    330,296    1,107,697  $  .30 - $3.20
    Unaudited:
     Options granted....................     13,334      (13,334) $ 3.20 - $3.20
     Options exercised..................       (833)          --  $ 1.20 - $1.20
     Options canceled...................     (6,543)       6,543  $ 1.20 - $1.20
                                         ----------   ----------
   Balance, September 30, 1996
    (Unaudited).........................    336,254    1,100,906  $  .30 - $3.20
                                         ==========   ==========
   Options Exercisable,                     101,021
    June 30, 1996....................... ==========               $  .30 - $1.20
    September 30, 1996 (Unaudited)......    122,612               $  .30 - $1.20
                                         ==========
</TABLE>

 
  Common Shares Reserved--The Company has reserved shares of Common Stock for
future issuance as follows:
 

<TABLE>
<CAPTION>
                                                         JUNE 30,  SEPTEMBER 30,
                                                           1996        1996
                                                         --------- -------------
                                                                    (Unaudited)
   <S>                                                   <C>       <C>
   Issuance under 1992 Stock Option Plan................ 1,437,993   1,437,160
   Conversion of preferred stock........................ 7,961,168   8,098,422
                                                         ---------   ---------
                                                         9,399,161   9,535,582
                                                         =========   =========
</TABLE>

 
                                      F-12

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
5. FEDERAL INCOME TAXES
 
  Deferred tax assets consist of the following:
 

<TABLE>
<CAPTION>
                                                              JUNE 30,
                                                       ------------------------
                                                          1995         1996
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Net operating loss carryforwards................... $ 5,280,000  $ 9,210,000
   Tax credits and other..............................     360,000      440,000
                                                       -----------  -----------
   Gross deferred tax assets..........................   5,640,000    9,650,000
   Deferred tax assets valuation allowance............  (5,640,000)  (9,650,000)
                                                       -----------  -----------
                                                       $        --  $        --
                                                       ===========  ===========
</TABLE>

 
  Due to the historical losses incurred by the Company, a full valuation
allowance for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset income
taxes. The Company's net operating loss and tax credit carryforwards will
expire from 2004 through 2011, if not utilized.
 
  The Company's ability to utilize its net operating loss and tax credit
carryforwards would be limited in the event of a future change in ownership
for tax purposes. Such a change in ownership may likely occur upon the
completion of an initial public offering of the Company's Common Stock.
 
6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS
 
  University of Michigan--In March 1989, the Company entered into a research
agreement with the University of Michigan (the "University") for the
development of an adaptable, high-efficiency blood cell factory and to conduct
related research. Under the terms of this research agreement, as amended, the
Company agreed to reimburse the University for research costs in this regard
through the date of its expiration in December 1994. Payments made to the
University under the aforementioned agreements totaled $316,000, $121,000 and
$2,521,000 for the years ended June 30, 1994, 1995, for the period from
Inception to June 30, 1996. As part of this relationship, the Company issued
to the University 454,545 shares of Common Stock in August 1989. No value has
been assigned to these shares in the accompanying financial statements. In
March 1992, the Company entered into a license agreement for the technology
developed under the research agreement. The license agreement, as amended,
provides for a royalty to be paid to the University equal to 2% of net sales
of products containing the licensed technology sold by the Company.
 
  Cobe BCT, Inc.--In connection with the issuance of the Series C Preferred
Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. ("Cobe BCT"), an
affiliate of Cobe, entered into an agreement which grants to Cobe BCT
exclusive worldwide distribution and marketing rights to the Company's Cell
Production System ("CPS") for stem cell therapy applications ("Distribution
Agreement"). The term of the Distribution Agreement is ten years, with an
option, exercisable by Cobe BCT, to extend the term for an additional ten
years. Pursuant to the Distribution Agreement, Cobe BCT will perform worldwide
marketing and distribution activities of the CPS for use in stem cell therapy
and will receive a share of the resulting net sales, as defined, ranging from
38% to 42%, subject to certain negotiated discounts and volume-based
adjustments.
 
                                     F-13

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
  The agreements establishing this collaboration provided for payments
totaling $5,000,000 to be made by Cobe BCT upon the Company meeting certain
development milestones. In May 1995, the Company accepted, as part of the sale
of the Series D Preferred Stock, an equity investment of $5,000,000 from Cobe
in lieu of those future milestone payments.
 
  M.D. Anderson Cancer Center--In December 1992, the Company entered into a
research agreement with the University of Texas, M.D. Anderson Cancer Center
("M.D. Anderson"). Under this agreement, the Company funded certain research
being conducted at M.D. Anderson and issued to M.D. Anderson 33,333 shares of
its Common Stock subject to vesting rights over the succeeding four year
period. In November 1994, the Company and M.D. Anderson terminated the
collaboration and 25,000 shares of Common Stock held by M.D. Anderson were
returned to the Company.
 
  License and Royalty Agreements--In July 1992, the Company licensed certain
cell culture technology under which it obtained an exclusive worldwide license
to the technology in exchange for a royalty of up to 3% of net sales on
products utilizing the licensed technology.
 
  In March 1996, the Company executed a license agreement which provides for
the use of licensed products in the CPS. Pursuant to this license agreement,
the Company recorded a charge to research and development expense of
$1,500,000 representing the license fee payable upon execution of the
agreement. The license agreement provides for annual renewal fees of
$1,000,000 over the five year license term and can be extended at the
Company's option for an additional five years.
 
  Rhone-Poulenc Rorer Inc.--In September 1995, the Company entered into a
research and development collaboration with Rhone-Poulenc Rorer Inc. ("RPR"),
granting RPR a right to license the Company's CPS for Lymphoid cell
applications. Prior to the establishment of this collaboration, the Company
received a option fee of $250,000 and a development deposit of $225,000 to
initiate the preliminary research and development plan. Pursuant to the
agreements establishing this collaboration, RPR was obligated to fund certain
costs associated with the development of the CPS for Lymphoid cell
applications and was entitled to make equity purchases of up to $12,500,000
subject to the Company's satisfaction of certain milestones and RPR's decision
to exercise certain options. As of June 30, 1996, the Company has received
$3,500,000 in equity payments and recognized $1,342,000 in research revenue
through June 30, 1996 and $1,537,000 through September 30, 1996. The remaining
$9,000,000 equity payment was to be paid by RPR by October 1996 pending RPR's
evaluation of the research efforts for Lymphoid cell applications and its
decision to proceed with the collaboration (Note 9).
 
 
7. COMMITMENTS
 
  The Company leases certain machinery and equipment and office equipment
under capital leases. Obligations under these leasing arrangements bear
interest at rates ranging from 9.7% to 12.1% and mature at dates ranging from
November 1996 to May 1999. Additionally, the Company leases its facilities
under an operating lease which expires in May 1998, at which time the Company
has the option to renew the lease for an additional period of up to five
years.
 
                                     F-14

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
  Future minimum payments under capital leases and non-cancelable operating
leases are as follows:
 

<TABLE>
<CAPTION>
                                                             CAPITAL   OPERATING
                                                              LEASES    LEASES
                                                             --------  ---------
      <S>                                                    <C>       <C>
      Year Ended June 30,
        1997................................................ $255,000  $453,000
        1998................................................  138,000   435,000
        1999................................................   69,000        --
                                                             --------  --------
      Total minimum lease payments..........................  462,000  $888,000
                                                                       ========
      Less amount representing interest.....................  (50,000)
                                                             --------
      Obligations under capital lease....................... $412,000
                                                             ========
</TABLE>

 
  Certain of the Company's capital lease agreements contain restrictive
provisions which require that the Company's total assets exceed its total
liabilities by at least $1,000,000. Should the Company fall out of compliance
with this provision, and a waiver cannot be obtained from the lessor,
remaining amounts due under the leases become immediately due and payable.
 
  Rent expense for the years ended June 30, 1994, 1995 and 1996, was $176,000,
$241,000 and $338,000, respectively, and for the period from Inception to June
30, 1996 was $822,000. Rent expense for the three months ended September 30,
1995 and 1996, was $83,000 and $107,000, respectively, and for the period from
Inception to September 30, 1996 was $929,000.
 
8. EMPLOYEE SAVINGS PLAN
 
  The Company has a 401(k) plan that became effective in January 1994. The
plan allows participating employees to contribute up to 15% of their salary,
subject to annual limits and minimum qualifications. The Board may, at its
sole discretion, approve Company contributions. Through June 30, 1996, the
Company has made no contributions to the plan.
 
9. SUBSEQUENT EVENTS (UNAUDITED)
 
  In September 1996, RPR notified the Company of its intent to terminate its
collaboration with the Company. This notification was made after RPR had
determined that for strategic reasons its support for the development of the
technologies being pursued under the collaboration would be discontinued. As a
result of this termination, no further equity payments or research funding is
due from RPR and RPR's license rights to the Company's CPS for Lymphoid cell
applications are terminated. Upon termination of the collaboration, RPR became
entitled to receive shares of the Company's Series E Preferred Stock at $17.00
per share for the $3,500,000 in equity payments made by RPR under the
collaboration. Accordingly, the accompanying financial statements as of
September 30, 1996 reflect the issuance of 205,882 shares of Series E
Preferred Stock issuable to RPR in this regard.
 
  In October 1996, the Company executed a financing commitment for up to
$5,000,000 in additional equity funding from Cobe ("Equity Commitment") and
$5,000,000 in funding under a convertible loan agreement ("Convertible Loan
Commitment") with another current investor. Under the terms of the Equity
Commitment,
 
                                     F-15

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
the Company may sell up to $5,000,000 of preferred stock at $6.00 per share
during a funding period that extends from January 1997 to December 1997. The
conversion rights of such preferred stock will be adjusted to provide for a
conversion at 80% of the per share price in the Company's next financing, as
adjusted for the Reverse Stock Split, and provided that such financing meets
certain minimum requirements ("Qualifying Financing"), such as the proposed
IPO in which these financial statements appear. If such a financing is not
completed by December 1997, then the conversion rights of this class of
preferred stock into Common Stock will be set at $6.98 per share of Common
Stock. To the extent shares are sold to Cobe under the Equity Commitment, its
preemptive right in the Company's next Qualifying Financing and the Company's
Put Option to Cobe is reduced to the extent of its purchase.
 
  Upon the sale of $5,000,000 in preferred stock under the Equity Commitment,
the Company becomes entitled to borrow funds under the Convertible Loan
Commitment. Such funds may be borrowed by the Company during a funding period
that extends from January 1997 to September 1997. Upon the completion of a
Qualifying Financing by the Company, the Company has the option to repay
outstanding borrowings under the Convertible Loan Commitment, in cash, or to
convert such borrowings into preferred stock. The conversion rights of such
class of preferred stock will be adjusted to provide for a conversion at 90%
of the per share price in the Company's next Qualifying Financing, as adjusted
for the Reverse Stock Split. If such financing is not completed by December
1997, then the conversion rights of this class of preferred stock will be set
at $6.98 per share of Common Stock. Interest accrues at 10% on amounts
borrowed under the Convertible Loan Commitment, which is due at maturity, and
may be retired in a manner consistent with principal. The Company may repay
borrowed amounts at anytime prior to the maturity date which is established
for all amounts borrowed as one year from the date of the first borrowing.
 
  In connection with the Convertible Loan Commitment, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The Company will issue additional warrants to purchase 8,333
shares of Common Stock for each $1,000,000 borrowed under the Convertible Loan
Commitment, with such additional warrants to be prorated to the level of
borrowing. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made in the Prospectus to which these financial
statements are included; or (b) 85% of the fair market value of the Company's
Common Stock at the time of exercise.
 
  The Equity Commitment and the Convertible Loan Commitment expire upon the
closing of an initial public offering by the Company.
 
                                     F-16

<PAGE>
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
  No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or any of the
Underwriters or any other person. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any security other than the shares
of Common Stock offered, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered to any person in
any jurisdiction or in which it is unlawful to make such offer or solicitation
to such person. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that the
information contained herein is correct as of any date subsequent to the date
hereof.
 
                              -------------------
 
 
                              TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................    5
The Company...............................................................   14
Use of Proceeds...........................................................   14
Dividend Policy...........................................................   14
Capitalization............................................................   15
Dilution..................................................................   16
Selected Financial Data...................................................   17

Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   18
Business..................................................................   22
Management................................................................   41
Certain Transactions......................................................   49
Principal Stockholders....................................................   51
Description of Capital Stock..............................................   53
Shares Eligible for Future Sale...........................................   56
Underwriting..............................................................   57
Legal Matters.............................................................   58
Experts...................................................................   58
Additional Information....................................................   58
Index to Financial Statements.............................................  F-1
</TABLE>

 
                              -------------------
 
  Until             , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                                3,250,000 Shares
 
                        [LOGO] AASTROM BIOSCIENCES INC
 
 
                                  Common Stock
 
                              -------------------
                                   PROSPECTUS
                              -------------------
 
                                COWEN & COMPANY
 
                               J.P. MORGAN & CO.
 
                                       , 1996
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<PAGE>
 

 
                                   PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  Other expenses in connection with the registration of the securities
hereunder, which will be paid by the Company, will be substantially as
follows:
 

<TABLE>
<CAPTION>
   ITEM                                                                 AMOUNT
   ----                                                                --------
   <S>                                                                 <C>
   Securities and Exchange Commission registration fee................ $ 11,326
   NASD filing fee....................................................    4,238
   Nasdaq National Market fee.........................................   50,000
   Blue sky qualification fees and expenses...........................   20,000
   Accounting fees and expenses.......................................   85,000
   Legal fees and expenses............................................  350,000
   Printing and engraving expenses....................................  115,000
   Transfer agent and registrar fees..................................    7,500
   Officers' and Directors' Insurance.................................  200,000
   Miscellaneous expenses.............................................   56,936
                                                                       --------
     Total............................................................ $900,000
                                                                       ========
</TABLE>

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Sections 1561 through 1565 of the Michigan Business Corporation Act (the
"MBCA") authorize a corporation to grant or a court to award, indemnity to
directors, officers, employees and agents in terms sufficiently broad to
permit such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933.
 
  The Bylaws of the Company (see Exhibit 3.4), provide that the Company shall,
to the fullest extent authorized or permitted by the MBCA, or other applicable
law, indemnify a director or officer who was or is a party or is threatened to
be made a party to any proceeding by or in the right of the Company to procure
a judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the Company, against expenses,
including actual and reasonable attorneys' fees, and amounts paid in
settlement incurred in connection with the action or suit, if the indemnitee
acted in good faith and in a manner the person reasonably believed to be in,
or not opposed to, the best interests of the Company or its shareholders. This
section also authorizes the Company to advance expenses incurred by any agent
of the Company in defending any proceeding prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified.
 
  The Bylaws also authorize the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company against any liability asserted against or incurred by such person
in such capacity or arising out of such person's status as such, regardless of
whether the Company would have the power to indemnify such person against such
liability under the provisions of the MBCA.
 
  The Company has entered into an indemnification agreement with certain of
its directors, officers and other key personnel, which contains provisions
that may in some respects be broader than the specific indemnification
provisions contained under applicable law. The indemnification agreement may
require the Company, among other things, to indemnify such directors, officers
and key personnel against certain liabilities that may arise by reason of
their status or service as directors, officers or employees of the Company, to
advance the expenses incurred by such parties as a result of any threatened
claims or proceedings brought against them as to which
 
                                     II-1

<PAGE>
 
they could be indemnified, and, to the maximum extent that insurance coverage
of such directors, officers and key employees under the Company's directors'
and officers' liability insurance policies is maintained.
 
  Section 1209 of the MBCA permits a Michigan corporation to include in its
Articles of Incorporation a provision eliminating or limiting a director's
liability to a corporation or its shareholders for monetary damages for
breaches of fiduciary duty. The enabling statute provides, however, that
liability for breaches of the duty of loyalty, acts or omissions not in good
faith or involving intentional misconduct or knowing violation of the law, or
the receipt of improper personal benefits cannot be eliminated or limited in
this manner. The Company's Restated Articles of Incorporation include a
provision which eliminates, to the fullest extent permitted by the MBCA
director liability for monetary damages for breaches of fiduciary duty.
 
  Section 6 of the Underwriting Agreement filed as Exhibit 1.1 hereto sets
forth certain provisions with respect to the indemnification of certain
controlling persons, directors and officers against certain losses and
liabilities, including certain liabilities under the Securities Act.
 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
  (a)ISSUANCES OF COMMON STOCK
 
  Since October 1, 1993, the Company has sold the following shares of Common
Stock:
 
  In October 1995, the registrant issued 37,500 shares of Common Stock to
Albert B. Deisseroth at a price of $.80 per share.
 
  (b) ISSUANCES OF SHARES OF PREFERRED STOCK
 
  Since October 1, 1993, the Company has sold the following shares of
Preferred Stock:
 
  In October 1993, the registrant issued 10,000 shares of Series C Preferred
Stock to Cobe at a price of $1,000 per share.
 
  In April and May 1995, the registrant issued an aggregate of 2,500,001
shares of Series D Preferred Stock to 11 accredited investors at a price of
$4.00 per share.
 
  In December 1995, the registrant issued 62,500 shares of Series D Preferred
Stock to Northwest Ohio Venture Fund, L.P. at a purchase price of $4.00 per
share.
 
  In January 1996, the registrant issued an aggregate of 1,411,765 shares of
Series E Preferred Stock to SBIC Partners, L.P. and the State Treasurer of the
State of Michigan at a purchase price of $4.25 per share.
 
  Pursuant to a Governance Agreement between the Company and Rhone-Poulenc
Rorer Inc. ("RPR"), dated September 15,1995, RPR terminated its contractual
relationship with the Company on September 6, 1996. As a result of such
termination, the Company became obligated to issue 205,882 shares of Series E
Preferred Stock to RPR at a purchase price of $17.00 per share.
 
  The Company believes that each such sale and issuance of securities was
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
 
  (c) OPTION ISSUANCES TO, AND EXERCISES BY, EMPLOYEES AND DIRECTORS
 
  From January 18, 1990 to the present, the registrant has granted options to
purchase a total of 2,945,174 shares of Common Stock at exercise prices
ranging from $.10 to $2.13 per share to 95 employees and one non-employee
director. No consideration was paid to the Registrant by any recipient of any
of the foregoing options for the grant of any such options. From October 30,
1992 to the present, the Registrant issued a total of 2,829,735 shares of
Common Stock to 26 employees and one non-employee director upon exercise of
stock options at exercise prices ranging from $.10 to $2.13 per share.
 
  There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
 
 
                                     II-2

<PAGE>
 
  The issuances described in Items 15(a) were exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The issuances
described in Item 15(b) were exempt from registration under the Securities Act
in reliance on Rule 701 promulgated thereunder as transactions pursuant to
compensatory benefit plans and contracts relating to compensation. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and other instruments issued in such
transactions.
 

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) Exhibits
 
  1.1*  Form of Underwriting Agreement.
 
  3.1   Restated Articles of Incorporation.
 
  3.2*  Form of Restated Articles of Incorporation (to be filed with the
        Secretary of State of the State of Michigan prior to the closing of
        this offering).
 
  3.3   Bylaws, as amended.
 
  4.1*  Specimen Common Stock Certificate.
 
  4.2   Amended and Restated Investors' Rights Agreement dated April 7, 1992.
 
  5.1*  Opinion of Pepper, Hamilton & Scheetz, counsel to the Company, with
        respect to the legality of the securities being registered, including
        their consent to being named in the Registration Statement.
 
  10.1  Form of Indemnification Agreement.
 
  10.2  1989 Stock Option Plan and form of agreement thereunder.
 
  10.3  Ancillary Stock Option Plan and form of agreement thereunder.
 
  10.4  401(k) Plan.
 
  10.5  Amended and Restated 1992 Incentive and Non-Qualified Stock Option
        Plan and forms of agreements thereunder.
 
  10.6  1996 Outside Directors Stock Option Plan and forms of agreements
        thereunder.
 
  10.7  1996 Employee Stock Purchase Plan and form of agreement thereunder.
 
  10.8  Form of Employment Agreement.
 
  10.9  Stock Purchase Agreement dated October 22, 1993 between Cobe
        Laboratories, Inc. and the Company and amendment thereto dated
        October 29, 1996.
 
  10.10** Distribution Agreement dated October 22, 1993 between Cobe BCT,
          Inc. and the Company and amendments thereto dated March 29, 1995,
          September 11, 1995 and October 29, 1996.
 
  10.11 License Agreement dated July 17, 1992 between J.G. Cremonese and the
        Company and related addenda thereto dated July 14, 1992 and July 7,
        1993.
 
  10.12** Collaborative Product Development Agreement dated May 10, 1994
          between SeaMED Corporation and the Company.
 
  10.13** Collaborative Product Development Agreement dated November 8, 1994
          between Ethox Corporation and the Company.
 
 
                                     II-3

<PAGE>
 
  10.14** License and Supply Agreement dated April 1, 1996 between Immunex
          Corporation and the Company.
 
  10.15 Lease Agreement dated May 18, 1992 between Domino's Farms Holding,
        L.P. and the Company and amendments thereto dated February 26, 1993,
        October 3, 1994, November 16, 1994 and July 29, 1996.
 
  10.16 Clinical Trial Agreement dated April 19, 1996 between the Company and
        the University of Texas M.D. Anderson Cancer Center.
 
  10.17 License Agreement dated March 13, 1992 between the Company and the
        University of Michigan and amendments thereto dated March 13, 1992,
        October 8, 1993 and June 21, 1995.
 
  10.18 Employee Proprietary Information and Invention Agreement effective
        June 1, 1991 between the Company and R. Douglas Armstrong.
 
  10.19 Employment Agreement dated June 19, 1992 between the Company and
        James Maluta.
 
  10.20 Employment Agreement dated December 8, 1995 between the Company and
        Todd E. Simpson, C.P.A.
 
  10.21 Employment Agreement dated February 10, 1994 between the Company and
        Walter C. Ogier.
 
  10.22 Employment Agreement dated April 19, 1994 between the Company and
        Thomas E. Muller, Ph.D.
 
  10.23 Employment Agreement dated October 26, 1995 between the Company and
        Alan K. Smith, Ph.D.
 
  10.24 Promissory Note dated November 18, 1993 for $120,000 loan by the
        Company to R. Douglas Armstrong and amendment thereto dated October
        30, 1996.
 
  10.25 Promissory Note dated October 20, 1993 for $47,303 loan by the
        Company to Stephen G. Emerson, M.D., Ph.D and amendment thereto dated
        October 30, 1996.
 
  10.26 Consulting Agreement dated June 1, 1995 between the Company and
        Stephen G. Emerson, M.D., Ph.D.
 
  10.27 Clinical Trial Agreement dated August 28, 1996 between the Company
        and Loyola University Medical Center Cancer Center.
 
  10.28 Stock Purchase Commitment Agreement dated October 29, 1996 between
        Cobe Laboratories, Inc. and the Company.
 
  10.29 Convertible Loan Commitment Agreement dated October 15, 1996 between
        the State Treasurer of the State of Michigan and the Company.
 
  10.30* Forms of Subscription Agreement for the purchase of Series D
         Preferred Stock.
 
  10.31* Stock Purchase Agreement dated January 8, 1996 among the Company,
         SBIC Partners, L.P. and the State Treasurer of the State of
         Michigan.
 
  11.1  Computation of earnings per share.
 
  23.1  The consent of Coopers & Lybrand, L.L.P.
 
  23.2* The consent of Pepper, Hamilton & Scheetz is contained in their
        opinion filed as Exhibit 5.1 of the Registration Statement.
 
                                     II-4

<PAGE>
 
  24.1  Power of Attorney is contained on the signature page of this
        Registration Statement (see page II-6).
 
  27.1  Financial Data Schedule.
 
  27.2  Financial Data Schedule.
 
  27.3  Financial Data Schedule.
 
  27.4  Financial Data Schedule.
 
  27.5  Financial Data Schedule.
 
  27.6  Financial Data Schedule.
- --------
*To be filed by Amendment.
**The Company has applied for confidential treatment with respect to certain
portions of these documents.
 
  (b)Financial Statement Schedules
 
  Schedules other than those referred to above have been omitted because they
are not applicable or not required under the instructions contained in
Regulation S-X or because the information is included elsewhere in the
Financial Statements or the notes thereto.
 

ITEM 17. UNDERTAKINGS
 
  The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
 
  The undersigned Registrant hereby undertakes that:
 
  (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
 
  (2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
 
                                     II-5

<PAGE>
 

                                  SIGNATURES
 
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ann Arbor, State of
Michigan, on the 1st day of November, 1996.
 
                                       AASTROM BIOSCIENCES, INC.
 
                                              /s/ R. Douglas Armstrong
                                       By: ___________________________________
                                           R. Douglas Armstrong, Ph.D.
                                           President and Chief Executive
                                           Officer
                                           (Principal Executive Officer)
 
                               POWER OF ATTORNEY
 
  KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints R. Douglas Armstrong and Todd E.
Simpson, or either of them, as his attorney-in-fact, each with full power of
substitution for him in any and all capacities, to sign any and all amendments
to this Registration Statement, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorney-in-
fact or his substitute or substitutes may do or cause to be done by virtue
hereof.
 
  Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 

<TABLE>
<CAPTION>
             SIGNATURE                                 TITLE                          DATE
             ---------                                 -----                          ----
<S>                                  <C>                                        <C>
      /s/ R. Douglas Armstrong
____________________________________ President, Chief Executive Officer,        November 1, 1996
    R. Douglas Armstrong, Ph.D.      and Director (Principal Executive Officer)

        /s/ Todd E. Simpson
____________________________________ Vice President, Finance & Administration   November 1, 1996
          Todd E. Simpson            and Chief Financial Officer (Principal
                                     Financial and Accounting Officer)
        /s/ Robert J. Kunze
____________________________________ Chairman of the Board and Director         November 1, 1996
          Robert J. Kunze

      /s/ Albert B. Deisseroth
____________________________________ Director                                   November 1, 1996
 Albert B. Deisseroth, M.D., Ph.D.

       /s/ Stephen G. Emerson
____________________________________ Director                                   November 1, 1996
  Stephen G. Emerson, M.D., Ph.D.

       /s/ G. Bradford Jones
____________________________________ Director                                   November 1, 1996
         G. Bradford Jones

        /s/ Horst R. Witzel
____________________________________ Director                                   November 1, 1996
     Horst R. Witzel, Dr.-Ing.

         /s/ Edward C. Wood
____________________________________ Director                                   November 1, 1996
        Edward C. Wood, Jr.
</TABLE>

 
                                     II-6

<PAGE>
 

                                 EXHIBIT INDEX
 
  1.1*  Form of Underwriting Agreement.
 
  3.1   Restated Articles of Incorporation.
 
  3.2*  Form of Restated Articles of Incorporation (to be filed with the
        Secretary of State of the State of Michigan prior to the closing of
        this offering).
 
  3.3   Bylaws, as amended.
 
  4.1*  Specimen Common Stock Certificate.
 
  4.2   Amended and Restated Investors' Rights Agreement dated April 7, 1992.
 
  5.1*  Opinion of Pepper, Hamilton & Scheetz, counsel to the Company, with
        respect to the legality of the securities being registered, including
        their consent to being named in the Registration Statement.
 
  10.1  Form of Indemnification Agreement.
 
  10.2  1989 Stock Option Plan and form of agreement thereunder.
 
  10.3  Ancillary Stock Option Plan and form of agreement thereunder.
 
  10.4  401(k) Plan.
 
  10.5  Amended and Restated 1992 Incentive and Non-Qualified Stock Option
        Plan and forms of agreements thereunder.
 
  10.6  1996 Outside Directors Stock Option Plan and forms of agreements
        thereunder.
 
  10.7  1996 Employee Stock Purchase Plan and form of agreement thereunder.
 
  10.8  Form of Employment Agreement.
 
  10.9  Stock Purchase Agreement dated October 22, 1993 between Cobe
        Laboratories, Inc. and the Company and amendment thereto dated
        October 29, 1996.
 
  10.10** Distribution Agreement dated October 22, 1993 between Cobe BCT,
          Inc. and the Company and amendments thereto dated March 29, 1995,
          September 11, 1995 and October 29, 1996.
 
  10.11 License Agreement dated July 17, 1992 between J.G. Cremonese and the
        Company and related addenda thereto dated July 14, 1992 and July 7,
        1993.
 
  10.12** Collaborative Product Development Agreement dated May 10, 1994
          between SeaMED Corporation and the Company.
 
  10.13** Collaborative Product Development Agreement dated November 8, 1994
          between Ethox Corporation and the Company.
 
  10.14** License and Supply Agreement dated April 1, 1996 between Immunex
          Corporation and the Company.
 
  10.15 Lease Agreement dated May 18, 1992 between Domino's Farms Holding,
        L.P. and the Company and amendments thereto dated February 26, 1993,
        October 3, 1994, November 16, 1994 and July 29, 1996.
 
  10.16 Clinical Trial Agreement dated April 19, 1996 between the Company and
        the University of Texas M.D. Anderson Cancer Center.

<PAGE>
 
  10.17 License Agreement dated March 13, 1992 between the Company and the
        University of Michigan and amendments thereto dated March 13, 1992,
        October 8, 1993 and June 21, 1995.
 
  10.18 Employee Proprietary Information and Invention Agreement effective
        June 1, 1991 between the Company and R. Douglas Armstrong.
 
  10.19 Employment Agreement dated June 19, 1992 between the Company and
        James Maluta.
 
  10.20 Employment Agreement dated December 8, 1995 between the Company and
        Todd E. Simpson, C.P.A.
 
  10.21 Employment Agreement dated February 10, 1994 between the Company and
        Walter C. Ogier.
 
  10.22 Employment Agreement dated April 19, 1994 between the Company and
        Thomas E. Muller, Ph.D.
 
  10.23 Employment Agreement dated October 26, 1995 between the Company and
        Alan K. Smith, Ph.D.
 
  10.24 Promissory Note dated November 18, 1993 for $120,000 loan by the
        Company to R. Douglas Armstrong and amendment thereto dated October
        30, 1996.
 
  10.25 Promissory Note dated October 20, 1993 for $47,303 loan by the
        Company to Stephen G. Emerson, M.D., Ph.D and amendment thereto dated
        October 30, 1996.
 
  10.26 Consulting Agreement dated June 1, 1995 between the Company and
        Stephen G. Emerson, M.D., Ph.D.
 
  10.27 Clinical Trial Agreement dated August 28, 1996 between the Company
        and Loyola University Medical Center Cancer Center.
 
  10.28 Stock Purchase Commitment Agreement dated October 29, 1996 between
        Cobe Laboratories, Inc. and the Company.
 
  10.29 Convertible Loan Commitment Agreement dated October 15, 1996 between
        the State Treasurer of the State of Michigan and the Company.
 
  10.30* Forms of Subscription Agreement for the purchase of Series D
         Preferred Stock.
 
  10.31* Stock Purchase Agreement dated January 8, 1996 among the Company,
         SBIC Partners, L.P. and the State Treasurer of the State of
         Michigan.
 
  11.1  Computation of earnings per share.
 
  23.1  The consent of Coopers & Lybrand, L.L.P.
 
  23.2* The consent of Pepper, Hamilton & Scheetz is contained in their
        opinion filed as Exhibit 5.1 of the Registration Statement.
 
  24.1  Power of Attorney is contained on the signature page of this
        Registration Statement (see page II-6).
 
  27.1  Financial Data Schedule.
 
  27.2  Financial Data Schedule.
 
  27.3  Financial Data Schedule.
 
  27.4  Financial Data Schedule.
 
  27.5  Financial Data Schedule.
 
  27.6  Financial Data Schedule.
- --------
*To be filed by Amendment.
**The Company has applied for confidential treatment with respect to certain
portions of these documents.

<PAGE>


 
                     Inside back cover page of Prospectus
                     ------------------------------------












       








       [COLOR DIAGRAM OF CELL LINEAGES OF HUMAN BONE MARROW STEM CELLS]





<PAGE>
 
- --------------------------------------------------------------------------------
      MICHIGAN DEPARTMENT OF COMMERCE - CORPORATION AND SECURITIES BUREAU
- --------------------------------------------------------------------------------
Date Received                                        (FOR BUREAU USE ONLY)

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


- -----------------------------
- -------------------------------------------------
Name
         T. Knox Bell, Esq.
- -------------------------------------------------
Address
         Gray Cary Ware & Freidenrich
         4365 Executive Drive, Suite 1600
- -------------------------------------------------
City                  State           Zip Code

         San Diego     CA              92121       EFFECTIVE DATE
- ------------------------------------------------- -----------------------------
Document will be returned to the name and address you enter above



                      RESTATED ARTICLES OF INCORPORATION
                    FOR USE BY DOMESTIC PROFIT CORPORATIONS
          (Please read information and instructions on the last page)


     Pursuant to the provisions of Act 284, Public Acts of 1972, the undersigned
corporation executes the following Articles:

- --------------------------------------------------------------------------------
1. The present name of the corporation is:
                    Aastrom Biosciences, Inc.
2. The identification number assigned by the Bureau is:   529-456
                                                          -------
3. All former names of the corporation are:
                    Ann Arbor Stromal, Inc.

4. The date of filing the original Articles of Incorporation was: March 24, 1989
                                                                 ---------------
- --------------------------------------------------------------------------------

     The following Restated Articles of Incorporation supersede the Articles of
     Incorporation as amended and shall be the Articles of Incorporation for the
     corporation:

ARTICLE I

- --------------------------------------------------------------------------------
   The name of the corporation is:
                                     Aastrom Biosciences, Inc.

- --------------------------------------------------------------------------------
ARTICLE II

- --------------------------------------------------------------------------------
   The purpose or purposes for which the corporation is formed are:
                     To engage in any activity within the purpose for which
       corporations
 may be organized under the Michigan Business Corporation
       Act.


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

<PAGE>
 
ARTICLE III
- --------------------------------------------------------------------------------
The total authorized shares:
 
   Common shares 20,300,000                 Preferred shares  10,990,980
                --------------------------                  --------------------

   A statement of all or any of the relative rights, preferences and limitations
   of the shares of each class is as follow:

               See Rider attached hereto and made a part hereof.


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

ARTICLE IV

- --------------------------------------------------------------------------------
1. The address of the current registered office is:

   36th Floor, 100 Renaissance Center, Detroit,   Michigan          48243
   ----------------------------------------------          ---------------------
   (Street Address)                                               (Zip Code)

2. The mailing address of the current registered office, if different than 
   above:
                                                  Michigan 
   ----------------------------------------------,         ---------------------
   (Street Address or P.O. Box)       (City)                     (Zip Code)

3. The name of the current resident agent is:  Michael B. Staebler
                                             -----------------------------------

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

ARTICLE V (Optional. Delete if not applicable)

- --------------------------------------------------------------------------------
When a compromise or arrangement or a plan of reorganization of this corporation
is proposed between this corporation and its creditors or any class of them or
between this corporation and its shareholders or any class of them, a court of
equity jurisdiction within the state, on application of this corporation or of a
creditor or shareholder thereof, or on application of a receiver appointed for
the corporation, may order a meeting of the creditors or class of creditors or
of the shareholders or class of shareholders to be affected by the proposed
compromise or arrangement or reorganization, to be summoned in such manner as
the court directs. If a majority in number representing 3/4 in value of the
creditors or class of creditors, or of the shareholders or class of shareholders
to be affected by the proposed compromise or arrangement or a reorganization,
agree to a compromise or arrangement or a reorganization of this corporation as
a consequence of the compromise or arrangement, the compromise or arrangement
and the reorganization, if sanctioned by the court to which the application has
been made, shall be binding on all the creditors or class of creditors, or on
all the shareholders or class of shareholders and also on this corporation.
- --------------------------------------------------------------------------------

ARTICLE VI (Optional. Delete if not applicable)

- --------------------------------------------------------------------------------
Any action required or permitted by the Act to be taken at an annual or special
meeting of shareholders may be taken without a meeting, without prior notice,
and without a vote, if consents in writing, setting forth the action so taken,
are signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take the action at a
meeting at which all shares entitled to vote on the action were present and
voted. The written consents shall bear the date of signature of each shareholder
who signs the consent. No written consents shall be effective to take the
corporate action referred to unless, within 60 days after the record date for
determining shareholders entitled to express consent to or to dissent from a
proposal without a meeting, written consents dated not more than 10 days before
the record date and signed by a sufficient number of shareholders to take the
action are delivered to the corporation. Delivery shall be to the corporation's
registered office, its principal place of business, or an officer or agent of
the corporation having custody of the minutes of the proceedings of its
shareholders. Delivery made to a corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested.

Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to shareholders who would have
been entitled to notice of the shareholder meeting if the action had been taken
at a meeting and who have not consented in writing.
- --------------------------------------------------------------------------------

<PAGE>
 
Article VII.  (Additional provisions, if any, may be inserted here; attach
additional pages if needed.)

               See Rider attached hereto and made a part hereof.

5.   COMPLETE SECTION (a) IF THE RESTATED ARTICLES WERE ADOPTED BY THE UNANIMOUS
     CONSENT OF THE INCORPORATOR(S) BEFORE THE FIRST MEETING OF THE BOARD OF
     DIRECTORS; OTHERWISE, COMPLETE SECTION (b). DO NOT COMPLETE BOTH.

     a. [ ] These Restated Articles of Incorporation were duly adopted on the 
            ____________ day of

            ____________, 19 __________ in accordance with the provisions of
            Section 642 of the Act by the unanimous consent of the
            incorporator(s) before the first meeting of the Board of Directors.

               Signed this ________ day of ___________________, 19 ___________.

        ______________________________________  ______________________________  

        ______________________________________  ______________________________  
        (Signatures of Incorporators: Type or Print Name Under Each Signature)

     b. [X] These Restated Articles of Incorporation were duly adopted on the
            31st day of October, 1996 in accordance with the provisions of
            Section 642 of the Act and: (check one of the following)

            [ ] were duly adopted by the Board of Directors without a vote of
                the shareholders. These Restated Articles of Incorporation only
                restate and integrate and do not further amend the provisions of
                the Articles of Incorporation as heretofore amended and there is
                no material discrepancy between those provisions and the
                provisions of these Restated Articles.

            [ ] were duly adopted by the shareholders. The necessary number of
                shares as required by statute we voted in favor of these
                Restated Articles.

            [X] were duly adopted by the written consent of the shareholders
                having not less than the minimum number of votes required by
                statute in accordance with Section 407(1) of the Act. Written
                notice to shareholders who have not consented in writing has
                been given. (Note: Written consent by less than all of the
                shareholders is permitted only if such provision appears in the
                Articles of Incorporation.)

            [ ] were duly adopted by the written consent of all the shareholders
                entitled to vote in accordance with section 407(2) of the Act.
            
               Signed this 31st day of October, 1996.


               By /s/ R. Douglas Armstrong                                    
                  ----------------------------------------------------------
                  (Only Signature of President, Vice-President, Chairperson,
                                       or Vice-Chairperson)

                R. Douglas Armstrong, Ph.D.            President
               ---------------------------------------------------------------  
                   (Type or Print Name)           (Type or Print Title)








        


<PAGE>
 
Name of person or organization         Preparer's name and business
remitting fees:                        telephone number:

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

                                       (    )
- ----------------------------------     ----------------------------------

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

                         INFORMATION AND INSTRUCTIONS

 1. The articles of incorporation cannot be restated until this form, or a 
    comparable document, is submitted.

 2. Submit one original of this document. Upon filing, the document will be
    added to the records of the Corporation and Securities Bureau. The original
    will be returned to the address appearing in the box on the front as
    evidence of filing.

    Since this document will be maintained on optical disk media, it is
    important that the filing be legible. Documents with poor black and white
    contrast, or otherwise illegible, will be rejected.

 3. This document is to be used pursuant to sections 641 through 643 of the Act
    for the purpose of restating the articles of incorporation of a domestic
    profit corporation. Restated articles of incorporation are an integration
    into a single instrument of the current provisions of the corporation's
    articles of incorporation, along with any desired amendments to those
    articles.

 4. Restated articles of incorporation which do not amend the articles of
    incorporation may be adopted by the board of directors without a vote of the
    shareholders. Restated articles of incorporation which amend the articles of
    incorporation require adoption by the shareholders. Restated articles of
    incorporation submitted before the first meeting of the board of directors
    require adoption by all of the incorporators.

 5. Item 2 - Enter the identification number previously assigned by the Bureau. 
    If this number is unknown, leave it blank.

 6. The duration of the corporation should be stated in the restated articles of
    incorporation only if it is not perpetual.

 7. This document is effective on the date endorsed "filed" by the Bureau. A
    later effective date, no more than 90 days after the date of delivery, may
    be stated as an additional article.

 8. If the restated articles are adopted before the first meeting of the board
    of directors, item 5(a) must be completed and signed in ink by a majority of
    the incorporators. Other restated articles must be signed by the president,
    vice-president, chairperson or vice-chairperson.

 9. FEES: Make remittance payable to the State of Michigan. Include corporation 
    name and identification number on check or money order.

    NONREFUNDABLE FEE.................................................... $10.00
    TOTAL MINUMUM FEE.................................................... $10.00
    ADDITIONAL FEES DUE FOR INCREASED AUTHORIZED SHARES ARE:
      each additional 20,000 authorized shares or portion thereof. $30.00
      maximum fee for first 10,000,000 authorized shares....... $5,000.00
      each additional 20,000 authorized shares or portion
        thereof in excess of 10,000,000 shares.................... $30.00
      maximum fee per filing for authorized shares in excess of
        10,000,000 shares.................................... $200,000.00

10. Mail form and fee to:                  The office is located at:

      Michigan Department of Commerce          6546 Mercantile Way
      Corporation and Securities Bureau        Lansing, MI 48910
      Corporation Division                     Telephone: (517) 334-6302
      P.O. Box 30054
      Lansing, MI 48909-7554

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

<PAGE>
 
                              RIDER TO ARTICLE III
                              --------------------


PART A:  COMMON STOCK

     Section 1.  Voting Rights. The holders of shares of Common Stock shall be
entitled to one vote for each share so held with respect to all matters voted on
by the shareholders of the corporation, subject in all cases to Section 4 of
Part B of this Article III.

     Section 2. Liquidation Rights. The rights of the holders of Common Stock
upon any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation shall be as set forth in Section 3 of Part B of this
Article III. However, all distributions made or funds paid to the holders of
Common Stock upon the occurrence of such an event shall be made on the basis of
the number of shares of Common Stock held by each of them.

     Section 3. Dividends. Dividends may be paid on the Common Stock as and when
declared by the Board of Directors, subject in all cases to Section 2 of Part B
of this Article III.

PART B:  PREFERRED STOCK

     Section 1.  Designation. The Preferred Stock shall consist of six series to
 be designated and known as "Series A Preferred Stock" (or "Series A"), "Series
 B Preferred Stock" (or "Series B"), "Series C Preferred Stock" (or "Series C"),
 "Series D Preferred Stock" (or "Series D"), "Series E Preferred Stock" (or
 "Series E") and "Series F Preferred Stock" (or "Series F"). All series of
 Preferred Stock shall be identical with each other in all respects except as
 otherwise provided herein. As used herein, the term "Preferred Stock" without
 designation shall refer to shares of Series A, Series B, Series C, Series D,
 Series E and Series F Preferred Stock, or to shares of any series. The number
 of shares constituting each such series of Preferred Stock shall be as set
 forth below:
          .     Series A Preferred Stock:   2,500,000 shares.
                                           
          .     Series B Preferred Stock:   3,030,000 shares.
                                           
          .     Series C Preferred Stock:   10,000 shares.
                                           
          .     Series D Preferred Stock:   3,000,000 shares.
                                         
          .     Series E Preferred Stock:   1,617,647 shares.
                                       
          .     Series F Preferred Stock:   833,333 shares.
                                           
     Section 2. Dividends.  Dividends are payable when and as declared by the 
Board of Directors subject to the restrictions imposed by the Michigan Business
Corporation Act. Dividends on the Preferred Stock shall not be cumulative and 
no right to such dividends shall accrue to holders of Preferred Stock unless 
declared by the Board of Directors. Holders of outstanding shares of certain 
series of Preferred Stock 

         

<PAGE>
 
shall be entitled to receive dividends in preference to any dividend (whether in
cash, securities of the Corporation or other property) on certain other shares
of capital stock of the Corporation, as set forth below in terms of four
"Levels," to be designated and known as "Level 1," "Level 2," "Level 3" and
"Level 4." No dividends or other distributions shall be made with respect to a
particular Level until all dividends on the preceding Levels have been paid on
or set apart for payment. For example, dividends on Level 3 shall not be paid or
set apart for payment until full dividends on Level 1 and Level 2 have been paid
or set apart for payment. Dividends, if paid, must be paid on, or, if declared
and set apart for payment on, must be declared and set apart for payment on, all
outstanding shares of capital stock on a particular Level contemporaneously, and
if less than full dividends are paid on or if declared and set apart for payment
on a particular Level, then the same percentage of the respective dividend rate
on all shares on such Level shall be paid or declared and set apart for payment.

          .      Level 1:    $0.48 per share of Series F Preferred Stock; and
                             $0.34 per share of Series E Preferred Stock

          .      Level 2:    $0.32 per share of Series D Preferred Stock;
                             $80.00 per share of Series C Preferred Stock; and
                             $0.16 per share of Series B Preferred Stock.

          .      Level 3:    $0.08 per share of Series A Preferred Stock.
 
          .      Level 4:    If a dividend is declared with respect to the
                             Common Stock, then a contemporaneous dividend must
                             be declared with respect to the Series E and Series
                             F Preferred Stock in an amount equal to that which
                             would be received if the Series E and Series F
                             Preferred Stock had been converted to Common Stock
                             on the declaration date of such dividend.

     Section 3.  Liquidation Preference.

     3.1  Preferential Amounts. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, any distribution of
the assets or surplus funds of the Corporation to holders of shares of capital
stock of the Corporation by reason of their ownership thereof must take place as
set herein. Holders of shares of certain series of Preferred Stock shall be
entitled to receive such distributions prior and in preference to any such
distributions on certain other shares of capital stock of the Corporation, as
set forth below in terms of four "Tiers," to be designated and known as "Tier
1," "Tier 2," "Tier 3" and "Tier 4." No such distributions shall be made with
respect to a particular Tier until all such preferential distributions on the
preceding Tiers have been made. For example, such distributions on Tier 3 shall
not be made until the full preferential distributions on Tier 1 and Tier 2 have
been made. If the assets or surplus funds of the Corporation available for
distribution to stockholders are insufficient to permit payment in full of
amounts to which the holders of the outstanding

                                       2
                                       

<PAGE>
 
shares on a particular Tier are entitled pursuant to this Section 3, then such
available assets and funds shall be distributed ratably among the holders of the
outstanding shares on such Tier in proportion to the full preferential
distribution each such holder is otherwise entitled to receive. The preferential
amounts set forth below shall be adjusted for any stock dividends, combinations
or splits with respect to such shares.

          .    Tier One:   $6.00 per share of Series F Preferred Stock, plus all
                           accrued or declared but unpaid dividends thereon (the
                           "Series F Preferential Amount"); and
                           $4.25 per share of Series E Preferred Stock, plus all
                           accrued or declared but unpaid dividends thereon (the
                           "Series E Preferential Amount").

          .    Tier Two:   $4.00 per share of Series D Preferred Stock, plus all
                           accrued or declared but unpaid dividends thereon (the
                           "Series D Preferential Amount");
                           $1,000.00 per share of Series C Preferred Stock, plus
                           all accrued or declared but unpaid dividends thereon
                           (the "Series C Preferential Amount"); and
                           $2.00 per share of Series B Preferred Stock, plus all
                           accrued or declared but unpaid dividends thereon (the
                           "Series B Preferential Amount").

          .    Tier Three: $1.00 per share of Series A Preferred Stock, plus
                           all accrued or declared but unpaid dividends thereon
                           (the "Series A Preferential Amount").
 
     3.2  Participation of Preferred Stock. After the payment or setting apart
for payment of the Series A Preferential Amount, the Series B Preferential
Amount, the Series C Preferential Amount, the Series D Preferential Amount, the
Series E Preferential Amount and the Series F Preferential Amount, the remaining
assets or surplus funds of the Corporation available for distribution upon such
liquidation, dissolution or winding up shall be divided pro rata among the
holders of Common Stock and Preferred Stock, treating the Preferred Stock as if
converted to Common Stock on the date of such liquidation, dissolution or
winding up.

     3.3  Limits on Participation. In the event of such distribution upon a
liquidation, dissolution or winding up of the Corporation, the amount otherwise
payable to a holder of Preferred Stock shall not exceed the amount per share set
forth opposite the name of the particular series of Preferred Stock, as set
forth below and as adjusted for any stock dividends, combinations or splits with
respect to such shares.

          .    Series A Preferred Stock:   $5.00 per share.
          .    Series B Preferred Stock:   $6.00 per share.
          .    Series C Preferred Stock:   $2,500.00 per share.
          .    Series D Preferred Stock:   $6.00 per share.
 
                                       3

<PAGE>
 
          .      Series E Preferred Stock:   $6.00 per share.
          .      Series F Preferred Stock :  $9.00 per share.

     3.4  Consolidation or Merger. A consolidation or merger of the Corporation
with or into another corporation or entity shall be regarded as a liquidation,
dissolution or winding up of the Corporation with respect to the Preferred Stock
within the meaning of this Section 3 unless such consolidation or merger is not
intended to effect a change in the ownership or control of the Corporation or of
its assets and is not intended to alter materially the business or assets of the
Corporation, including, by way of example and without limiting the generality of
the foregoing: (i) a consolidation or merger which merely changes the identity,
form or place of organization of the Corporation, or which is between or among
the Corporation and any of its direct or indirect subsidiaries, or (ii)
following such merger or consolidation, shareholders of the Corporation
immediately prior to such event own not less than 51% of the voting power of
such corporation immediately after such merger or consolidation on a pro rata
basis.

     Section 4.  Voting Rights.

     4.1  General. Except as otherwise required by law, the holder of each share
of Preferred Stock issued and outstanding shall have the number of votes equal
to the number of shares of Common Stock into which such shares of Preferred
Stock could be converted at the record date for determination of the
shareholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited, such votes to be counted together with all other
shares of stock of the Corporation having general voting power and not
separately as a class.

     4.2  Merger or Sale of Assets. Consent of the holders of at least the
percentage or ratio of the outstanding shares of the class or series set forth
opposite the name of such particular class or series of capital stock of the
Corporation, as set forth below, shall be required for any action which results
in a consolidation or merger which would be treated as a liquidation,
dissolution or winding up of the Corporation under Section 3.4, or the
liquidation, sale or assignment of all or substantially all of the assets of the
Corporation.

          .      Common Stock and Preferred Stock, with the exception of
                 Series C Preferred Stock:   2/3.
          .      Series A Preferred Stock:   2/3.
          .      Series B Preferred Stock:   2/3.
          .      Series D Preferred Stock:   2/3.
          .      Series E Preferred Stock:   51%.
          .      Series F Preferred Stock:   51%.
 
     4.3  Changes Affecting a Particular Series. Consent of the holders of at
least the percentage or ratio of the outstanding shares of a particular series
of Preferred Stock set forth opposite the name of such series, as set forth
below, with only the affected series

                                       4

<PAGE>
 
 voting and with each such affected series voting as a separate class, shall be
 required for any action which: (a) alters the rights, preferences, privileges
 or restrictions of such series; (b) increases or decreases the authorized
 number of shares of such series; or (c) creates any new class or series of
 capital stock of the Corporation having rights, preferences or privileges
 senior to or on a parity with such series.

          .    Series A Preferred Stock:   2/3.
          .    Series B Preferred Stock:   2/3.
          .    Series C Preferred Stock:   Majority.
          .    Series D Preferred Stock:   2/3.
          .    Series E Preferred Stock:   51%.
          .    Series F Preferred Stock:   51%.
 
     4.4  Other Actions.  Consent of the holders of at least the percentage or
 ratio of the outstanding shares of a particular series of Preferred Stock set
 forth opposite the name of such series, as set forth below, with each such
 series voting as a separate class, shall be required for: (a) any purchase or
 redemption by the Corporation of any shares of Preferred Stock; (b) any
 repurchase by the Corporation of any shares of Common Stock, other than
 repurchases from directors, employees and consultants of the Corporation which
 do not in any consecutive twelve-month period exceed One Hundred Thousand
 Dollars ($100,000); (c) any declaration or payment by the Corporation of a
 dividend or distribution on account of the Common Stock prior to the conversion
 of all shares of Preferred Stock, other than a dividend or distribution payable
 in shares of Common Stock or otherwise taken into account by the anti-dilution
 provisions set forth in these Articles of Incorporation for the benefit of the
 Preferred Stock; (d) the sale by any wholly-owned subsidiary of the Corporation
 of any shares of its stock to a third person; and (e) any amendment to these
 Articles of Incorporation.
 
          .    Series A Preferred Stock:   2/3.
          .    Series B Preferred Stock:   2/3.
          .    Series D Preferred Stock:   2/3.
          .    Series E Preferred Stock:   51%.
          .    Series F Preferred Stock:   51%.

     4.5  Series C Quorum Requirement. At any meeting of the holders of all
outstanding shares of Preferred Stock to vote as a class, the presence in person
or by proxy of the holders of a majority of the outstanding shares of Series C
Preferred Stock shall be required to constitute a quorum; in the absence of a
quorum a majority of the holders present in person or by proxy shall have the
power to adjourn the meeting from time to time without notice, other than
announcement at the meeting, until a quorum shall be present.

     Section 5.  Redemption.  The Preferred Stock is not redeemable.

     Section 6.  Conversion of Preferred Stock.  The holders of Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):

                                       5

<PAGE>
 
     6.1  Conversion Prices.

          6.1.1  Series A, Series B, Series C, Series D and Series E Preferred
Stock.

     Upon any conversion of Series A, Series B, Series C, Series D and Series E
Preferred Stock into Common Stock pursuant to this Section 6, each such share of
such series of Preferred Stock shall be converted into such number of fully paid
and nonassessable shares of Common Stock as is determined by taking the
respective preferential amount for such series of Preferred Stock, as set forth
below:

          .    Series A Preferred Stock:   $1.00;
          .    Series B Preferred Stock:   $2.00;
          .    Series C Preferred Stock:   $1,000.00;
          .    Series D Preferred Stock:   $4.00;
          .    Series E Preferred Stock:   $4.25;

          and dividing such preferential amount set forth above by the
respective conversion price for such series of Preferred Stock, as set forth
below:

          .    "Series A Conversion Price":  $1.00;
          .    "Series B Conversion Price":  $2.00;
          .    "Series C Conversion Price":  $4.00;
          .    "Series D Conversion Price":  $4.00;
          .    "Series E Conversion Price":  $4.25.

          The Applicable Conversion Price (as defined below in Section 6.1.3)
for each such series shall be subject to adjustment as provided below in Section
6.5.

          6.1.2  Series F Preferred Stock.  Upon any conversion of Series F
Preferred Stock into Common Stock pursuant to this Section 6, each such share of
Series F Preferred Stock shall be converted into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing $6.00 by the
Series F Conversion Price, as such Series F Conversion Price is determined
pursuant to Section 6.3.4.

          6.1.3  Applicable Conversion Price.  The term "Applicable Conversion
Price" shall refer to the Series A Conversion Price with respect to the Series A
Preferred Stock, the Series B Conversion Price with respect to the Series B
Preferred Stock, the Series C Conversion Price with respect to the Series C
Preferred Stock, the Series D Conversion Price with respect to the Series D
Preferred Stock, the Series E Conversion Price with respect to the Series E
Preferred Stock and the Series F Conversion price with respect to the Series F
Preferred Stock, subject to adjustment as provided below in Section 6.5.

                                       6

<PAGE>
 
     6.2  Voluntary Conversion.

          6.2.1  Series A, Series B, Series D and Series E Preferred Stock.
Each share of Series A, Series B, Series D, and Series E Preferred Stock shall
be convertible into Common Stock, at the option of the holder thereof, at any
time after the date of issuance of such share at the office of the Corporation
or any transfer agent for such stock.

          6.2.2  Series C Preferred Stock.  Each share of Series C Preferred
Stock shall be convertible into Common Stock, at the option of the holder
thereof, at any time after April 1, 1998, at the office of the Corporation or
any transfer agent for such stock.

     6.3  Automatic Conversion.

          6.3.1  Series A, Series B and Series D Preferred Stock.  Each share of
Series A, Series B and Series D Preferred Stock shall automatically be converted
into shares of Common Stock at the then effective Applicable Conversion Price
immediately upon the closing of the sale of the Corporation's Common Stock in a
firm commitment, underwritten public offering registered under the Securities
Act of 1933, as amended (the "Securities Act") (other than a registration
relating solely to a transaction under Rule 145 under the Securities Act or any
successor thereto or to an employee benefit plan of the Corporation) at a public
offering price (prior to underwriter commissions and expenses) equal to or
exceeding $4.26 per share of Common Stock, as adjusted for any stock dividends,
combinations or splits with respect to such shares, and the gross proceeds of
which exceed $10,000,000. In addition, each share of Series A, Series B and
Series D Preferred Stock shall automatically be converted into shares of Common
Stock at the then effective Applicable Conversion Price for such particular
series upon the conversion of a majority of the shares of such particular series
then outstanding.

          6.3.2  Series C Preferred Stock.  Each share of Series C Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series C Conversion Price immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act (other than a registration relating
solely to a transaction under Rule 145 under the Securities Act or any successor
thereto or to an employee benefit plan of the Corporation).

          6.3.3  Series E Preferred Stock.  Each share of Series E Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series E Conversion Price immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act (other than a registration relating
solely to a transaction under Rule 145 under the Securities Act or any successor
thereto or to an employee benefit plan of the Corporation) at a public offering
price (prior to underwriter commissions and expenses) equal to or exceeding
$4.26 per share of Common Stock, as adjusted for any stock dividends,
combinations or splits with respect to such shares, and the gross proceeds of
which exceed $12,500,000. In addition, each share of Series E Preferred Stock
shall

                                       7

<PAGE>
 
automatically be converted into shares of Common Stock at the then effective
Series E Conversion Price upon the conversion of a majority of the shares of
Series E Preferred Stock then outstanding.

          6.3.4  Series F Preferred Stock.  Each share of Series F Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series F Conversion Price as follows:

               (a)  Initial Public Offering.  Each share of Series F Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series F Conversion Price immediately upon the closing of the sale of
the Corporation's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act (other than a registration relating
solely to a transaction under Rule 145 under the Securities Act of any successor
thereto or to an employee benefit plan of the Corporation). In the event that
the conversion of Series F Preferred Stock shall occur pursuant to this Section
6.3.4(a), the Series F Conversion Price shall equal eighty percent (80%) of the
price per share of the Common Stock sold in such initial public offering (prior
to any underwriter commissions, fees or discounts), and such conversion shall
occur following any adjustment to the Series F Conversion Price pursuant to
Section 6.5.

               (b)  Qualifying Financing.  Each share of Series F Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Series F Conversion Price immediately upon the closing of a non-public
equity financing (including a transaction with multiple closings for the sale of
shares of the same class at the same price per share within any twelve-month
period) wherein the aggregate consideration for such issuance received by the
Corporation is at least $10,000,000, of which at least $1,000,000 is from new
investors, and the Corporation is not subjected to any restrictions imposed by
the investors in such equity financing upon the use of such funds. In the event
that the conversion of the Series F Preferred Stock into shares of Common Stock
shall occur pursuant to this Section 6.3.4(b), the Series F Conversion Price
shall equal eighty percent (80%) of the price per share (on an "as converted"
into Common Stock basis) paid in said non-public equity financing, and such
conversion shall occur following any adjustment to the Series F Conversion Price
pursuant to Section 6.5.

               (c)  Merger, etc..  Each share of Series F Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Series F Conversion Price immediately prior to the closing of a consolidation or
merger of the Corporation with or into another corporation which would be
treated as a liquidation, dissolution or winding up pursuant to Section 3.4 or
the sale or conveyance to another corporation of all or substantially all of the
assets of the Corporation, which results in aggregate consideration to the
Corporation or its shareholders with a fair market value of at least
$85,000,000, as determined in good faith by the Board of Directors of the
Corporation. In the event that the conversion of the Series F Preferred Stock
into shares of Common Stock shall occur pursuant to this Section 6.3.4(c), the
Series F Conversion Price shall equal eighty percent (80%) of the value per
share (on an "as

                                       8

<PAGE>
 
converted" into Common Stock basis) realized by the Company's shareholders from
the consideration received in said consolidation or merger, which value shall be
determined by the mutual agreement between the Company and the Purchaser. If the
Company and the Purchaser do not reach mutual agreement as to said value, then
said value shall be determined by a nationally recognized investment banking
firm which is mutually selected by the Company and the Purchaser, with the fees
for obtaining said valuation determination to be borne equally by the Company
and the Purchaser. Such conversion shall occur following any adjustment to the
Series F Conversion Price pursuant to Section 6.5.

               (d)  Operational Plan.  Each share of Series F Preferred Stock
shall automatically be converted into shares of Common Stock at the then
effective Series F Conversion Price immediately upon the adoption by resolution
of the Corporation's Board of Directors of an operational plan for the
Corporation which provides for the Corporation to continue its operations in the
ordinary course of business through revenues, working capital or other resources
through at least December 31, 1998 without any further infusion of capital from
investors through debt or equity investment in the Corporation; provided,
however, that any such operational plan, as determined in good faith by the
Corporation's Board of Directors, must be consistent with the intent of the then
current annual Product Development Plan pursuant to the Distribution Agreement
by and between the Corporation and Cobe BCT, Inc., dated October 22, 1993. In
the event that the conversion of the Series F Preferred Stock into shares of
Common Stock shall occur pursuant to this Section 6.3.4(d), the Series F
Conversion Price shall equal eighty percent (80%) of the fair market value of a
share of Series F Preferred Stock, as determined by the mutual agreement of the
Company and the Purchaser. If the Company and the Purchaser do not reach mutual
agreement as to said value, then said value shall be determined by a nationally
recognized investment banking firm which is mutually selected by the Company and
the Purchaser, with the fees for obtaining said valuation determination to be
borne equally by the Company and the Purchaser. Such conversion shall occur
following any adjustment to the Series F Conversion Price pursuant to Section
6.5.

               (e)  December 1, 1997.  If not earlier converted pursuant to this
Section 6.3.4, each share of Series F Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective Series F Conversion
Price on December 1, 1997; provided, however, that in the event that prior to
December 1, 1997, the Corporation has entered into a letter of intent (whether
or not such letter of intent is intended to be binding or non-binding on the
Corporation) which contemplates a transaction which would trigger automatic
conversion of the Series F Preferred Stock into Common Stock pursuant to
paragraph (a), (b) or (c) of this Section 6.3.4 and contemplates the
consummation of the closing of such transaction on or before February 1, 1998,
then each share of Series F Preferred Stock shall automatically be converted
into shares of Common Stock at then effective Series F Conversion Price on
February 2, 1998. In the event that the conversion of the Series F Preferred
Stock into shares of Common Stock shall occur pursuant to this Section 6.3.4(e),
the Series F Conversion Price shall be $4.65, as adjusted pursuant to Section
6.5.

                                       9

<PAGE>
 
     6.4  Mechanics of Conversion.  No fractional shares of Common Stock shall
be issued upon conversion of shares of Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Applicable Conversion Price for the series. Before any holder of
Preferred Stock shall be entitled to convert the same into shares of Common
Stock pursuant to Section 6.2, such holder shall surrender the certificate or
certificates therefor at the principal office of the Corporation or of any
transfer agent for such stock and shall give written notice to the Corporation
at such office that such holder elects to convert the same and shall state
therein the name or names of the nominees in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Preferred Stock, or to their respective nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder or nominee shall be entitled as aforesaid, together with
cash in lieu of any fraction of a share. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of such
surrender of the shares of Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.

     6.5  Adjustments to Conversion Prices.

          6.5.1  Special Definitions.  For purposes of this Section 6.5, the
following definitions shall apply:

               (a)  "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities (defined below).

               (b)  "Original Issue Date" shall mean the date on which a share
of a particular series of Preferred Stock was first issued.

               (c)  "Convertible Securities" shall mean any evidence of
indebtedness, shares or other securities directly or indirectly convertible into
or exchangeable for Common Stock.

               (d)  "Additional Shares of Common Stock" shall mean all shares of
Common Stock issued (or, pursuant to Section 6(D)(3) deemed to be issued) by the
Corporation after the Original Issue Date, other than shares of Common Stock
issued or issuable:

                    (i)   upon conversion of shares of Preferred Stock;

                    (ii)  to the University of Michigan, Stephen G. Emerson,
Bernhard O. Palsson, Michael F. Clarke, or to the officers, employees,
consultants or directors of the Corporation pursuant to any stock purchase plan
or arrangement, stock

                                      10

<PAGE>
 
option plan, or other stock incentive plan or agreement approved by the
Corporation's Board of Directors; or

                    (iii) by way of dividend or other distribution on shares
excluded from the definition of Additional Shares of Common Stock by the
foregoing clauses (i) or (ii), or this clause (iii).

          6.5.2  No Adjustment of Applicable Conversion Price.  No adjustment in
the Applicable Conversion Prices for the series of Preferred Stock shall be made
with respect to the issuance of Additional Shares of Common Stock or otherwise,
unless the consideration per share (determined pursuant to Section 6.5.5 hereof)
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Applicable Conversion Price for such series in
effect on the date of, and immediately prior to, the issue of such Additional
Share of Common Stock.

          6.5.3  Deemed Issuances of Additional Shares of Common Stock.

               (a)  Options and Convertible Securities.  In the event the
Corporation at any time or from time to time after the Original Issue Date of a
particular series shall issue any Options or Convertible Securities or shall fix
a record date for the determination of holders of any class of securities
entitled to receive any such Options or Convertible Securities, then the maximum
number of shares (as set forth in the instrument relating thereto without regard
to any provisions contained therein for a subsequent adjustment of such number)
of Common Stock issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common Stock
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common Stock shall not be deemed to have been issued with
respect to the Preferred Stock unless the consideration per share (determined
pursuant to Section 6.5.5 hereof) of such Additional Shares of Common Stock
would be less than the Applicable Conversion Price of such series in effect on
the date of and immediately prior to such issue, or such record date, as the
case may be, and provided further that in any case in which Additional shares of
Common Stock are deemed to be issued the following provisions shall apply:

               (i)  Exercise or Conversion.  No further adjustment in the
Applicable Conversion Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities.

               (ii) Increase or Decrease.  If such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Applicable Conversion Price computed upon the original
issue thereof (or upon the

                                      11

<PAGE>
 
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or decrease insofar as it
affects such Options or the rights of conversion or exchange under such
Convertible Securities.

          (iii) Expiration. Upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Applicable Conversion Prices computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as follows:

                         (A) Underlying Common Stock. In the case of Convertible
Securities or Options for Common Stock, any such subsequent adjustments shall be
recomputed as if the only Additional Shares of Common Stock issued were the
shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange.

                         (B) Underlying Convertible Securities. In the case of
Options for Convertible Securities, any such subsequent adjustments shall be
recomputed as if only the Convertible Securities, if any, actually issued upon
the exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation
(determined pursuant to Section 6.5.5 upon the issue of the Convertible
Securities with respect to which such Options were actually exercised.

                    (iv) Limitation. No readjustment pursuant to clause (ii) or
(iii) above shall have the effect of increasing the Applicable Conversion Price
to an amount which exceeds the lower of (A) such Applicable Conversion Price on
the original adjustment date, or (B) such Applicable Conversion Price that would
have resulted from any issuance of Additional Shares of Common Stock between the
original adjustment date and such readjustment date (nor shall any shares issued
upon conversion prior to such readjustment be affected by such readjustment).

                    (v) Short-Term Options. In the case of any Options that
expire by their terms not more than thirty (30) days after the date of issue
thereof, no adjustment of the Applicable Conversion Price shall be made until
the expiration or exercise of all such Options, whereupon such adjustment shall
be made in the same manner as provided in clause (iii) above.

                                      12

<PAGE>
 
                    (vi) Date of Issuance. If such record date shall have been
fixed and such Options or Convertible Securities are not issued on the date
fixed therefor, the adjustment previously made in the Applicable Conversion
Price which became effective on such record date shall be cancelled as of the
close of business on such record date, and thereafter the Applicable Conversion
Price shall be adjusted pursuant to this Section 6.5.3 as of the actual date of
their issuance.

               (b) Stock Dividends, Stock Distributions and Subdivisions. In the
event the Corporation at any time or from time to time after the Original Issue
Date shall declare or pay any dividend or make any other distribution on the
Common Stock payable in Common Stock, or effect a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in Common Stock), then and in any such event, Additional Shares of
Common Stock shall be deemed to have been issued as follows:

                    (i) Dividend or Distribution. In the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of any class of securities entitled to
receive such dividend or distribution.

                    (ii) Subdivision. In the case of any such subdivision, at
the close of business on the date immediately prior to the date upon which such
corporate action becomes effective.

          If such record date shall have been fixed and such dividend shall not
have been fully paid on the date fixed therefor, the adjustment previously made
in the Applicable Conversion Price which became effective on such record date
shall be cancelled as of the close of business on such record date, and
thereafter the Applicable Conversion Price shall be adjusted pursuant to this
Section 6.5.3 as of the time of actual payment of such dividend.

          6.5.4  Anti-Dilution Adjustment of Applicable Conversion Price Upon
Issuance of Additional Shares of Common Stock.

               (a) Series A, Series B and Series E Preferred Stock. In the event
the Corporation, at any time after the Original Issue Date, shall issue
Additional Shares of Common Stock (including Additional Shares of Common Stock
deemed to be issued pursuant to Section 6.5.3 but excluding Additional Shares of
Common Stock issued pursuant to Section 6.5.3(b) which event is dealt with in
Section 6.5.6 hereof) without consideration or for a consideration per share
less than the Series A Conversion Price, Series B Conversion Price or Series E
Conversion Price in effect on the date of and immediately prior to such
issuance, then and in such event, the Applicable Conversion Price for the
affected Series A, Series B and Series E Preferred Stock, respectively, shall be
reduced, concurrently with such issuance, in order to increase the number of
shares of Common Stock into which shares of such series of Preferred Stock is
convertible, to a price (calculated to the nearest cent) determined by the
following formula:

                                      13

<PAGE>
 
                            C
                          -----
     CP(1) = CP(O) x CS + CP(O)
                     ----------
                      CS + AS

     where:

     CP(O) = the Applicable Conversion Price for Series A, Series B or Series E
     Preferred Stock in effect on the date of and immediately prior to such
     issuance;

     CP(1) = the Applicable Conversion Price for Series A, Series B or Series E
     Preferred Stock as so adjusted;

     CS = the number of shares of Common Stock outstanding immediately prior to
     such issuance (including shares of Common Stock issuable upon conversion or
     exercise of any Convertible Securities or Options);

     C = the aggregate consideration received by the Corporation for the total
     number of Additional Shares of Common Stock so issued; and

     AS = the number of such Additional Shares of Common Stock so issued.

Notwithstanding the foregoing, the Applicable Conversion Price for Series A,
Series B or Series E Preferred Stock shall not be so reduced if the amount of
such reduction would be an amount less than $0.01, but any such amount shall be
carried forward and applied toward any subsequent reduction which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
$0.01 or more.

               (b) Series D Preferred Stock.

                    (i) Ratchet Adjustment. In the event the Corporation shall
issue Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 6.5.3, but excluding Series D
Preferred Stock and Additional Shares of Common Stock issued pursuant to Section
6.5.3(b) (which event is dealt with in Section 6.5.6 hereof)), either without
consideration or for a consideration per share less than the Series D Conversion
Price in effect on the date of and immediately prior to such issuance, wherein
the aggregate consideration for such issuance received by the Corporation is at
least $2,000,000, the following will be applicable:

                         (A) Single Transaction. In a private financing
transaction (including a transaction with multiple closings for the sale of
shares of the same class at the same price per share within any twelve-month
period), the Series D Conversion Price shall be reduced concurrently with such
issuance to a price equal to the consideration per share (as determined pursuant
to Section 6.5.5 hereof) received by

                                      14

<PAGE>
 
the Corporation for such Additional Shares of Common Stock; provided, however,
that in no event shall the Series D Conversion Price be reduced to less than
$3.00.

                         (B) Multiple Transactions. In multiple transactions at
different per share prices during any twelve-month period, the Series D
Conversion Price shall be reduced to an amount equal to the weighted average
consideration received by the Corporation for such Additional Shares of Common
Stock during such twelve-month period (but in no event shall the Series D
Conversion Price be reduced to less than $3.00. Such weighted average
consideration shall be determined by dividing the aggregate consideration
received by the Corporation for the Additional Shares of Common Stock over such
twelve-month period by the aggregate number of Additional Shares of Common Stock
issued over the same period.

                    (ii) Formula Adjustment. In the event the Corporation shall
issue Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 6.5.3 but excluding Series D
Preferred Stock and Additional Shares of Common Stock issued pursuant to Section
6.5.3(b), which event is dealt with in Section 6.5.6 for a per share
consideration less than the Series D Conversion Price in effect on the date of
and immediately prior to such issuance, in a single transaction or in a series
of transactions, and for aggregate consideration less than $2,000,000 during any
twelve-month period, then the Series D Conversion Price shall be adjusted for
such Additional Shares of Common Stock pursuant to the formula provided in
Section 6.5.4(a) as if the Series D Preferred Stock were Series B Preferred
Stock (except for the Applicable Conversion Price which shall be the Series D
Conversion Price).

                    (iii) Single Adjustment. For purposes of this Section
6.5.4(b) any issuance of Additional Shares of Common Stock shall be included in
only one twelve-month period (and in only one adjustment of the Series D
Conversion Price), which period shall be the earliest twelve-month period which
may be applicable (and which adjustment shall be the adjustment to be made with
respect to the earliest applicable twelve-month period). After the first twelve-
month period with respect to which an adjustment is made to the Series D
Conversion Price, any new twelve-month period shall be deemed to commence on the
date of issuance of Additional Shares of Common Stock first occurring more than
twelve months following the date of issuance of Additional Shares of Common
Stock which caused the most recent prior twelve-month period to begin.

               (c) Series F Preferred Stock. In the event the Corporation shall
issue Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to Section 6.5.3, but excluding Series F
Preferred Stock and Additional Shares of Common Stock issued pursuant to Section
6.5.3(b), which event is dealt with in Section 6.5.6, either without
consideration or for a consideration per share less than the Series F Conversion
Price in effect on the date of and immediately prior to such issuance, in a
private financing transaction (including a transaction with multiple closings
for the sale of shares of the same class at the same

                                      15

<PAGE>
 
price per share within any twelve-month period), wherein the aggregate
consideration for such issuance received by the Corporation is at least
$1,000,000, then the Series F Conversion Price shall be adjusted for such
Additional Shares of Common Stock pursuant to the formula provided in Section
6.5.4(a) as if the Series F Preferred Stock were Series B Preferred Stock
(except the Applicable Conversion Price shall be the Series F Conversion Price);
provided, however, that the adjustment to the Series F Conversion Price provided
for in this Section 6.5.4(c) shall apply only to the Corporation's first such
private financing following the Original Issue Date of the Series F Preferred
Stock.

          6.5.5  Determination of Consideration.  For purposes of this Section
6.5 the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:

               (a)  Cash and Property.  Such consideration shall be computed as
follows:

                    (i)   Cash.  Insofar as it consists of cash, such
consideration shall be computed at the aggregate amount of cash received by the
Corporation;

                    (ii)  Property.  Insofar as it consists of property other
than cash, such consideration shall be computed at the fair value thereof at the
time of such issue, as determined in good faith by the Board of Directors; and

                    (iii) Combination.  In the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, such consideration shall be the
proportion of such consideration so received, computed as provided in clauses
(i) and (ii) above, as determined in good faith by the Board of Directors.

               (b)  Options and Convertible Securities.  The consideration per
share received by the Corporation for Additional Shares of Common Stock deemed
to have been issued pursuant to Section 6.5.3(a), relating to Options and
Convertible Securities, shall be determined by dividing:

                    (i)   the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation upon the exercise of such Options or the conversion or exchange
of such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities; by

                    (ii)  the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained

                                      16

<PAGE>
 
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or the conversion or exchange of such Convertible Securities.

          6.5.6  Adjustment for Dividends or Combinations.

               (a)  Stock Dividends, Distributions or Subdivisions.  In the
event the Corporation shall issue Common Stock pursuant to Section 6.5.3(b) in a
stock dividend, stock distribution or subdivision, the Applicable Conversion
Price in effect immediately prior to such stock dividend, stock distribution or
subdivision shall, concurrently with the effectiveness of such stock dividend,
stock distribution or subdivision, be proportionately decreased.

               (b)  Combinations or Consolidations.  In the event the
outstanding shares of Common Stock shall be combined or consolidated, by
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Applicable Conversion Price in effect immediately prior to such combination
or consolidation shall, concurrently with the effectiveness of such combination
or consolidation, be proportionately increased.

          6.5.7  Adjustment for Merger or Reorganization.  In the event of any
consolidation or merger of the Corporation with or into another corporation or
the sale or conveyance of all or substantially all of the assets of the
Corporation to another corporation, each share of Series A, Series B, Series C,
Series D and Series E Preferred Stock shall thereafter be convertible into the
number of shares of stock or other securities or property to which a holder of
the number of shares of Common Stock of the Corporation deliverable upon
conversion of such series would have been entitled upon such consolidation,
merger or conveyance, and, in any such case, appropriate adjustment (as
determined by the Board of Directors) shall be made in the application of the
provisions herein set forth with respect to the rights and interest thereafter
of the holders of the series, in order that the provisions set forth herein
(including provisions with respect to changes in and other adjustments of the
Applicable Conversion Price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the conversion of that series of Preferred Stock.
However, in the case of any merger or consolidation which is treated as a
liquidation, dissolution or winding up of the affairs of the Corporation
pursuant to Section 3.4, each share of Series A, Series B, Series C, Series D
and Series E Preferred Stock shall not be converted into shares of stock or
other securities or property of the resulting corporation, but shall be
cancelled and surrendered to the Corporation upon distribution to the holders of
Series A, Series B, Series C, Series D and Series E Preferred Stock of all cash
or other property to which they are entitled pursuant to Section 3 as a result
of such transaction being treated as a liquidation, dissolution, or winding up
under Section 3.4.

          6.5.8  Adjustment to Series C Conversion Price for Distributions to
Holders of Common Stock.  In the event that the Corporation shall distribute to
the holders of its Common Stock (whether pursuant to a reclassification, merger
or consolidation or

                                      17

<PAGE>
 
otherwise) evidences of its indebtedness or assets (including cash, securities,
intangible assets or other property), then the Series C Conversion Price shall
be adjusted so that the number of shares of Common Stock into which a share of
Series C Preferred Stock is convertible equals the number of shares of Common
Stock determined as follows: multiply the number of shares of Common Stock into
which each share of Series C Preferred Stock is convertible at the then
effective Series C Conversion Price by a fraction, the numerator of which shall
be the Series C Conversion Price effective on the record date for determination
of shareholders entitled to receive such distribution, and the denominator of
which shall be such Series C Conversion Price less the fair market value of such
property, as determined in good faith by the Board of Directors of the
Corporation, distributed with respect to each share of Common Stock. Such
adjustment to the Series C Conversion Price shall be made whenever any such
distribution is made.

     6.6  No Impairment.  The Corporation will not, by amendment of these
Restated Articles of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.

     6.7  Certificate as to Adjustments.  Upon the occurrence of each adjustment
or readjustment of the Applicable Conversion Prices pursuant to this Section 6,
the Corporation at its expense shall promptly compute such adjustments or
readjustments in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time from any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Applicable Conversion Price at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of such holder's shares of Preferred
Stock.

     6.8  Notices of Record Date.  In the event of any taking by the Corporation
of a record of the holders of any class of securities (other than Preferred
Stock) for the purposes of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend which is the same as cash
dividends paid in previous quarters) or other distribution, the Corporation
shall mail to each holder of Preferred Stock at least ten (10) days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend or distribution.

     6.9  Common Stock Reserved.  The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common

                                      18

<PAGE>
 
Stock as shall from time to time be sufficient to effect conversion of the
Preferred Stock. The Corporation shall not take any corporate action which would
require an adjustment in the number of shares of Common Stock into which any
share of Preferred Stock is convertible unless either (i) immediately after such
corporate action is taken and the transactions contemplated thereby are
consummated, the number of authorized and unissued shares of Common Stock would
be sufficient to effect the conversion of all outstanding shares of Preferred
Stock at the Applicable Conversion Prices then in effect, or (ii) concurrently
with the taking of such corporate action, the Corporation shall take such
corporate action as, in the opinion of its counsel, may be necessary to increase
its authorized and unissued shares of Common Stock to such number as shall be
sufficient to provide for such conversion.

          6.10  Taxes Upon Conversion of Series C Preferred Stock.  The
Corporation shall pay any and all taxes that may be payable in respect of the
issue or delivery of shares of Common Stock on conversion of shares of Series C
Preferred Stock pursuant hereto. The Corporation shall not, however, be required
to pay any tax which may be payable in respect of any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that in which
the shares of Series C Preferred Stock so converted were registered, and no such
issue or delivery shall be made unless and until the person requesting such
issue has paid to the Corporation the amount of any such tax or has established,
to the satisfaction of the Corporation, that such tax has been paid.

                                      19

<PAGE>
 
                             RIDER TO ARTICLE VII
                             --------------------


                                  ARTICLE VII

          1.  Director Liability.  A director of the Corporation shall not be
personally liable to the Corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director. However, this provision does not
eliminate or limit the liability of a director for any of the following:

               (a)  any breach of the director's duty of loyalty to the
Corporation or its shareholders;

               (b)  any acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;

               (c)  a violation of Section 551(1) of the Michigan Business
Corporation Act, as amended (the "MBCA");

               (d)  a transaction from which the director derived an improper
personal benefit; or

               (e)  an act or omission occurring before the date these Articles
of Incorporation became effective in accordance with the pertinent provisions of
the MBCA.

Any repeal, amendment or other modification of this Article VII shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal, amendment or other modification.

          If the MBCA is amended, after this Article becomes effective, to
authorize corporate action further eliminating or limiting personal liability of
directors, then the liability of directors shall be eliminated or limited to the
fullest extent permitted by the MBCA as so amended.

          2.  Control Share Acquisitions.  Chapter 7B of the MBCA, known as the
"Stacey, Bennett, and Randall shareholder equity act," does not apply to control
share acquisitions of shares of the Corporation.

                                      20



<PAGE>
 

                                                             EXHIBIT 3.3
 
                                    BYLAWS

                                      OF

                           AASTROM BIOSCIENCES, INC.

<PAGE>
 
                                    BYLAWS
                                      OF
                           AASTROM BIOSCIENCES, INC.


                               ARTICLE I  GENERAL
                               ------------------

     Section 1.1  The name, location of principal office, and purposes of the
Corporation shall be as set forth in the Articles of Incorporation. The powers
of the Corporation and of its directors and shareholders, and all matters
concerning the conduct and regulation of the business of the Corporation, shall
be subject to such provisions in regard thereto, if any, as are set forth in
said Articles of Incorporation.

     Section 1.2  All references in these Bylaws to the Articles of
Incorporation shall be construed to mean the Articles of Incorporation of the
Corporation as amended from time to time.

     Section 1.3  The registered office of the Corporation may be the same as
the principal office of the Corporation, but in any event must be located in the
State of Michigan, and must be the business office of the registered agent, as
required by the Michigan Business Corporation Act (the "MBCA"). The Corporation
may have business offices at such other places, either within or without the
State of Michigan, as the Board of Directors may designate or as the business of
the Corporation may require from time to time.

                            ARTICLE
 II  SHAREHOLDERS
                            ------------------------

     Section 2.1  Annual Meeting.  The annual meeting of the shareholders of the
                  --------------
Corporation shall be held at the principal office of the Corporation, or at such
other place as may be set forth in the notice thereof, in August or September of
each year, at a date and time as designated by the Board of Directors, for the
purpose of election of Directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting. The
Board of Directors, for good and sufficient reasons, may schedule the annual
meeting at any other time, and notice shall be given or waived as provided in
Section 2.4 hereof.

     Section 2.2  Special Meetings.  Special Meetings of the shareholders
                  ----------------                                       
(or of any specific class thereof), for any purpose or purposes, unless
otherwise prescribed by statute or by the Articles of Incorporation, may be
called by the President and shall be called by the President or Secretary at the
request in writing of a majority of the Board of Directors, or at the request in
writing of a shareholder or shareholders owning at least ten percent (10%) of
the number of shares of stock (or, with respect to meetings of a specific class,
the number of shares of such specific class thereof) of the Corporation issued
and outstanding and entitled to vote.  Such request shall state the purpose or
purposes of the proposed meeting.  Upon the closing of the first sale of the
Corporation's common stock

                                      -2-

<PAGE>
 
pursuant to a firmly underwritten registered public offering (the "IPO"),
special meetings of the shareholders may be called only by the President and
shall be called by the President at the request in writing of a majority of the
Directors then in office, and shall be held at such place, on such date, and at
such time as the President or shall fix.  Business transacted at special
meetings shall be confined to the purpose or purposes stated in the notice.

     Section 2.3  List of Shareholders.  The officer who has charge of the stock
                  --------------------
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of shareholders, a complete list of the shareholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each shareholder and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any shareholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten (10) days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
shareholder who is present.

     Section 2.4  Notice of Meetings.  Written notice of the time, place and
                  ------------------                                    
purposes of the meeting of shareholders shall be given not less than 10 nor
more than 60 days before the date fixed for such meeting to each shareholder of
record entitled to vote at the meeting.  Notice shall be deemed duly served when
the same has been personally delivered or deposited in the United States Mail,
with postage fully prepaid, addressed to the shareholder at such shareholder's
address as it appears on the records of the Corporation.  Written notice may
also be given by facsimile or telegram, and such notice shall be deemed to be
given when the recipient receives the notice personally, or when confirmation of
transmission of the notice to the shareholder's address as it appears on the
books and records of the Corporation has been delivered to the Corporation or to
the equipment transmitting such notice.  Such notice shall be given by or under
the direction of the Secretary of the Corporation, and in the absence or refusal
of the Secretary to give such notice, notice shall be given by or under the
direction of any other officer of the Corporation.  No notice need be given of
an adjourned meeting of the shareholders provided the time and place to which
such meeting is adjourned is announced at the meeting at which the adjournment
is taken and at the adjourned meeting only such business is transacted as might
have been transacted at the original meeting.  If the adjournment is for more
than thirty (30) days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each shareholder of record entitled to vote at the meeting.  A waiver of such
notice in writing, signed by a person entitled to said notice, whether before or
after the time of the meeting, shall be deemed equivalent to said notice.
Attendance of a person at a meeting of shareholders, in person or by proxy,
shall constitute a waiver of such notice, except when the attendance is for the
express and sole purpose of objecting to the transaction of any business,

                                     -3-

<PAGE>
 
clearly stated at the commencement of the meeting, by reason of a claim that a
meeting was not lawfully called or convened.

 
     Section 2.5  Transaction of Business.  At an annual or special meeting of
                  -----------------------
the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before a meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Secretary or other officer of the
Corporation, (b) properly brought before the meeting by or at the direction of
the Board of Directors, (c) properly brought before an annual meeting by a
shareholder, or (d) properly brought before a special meeting by a shareholder,
but if, and only if, the notice of a special meeting provides for business to be
brought before the meeting by shareholders. For business to be properly brought
before a meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder proposal to be presented at an annual meeting shall be received at
the Corporation's principal executive offices not less than 120 calendar days in
advance of the date that the Corporation's (or the Corporation's predecessor's)
proxy statement was released to shareholders in connection with the previous
year's annual meeting of shareholders, except that if no annual meeting was held
in the previous year or the date of the annual meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the previous
year's proxy statement, or in the event of a special meeting, notice by the
shareholder to be timely must be received not later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the annual or special meeting (a) a brief description of the
business desired to be brought before the annual or special meeting and the
reasons for conducting such business at the special meeting, (b) the name and
address, as they appear on the Corporation's books, of the shareholder proposing
such business, (c) the class and number of shares of the Corporation which are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business.

     Section 2.6  Quorum.  The holders of a majority of the stock issued and
                  ------
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the shareholders (or any
specific class thereof) for the transaction of business except as otherwise
provided by statute or by the Articles of Incorporation. If, however, such
quorum shall not be present or represented by any meeting of the shareholders,
the chairman of the meeting or the holders of a majority of shares of stock
entitled to vote thereat who are present, in person or represented by proxy,
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented.

                                      -4-

<PAGE>
 
     Section 2.7  Voting and Record Date.  In order that the Corporation
                  ----------------------                                
may determine the shareholders entitled to notice of or to vote at any meeting
of shareholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution of allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be (i) more than sixty (60) nor less than ten (10)
days before the date of such meeting, nor (ii) more than ten (10) days after the
date upon which the resolution fixing the record date is adopted by the Board of
Directors for action by shareholder consent in writing without a meeting, nor
(iii) more than sixty (60) days prior to any other action.  If a record date is
not fixed (a) the record date for determination of shareholders entitled to vote
at a meeting of shareholders shall be the close of business on the day next
preceding the day on which notice of such meeting is given, and (b) the record
date for determining shareholders for any purpose other than that specified in
subdivision (a) shall be the close of business on the day on which the
resolution of the Board relating thereto is adopted.  When a determination of
shareholders of record entitled to vote at a meeting of shareholders has been
made as provided in this Section, the determination applies to any adjournment
of the meeting, unless the Board fixes a new record date under this Section for
the adjourned meeting.

     Section 2.8  Proxies.  A proxy, given by a shareholder to another person,
                  -------
authorizing such other person to vote the shares of such shareholder, shall be
in writing and signed by the shareholder or his authorized agent or
representative. A proxy shall not be valid after the expiration of three (3)
years from its date unless otherwise provided therein. All proxies shall be
filed with the Secretary at or before the meeting at which they are intended to
be used. A proxy shall be deemed sufficient if it appears on its face to confer
the requisite authority and is signed by the owner of the stock to be voted. No
witnesses to the execution of any proxy shall be required.

     Section 2.9  Inspectors.  The Board of Directors, in advance of a
                  ----------                                          
shareholders meeting, may appoint one or more inspectors to act at the meeting
or any adjournment thereof.  If inspectors are not so appointed, the person
presiding at a shareholders meeting may, and on request of a shareholder
entitled to vote thereat shall, appoint one or more inspectors.  In case a
person appointed fails to appear or act, the vacancy may be filled by
appointment made by the Board of Directors in advance of the meeting or at the
meeting by the person presiding thereat.  The inspectors shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine
challenges and questions arising in connection with the right to vote, count and
tabulate votes, ballots or consents, determine the result, and do such acts as
are proper to conduct the election or vote with fairness

                                      -5-

<PAGE>
 
to all shareholders.  On request of the person presiding at the meeting or a
shareholder entitled to vote thereat, the inspectors shall make and execute a
written report to the person presiding at the meeting of any of the facts found
by them and matters determined by them.  The report shall be prima facie
evidence of the facts stated and of the vote as certified.

     Section 2.10  Action by Written Consent.  The shareholders of the
                   -------------------------                          
Corporation shall have the ability to take action without a meeting only as
provided in the Articles of Incorporation.

     Section 2.11  Voting of Shares by Certain Holders.
                   ----------------------------------- 

          (a)  Voting by Trustee or Fiduciary.  Shares standing in the name of
               ------------------------------                                 
any person as trustee or other fiduciary may be voted and all rights incident
thereto may be exercised only by the trustee or other fiduciary, in person or by
proxy, and without proof of authority.

          (b)  Voting of Pledged Stock.  Unless the Corporation has specific
               -----------------------                                      
written instructions to the contrary, from the pledgee and pledgor, pledged
stock may be voted by the pledgor only.

          (c)  Voting by Guardian of Incompetent.  Shares standing in the name
               ---------------------------------                              
of a person adjudged incompetent may be voted and all rights incident thereto
may be exercised only by his guardian, in person or by proxy.

          (d)  Voting by Executor or Administrator.  Shares standing in the
                -----------------------------------                         
name of a deceased person may be voted and all rights incident thereto may be
exercised only by his executor or administrator, in person or by proxy.

          (e)  Voting by Guardian of Minor.  Shares standing in the name of a
               ---------------------------                                   
minor may be voted and all rights incident thereto may be exercised by his
guardian, in person or by proxy, or in the absence of such representation by his
guardian, by the minor, in person or by proxy, whether or not the Corporation
has notice, actual or constructive, of the nonage or the appointment of a
guardian, and whether or not a guardian has been in fact appointed.

          (f)  Voting of Shares in Name of Corporation.  Shares standing in
               ---------------------------------------                     
the name of a corporation, domestic or foreign, may be voted or represented and
all rights incident thereto may be exercised on behalf of that corporation by
the persons described in any of the following subdivisions:

               (1)  Any officer of the Corporation authorized so to do by the
Bylaws of that Corporation.

                                      -6-

<PAGE>
 
               (2)  Any person authorized so to do by resolution of the Board of
Directors or a duly authorized committee of the Board of Directors of that
Corporation.
 
               (3)  Any person authorized so to do by proxy or power of attorney
duly executed by the President or Vice President and Secretary or Assistant
Secretary of that Corporation.

             However, such shares may be voted or represented by the persons
described in any subdivision only in the absence of vote or representation by
the persons described in a preceding subdivision of this subparagraph.

          (g)  Voting Shares in Names of Two or More Persons. Shares standing 
               ---------------------------------------------
in the names of two or more persons shall be voted or represented in accordance
with the vote or consent of the majority of the persons in whose names the
shares stand.  If only one such person is present in person or by proxy, he may
vote all the shares, and all the shares standing in the names of such persons
are represented for the purpose of determining a quorum.  This applies to the
voting of shares by two or more administrators, executors, trustees, or other
fiduciaries, unless the instrument or order of court appointing them otherwise
directs.


                        ARTICLE III  BOARD OF DIRECTORS
                        -------------------------------

     Section 3.1  General Powers.  The property, affairs and business of the
                  --------------                                            
Corporation shall be managed by the Board of Directors.

     Section 3.2  Number, Qualification and Term of Office.  Unless otherwise
                  ----------------------------------------                   
provided in the Articles of Incorporation, the Board of Directors shall be
divided into three classes, as nearly equal in numbers as the then total number
of directors constituting the entire Board of Directors permits, with the term
of office of one class expiring each year.  The term of office of directors in
the first class shall expire at the first annual meeting of shareholders after
their election, the term of office of directors in the second class shall expire
at the second annual meeting of shareholders after their election, and the term
of office of directors in the third class shall expire at the third annual
meeting of shareholders after their election.  The directors elected at the 1994
Annual Shareholders Meeting will be classified into terms of one, two or three
years, by resolution of the Board of Directors.  At each annual meeting of
shareholders after such classification of the Board of Directors, a number of
directors equal to the number of the class whose term expires at the meeting
shall be elected to hold office until the third succeeding annual meeting.
Directors shall hold office until the next election of the class for which such
directors shall have been chosen and until their successors are elected and
qualified, except in the case of the death, resignation or removal of any
Director.  Directors need not be shareholders of the Corporation.  The size of
the

                                      -7-

<PAGE>
 
Board of Directors shall be within the range of five to nine directors, with the
exact size to be fixed from time to time by resolution of the Board of
Directors.

     Section 3.3  Vacancies.  The shareholders may, at any meeting called for
                  ---------                                                  
such purpose, by a vote of a majority of the capital stock issued and
outstanding and entitled to vote thereon, remove any Director from office, with
or without cause.  Any Director may resign by written notice to the President,
such resignation to be effective upon its receipt by the President or at such
subsequent time as may be specified in the notice of resignation.  Subject to
the rights of the holders of any series of Preferred Stock then outstanding,
newly created directorships resulting from any increase in the authorized number
of Directors or any vacancies in the Board of Directors resulting from death,
resignation, retirement, disqualification or other cause may be filled only by a
majority vote of the directors then in office, though less than a quorum, and
Directors so chosen shall hold office for a term expiring at the next annual
meeting of shareholders at which the term of office of the class to which they
have been elected expires, except in the case of death, resignation or removal
of any Director.  No decrease in the number of Directors constituting the Board
of Directors shall shorten the term of any incumbent Director.  Acceptance of
resignation shall not be necessary for it to be effective.

     Section 3.4  Meetings of the Board of Directors.  The Board of Directors
                  ----------------------------------                         
shall hold an annual meeting immediately following the annual shareholders
meeting, for the purpose of electing officers and for the transaction of such
other business as may properly come before the meeting.  No notice of such
annual meeting shall be necessary to the newly elected directors in order
legally to constitute the meeting, provided a quorum shall be present, unless
said meeting is held, by a consent of a majority of the Directors of such new
Board, at a time and place other then at the place of holding and immediately
following the annual meeting of shareholders.  Special meetings of the Board of
Directors may be held at any place either within or without the State of
Michigan at any time pursuant to resolution adopted by the Board of Directors or
upon call of the President or any two (2) officers.

     Section 3.5  Notice of Meetings.  Notice of meetings of Directors shall be
                  ------------------                                           
given or waived in the same manner as notice of meetings of shareholders, as
provided in Section 2.4, except that notice of Directors meetings shall be given
not later than two (2) nor more than ten (10) days prior to such meetings.

     Section 3.6  Quorum and Required Vote of Board.  A majority of the total
                  ---------------------------------                          
number of Directors shall constitute a quorum for the transaction of business,
and the act of a majority of the Directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors.  Amendment of
these Bylaws by the Board requires the vote of not less than a majority of the
members of the Board then in office.

                                      -8-

<PAGE>
 
     Section 3.7  Telephonic Meetings.  A member of the Board or of a committee
                  -------------------                                          
designated by the Board may participate in a meeting by means of conference
telephone or similar communications equipment by which all persons participating
in the discussion can hear each other.  Participation in a meeting pursuant to
this provision constitutes presence in person at the meeting.

     Section 3.8  Board Action Without Meeting.  If all of the Directors then
                  ----------------------------                               
constituting the Board of Directors of the Corporation or of any committee of
the Board of Directors shall severally and/or collectively consent in writing to
any action to be taken, such action shall have the same effect as though it had
been authorized at a duly called and properly held meeting of the Board of
Directors or such committee.  Such written consent shall be filed with the
minutes of the proceedings of the Board.

     Section 3.9  Committees.  The Board of Directors may, by resolution or
                  ----------                                               
resolutions, passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of two (2) or more of the
Directors of the Corporation, which, to the extent provided in said resolution
or resolutions or in other provisions of these Bylaws, shall have and may
exercise the powers of the Board of Directors in the management of the business
and affairs of the Corporation, and may have the power to authorize the seal of
the Corporation to be affixed to all papers which may require it.  However, such
a committee does not have the power or authority to amend the Bylaws of the
Corporation, fill vacancies on the Board of Directors, or fix compensation of
the Directors serving on the Board of Directors or on a committee; and, unless
the resolution of the Board of Directors creating such committee or the Articles
of Incorporation expressly so provide, such a committee does not have the power
or authority to declare a dividend or to authorize the issuance of stock.  Any
such committee, and each member thereof, shall serve at the pleasure of the
Board of Directors.  Such committee or committees shall have such name or names
as may be determined from time to time by resolution adopted by the Board of
Directors and each committee shall elect a chairman and secretary if one is not
named by the Board of Directors.  Each committee shall keep regular minutes of
its meetings and report to the Board of Directors when required.

     Section 3.10  Compensation.  By resolution of the Board of Directors, the
                   ------------                                               
Directors may be paid their expenses, if any, of attendance at each meeting of
the Board, and may be paid a fixed sum for attendance.  No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.  Members of the committees shall be allowed
similar compensation for attending committee meetings.

     Section 3.11  Presumption of Assent.  A Director of the Corporation who is
                   ---------------------                                       
present at a meeting of the Board at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to

                                      -9-

<PAGE>
 
such action with the person acting as Secretary of the meeting before the
adjournment thereof, or by registered mail to such Secretary immediately after
the adjournment thereof.  This shall not apply to a Director who voted in favor
of such action.

                        ARTICLE IV  OFFICERS AND AGENTS
                        -------------------------------

     Section 4.1  General.  The Corporation shall have a President, a Secretary,
                  -------                                                       
and a Treasurer, and, if desired, a Chairman of the Board and one or more Vice
Presidents, Assistant Secretaries and Assistant Treasurers.  All officers of the
Corporation shall be elected by the Directors and shall hold office until their
successors are elected and qualified.  The Corporation may also have such other
officers, agents and factors as may be deemed necessary for the transaction of
the business of the Corporation, who shall be chosen in such manner and hold
their offices for such terms and have such authority and duties as may be
determined by the Board of Directors.  The Board of Directors may secure the
fidelity of any and/or all of such officers by bond or otherwise and may also
provide for the qualification of any or all of such officers before any person
authorized by law to administer an oath.  The Board of Directors, by resolution,
may require any or all of the officers of the Corporation to give bonds, in
favor of the Corporation, with sufficient surety or sureties, and in such
amounts as the Board of Directors may fix, conditioned on the faithful
performance of the duties of their respective offices.  The President shall be
chosen from among the Directors.  Any two offices except those of President and
Vice President may be held by the same person but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.  Subject to
these Bylaws, each officer shall have in addition to the duties and powers
herein set forth, such duties and powers as are commonly incident to his office,
and such duties and powers as the Board of Directors shall from time to time
designate.  In all cases where the duties of any officer, agent or employee are
not specifically prescribed by the Bylaws or by the Board of Directors, such
officer, agent or employee shall obey the orders and instructions of the
President.  Compensation of the officers shall be as authorized by the Board of
Directors.

     Section 4.2  Duties of the President.  The President shall, subject to the
                  -----------------------                                      
direction and under the supervision of the Board of Directors, be the chief
executive officer of the Corporation and shall have general and active control
of its affairs and business and general supervision over its officers, agents
and employees.  The President shall also appoint and discharge all subordinate
agents and employees and fix their salaries, subject to review by the Board of
Directors, and shall designate their duties.  He shall preside at all meetings
of the shareholders and, unless a Chairman of the Board has been elected, at all
meetings of the Board of Directors, at which he is present.  The President shall
have custody of the Treasurer's bond, if any.

     Section 4.3  Duties of the Chairman of the Board.  The Board of Directors
                  -----------------------------------                         
may elect or appoint a Chairman of the Board.  The Chairman of the Board shall,
if

                                     -10-

<PAGE>
 
present, preside at all meetings of the Board of Directors and shall exercise
and perform such other powers and duties as may be assigned to him from time to
time by the Board of Directors or prescribed by these Bylaws.

     Section 4.4  Duties of the Vice President.  The Board of Directors may
                  ----------------------------                             
elect or appoint one or more Vice Presidents.  The Vice Presidents, if such be
elected, shall, subject to the direction and under the supervision of the
President, be the assistant chief executive officer of the Corporation and shall
assist the President in the general and active control of its affairs in
business.  The Vice Presidents shall perform all the duties of the President in
case of the absence or disqualification of the President.  Any of such Vice
Presidents shall preside at all meetings of the shareholders in the absence or
unavailability of the President.

     Section 4.5  Duties of the Secretary.  The Secretary shall: (a) keep the
                  -----------------------                                    
minutes of the proceedings of the shareholders and of the Board of Directors in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the corporate records and of the seal of the Corporation and
ensure that the seal of the Corporation is affixed to all documents the
execution of which on behalf of the Corporation under its seal is duly
authorized; (d) keep a register of the post office address of each shareholder
which shall be furnished to the Secretary by such shareholder; and (e) perform
all duties incident to the office of secretary and such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.  The Secretary also shall have charge of the stock ledger (which may,
however, be kept by any transfer agent or agents of the Corporation under the
direction of the Secretary), the original or duplicate of which shall, at all
times, during the usual hours for business, be open to the examination of every
shareholder at the principal office or place of business of the Corporation in
Michigan.  In the absence of the Secretary from any meeting, a temporary
Secretary shall be chosen, who shall be sworn to the faithful discharge of his
duty and shall record the proceedings of such meeting in the aforesaid books.

     Section 4.6  Duties of the Treasurer.  The Treasurer shall, subject to the
                  -----------------------                                      
direction and under the supervision of the Board of Directors, the President and
the Vice President, have the care and custody of the funds and valuable papers
of the Corporation, except his own bond, and he shall have power to endorse for
deposit or collection all notes, checks, drafts and other obligations for the
payment of money to the Corporation or its order.  He shall keep, or cause to be
kept, at the principal office of the Corporation accurate books of account,
which shall be the property of the Corporation.  He shall disburse the funds of
the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and
Directors, when they so direct, an account of all his transactions as Treasurer
and of the financial condition of the Corporation.

                                     -11-

<PAGE>
 
     Section 4.7  Assistant Secretaries and Assistant Treasurers.  The Assistant
                  ----------------------------------------------                
Secretary or Assistant Secretaries, in the absence or disability of the
Secretary, shall perform the duties and exercise the powers of the Secretary.
The Assistant Treasurer or Assistant Treasurers, in the absence or disability of
the Treasurer, shall perform the duties and exercise the powers of the
Treasurer.  Any Assistant Treasurer, if required by the Board, shall keep in
force a bond as provided in Section 4.1.  The Assistant Secretaries and
Assistant Treasurers, in general, shall exercise and perform such other powers
and duties as shall be assigned to them by the Secretary or by the Treasurer,
respectively, or by the Board of Directors or the President.

     Section 4.8  Vacancies.  The Board of Directors may, at any meeting called
                  ---------                                                    
for the purpose, by vote of a majority of their number, remove from office any
officer of the Corporation, with or without cause.  Any officer may resign by
written notice to the President, which resignation may be effective upon its
receipt by the President or at such subsequent time as may be specified in the
notice of resignation, PROVIDED, HOWEVER, that the resignation of the President
shall be submitted to the Board of Directors.  The Board of Directors may, at
any meeting, accept the resignation of any officer or remove or accept the
resignation of any agent or member of a committee, and may fill such vacancy for
the unexpired term and until the successor thereof shall be duly elected and
qualified.  Acceptance of resignation shall not be necessary for it to be
effective.

                            ARTICLE V  CAPITAL STOCK
                            ------------------------

     Section 5.1  Issuance.  The shares of capital stock of the Corporation
                  --------                                                 
shall be issued by the Board of Directors in such amounts, at such times, for
such consideration, and on such terms and conditions as the Board shall deem
advisable, subject to the provisions of the Articles of Incorporation of the
Corporation and the further provisions of these Bylaws.

     Section 5.2  Stock Certificates.  The shares of the capital stock of the
                  ------------------                                         
Corporation shall be represented by certificates signed and sealed in accordance
with the provisions of the laws of the State of Michigan.  Certificates shall
have a form and content complying with the laws of the State of Michigan and
approved by the Board of Directors of the Corporation.  Certificates of stock
shall bear the signature of the President, and shall be signed by the Secretary,
Assistant Secretary, or any other officer appointed by the Board of Directors
for the purpose, to be known as an Authorized Officer.  The signatures of the
officers may be facsimiles if the certificate is countersigned by a transfer
agent or registered by a registrar other than the Corporation itself or its
employee.  In case an officer who has signed or whose facsimile signature has
been placed upon a certificate ceases to be such officer before the certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer at the date of issue.  Each certificate shall recite on its
face the stock represented thereby is transferable only upon the books of the
Corporation properly endorsed.  A certificate

                                     -12-

<PAGE>
 
representing shares issued by a corporation which is authorized to issue shares
of more than one class shall set forth on its face or back or state that the
Corporation will furnish to a shareholder upon request and without charge a full
statement of the designation, relative rights, preferences and limitations of
the shares of each class authorized to be issued, and if the Corporation is
authorized to issue any class of shares in series, the designation, relative
rights, preferences and limitations of each series so far as the same have been
prescribed and the authority of the Board to designate and prescribe the
relative rights, preferences and limitations of other series.

     Section 5.3  Transfers.  Upon surrender to the Corporation or the transfer
                  ---------                                                    
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.

     Section 5.4  Ownership.  The Corporation shall be entitled to treat the
                  ---------                                                 
person in whose name any share of stock is registered as the owner thereof for
purposes of dividends and other distributions in the course of business, or in
the case of recapitalization, consolidation, merger, reorganization, sale of
assets, liquidation or otherwise and for the purpose of votes, approvals and
consents by shareholders, and for the purpose of notice to shareholders, and for
all other purposes whatever, and shall not be bound to recognize any equitable
or other claim to or interest in such shares on the part of any other person,
whether or not the Corporation shall have notice thereof, save as expressly
required by the laws of the State of Michigan.

     Section 5.5  Replacement of Certificates.  Upon the presentation to the
                  ---------------------------                               
Corporation of a proper affidavit attesting the loss, destruction or mutilation
of any certificate for shares of stock of the Corporation, the Board of
Directors may direct the issuance of a new certificate in lieu of and to replace
the certificate so alleged to be lost, destroyed and mutilated.  The Board of
Directors may require as a condition precedent to the issuance of a new
certificate any or all of the following, to wit:  (a) Additional evidence of the
loss, destruction or mutilation claimed; (b) Advertisement of the loss in such
manner as the Board of Directors may direct or approve; (c) A bond or agreement
of indemnity, in such form and amount and with such surety (or without surety)
as the Board of Directors may direct or approve; or (d) The order or approval of
a court.

     Section 5.6  Transfer Agent and Registrar.  The Board of Directors may
                  ----------------------------                             
appoint a transfer agent and a registrar for the registration of transfers of
its securities.

     Section 5.7  Regulations.  The Board of Directors shall have power and
                  -----------                                              
authority to make all such rules and regulations as the Board shall deem
expedient

                                     -13-

<PAGE>
 
regulating the issue, transfer and registration of certificates for shares of
this Corporation.

     Section 5.8  Dividends.  The Board of Directors, in its discretion from
                  ---------                                                 
time to time, may declare dividends upon the capital stock from the surplus of
the Corporation as permitted by the MBCA, subject to the Articles of
Incorporation.

     Section 5.9  Reserves.  Before payment of any dividend, there may be set
                  --------                                                   
aside out of any funds of the Corporation available for dividends such sum or
sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Directors shall think conducive to the interest of
the Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.


              ARTICLE VI  INDEMNIFICATION OF OFFICERS, DIRECTORS,
              ----------------------------------------------------
                              EMPLOYEES AND AGENTS
                              --------------------

     Section 6.1  Indemnification of Directors and Officers: Claims by Third
                  ----------------------------------------------------------
Parties.  The Corporation shall, to the fullest extent authorized or permitted
- -------                                                                       
by the MBCA or other applicable law, as the same presently exists or may
hereafter be amended, indemnify a director or officer (the "Indemnitee") who was
or is a party or is threatened to be made a party to a threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative and whether formal or informal, other than an action by or in
the right of the Corporation, by reason of the fact that he or she is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other enterprise, whether for profit or not, against
expenses, including attorneys' fees, judgments, penalties, fines, and amounts
paid in settlement actually and reasonably incurred by him or her in connection
with the action, suit, or proceeding, if the Indemnitee acted in good faith and
in a manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation or its shareholders, and with respect to a criminal
action or proceeding, if the Indemnitee had no reasonable cause to believe his
or her conduct was unlawful.  The termination of an action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that the Indemnitee
did not act in good faith and in a manner which he or she reasonably believed to
be in or not opposed to the best interests of the Corporation or its
shareholders, and, with respect to a criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.

                                     -14-

<PAGE>
 
     Section 6.2  Indemnification of Directors and Officers: Claims Brought By
                  ------------------------------------------------------------
or In the Right of the Corporation.  The Corporation shall, to the fullest
- ----------------------------------                                        
extent authorized or permitted by the MBCA or other applicable law, as the same
presently exists or may hereafter be amended, indemnify a director or officer
(the "Indemnitee") who was or is a party to or is threatened to be made a party
to a threatened, pending, or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, or other enterprise, whether for profit or
not, against expenses, including actual and reasonable attorneys' fees, and
amounts paid in settlement incurred by the person in connection with the action
or suit, if the Indemnitee acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Corporation or its shareholders.  However, indemnification under this Section
shall not be made for a claim, issue, or matter in which the Indemnitee has been
found liable to the Corporation unless and only to the extent that the court in
which the action or suit was brought has determined upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, the Indemnitee is fairly and reasonably entitled to indemnification for
the expenses which the court considers proper.

     Section 6.3  Actions by the Indemnitee.  Notwithstanding the provisions of
                  -------------------------                                    
Sections 6.1 and 6.2, the Corporation shall not indemnify an Indemnitee in
connection with any action, suit, proceeding or claim (or part thereof) brought
or made by such Indemnitee; unless such action, suit, proceeding or claim (or
part thereof) (i) was authorized by the Board of Directors of the Corporation,
or (ii) was brought or made to enforce this Article and such Indemnitee has been
successful in such action, suit, proceeding or claim (or part thereof).

     Section 6.4  Approval of Indemnification.  An indemnification under
                  ---------------------------                           
Sections 6.1 or 6.2 hereof, unless ordered by a court, shall be made by the
Corporation only as authorized in the specific case upon it determination that
indemnification of the Indemnitee is proper in the circumstances because such
Indemnitee has met the applicable standard of conduct set forth in Sections 6.1
and 6.2.  This determination shall be made in any of the following ways:

          (a)  By a majority vote of a quorum of the Board consisting of
Directors who were not parties to the action, suit, or proceeding.

          (b)  If the quorum described in subdivision (a) is not obtainable,
then by a majority vote of it committee of Directors who are not parties to the
action.  The committee shall consist of not less than two (2) disinterested
Directors.

          (c)  By independent legal counsel in a written opinion.

                                     -15-

<PAGE>
 
          (d)  By the shareholders.

     Section 6.5  Advancement of Expenses.  Expenses incurred in defending a
                  -----------------------                                   
civil or criminal action, suit, or proceeding described in Section 6.1 or 6.2
above shall be paid by the Corporation in advance of the final disposition of
the action, suit, or proceeding upon receipt of an undertaking by or on behalf
of the Indemnitee to repay the expenses if it is ultimately determined that the
Indemnitee is not entitled to be indemnified by the Corporation.  The
undertaking shall be by unlimited general obligation of the person on whose
behalf advances are made but need not be secured.

     Section 6.6  Partial Indemnification.  If an Indemnitee is entitled to
                  -----------------------                                  
indemnification under Section 6.1 or 6.2 for a portion of expenses including
attorneys' fees, judgments, penalties, fines, and amounts paid in settlement,
but not for the total amount thereof, the Corporation shall indemnify the
Indemnitee for the portion of the expenses, judgments, penalties, fines, or
amounts paid in settlement for which the Indemnitee is entitled to be
indemnified.

     Section 6.7  Indemnification of Employees and Agents.  Any person who is
                  ---------------------------------------                    
not covered by the foregoing provisions of this Article and who is or was an
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
may be indemnified to the fullest extent authorized or permitted by the MBCA or
other applicable law, as the same exists or may hereafter be amended, but in the
case of any such amendment, only to the extent such amendment permits the
Corporation to provide broader indemnification rights than before such
amendment, but in any event only to the extent authorized at any time or from
time to time by the Board of Directors.

     Section 6.8  Other Rights of Indemnification.  The indemnification or
                  -------------------------------                         
advancement of expenses provided under Sections 6.1 to 6.7 is not exclusive of
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the Articles of Incorporation, Bylaws, or a
contractual agreement.  However, the total amount of expenses advanced or
indemnified from all sources combined shall not exceed the amount of actual
expenses incurred by the person seeking indemnification or advancement of
expenses.  The indemnification provided for in Sections 6.1 to 6.7 continues as
to a person who ceases to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.

     Section 6.9  Definitions.  "Other enterprises" shall include employee
                  -----------                                             
benefit plans; "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and "serving at the request of the
corporation" shall include any service as a director, officer, employee, or
agent of the corporation which imposes duties on, or involves services by, the
director, officer, employee,

                                     -16-

<PAGE>
 
or agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be considered to have acted in a manner "not
opposed to the best interests of the corporation or its shareholders" as
referred to in Sections 6.1 and 6.2.

     Section 6.10  Application to a Resulting or Surviving Corporation or
                   ------------------------------------------------------
Constituent Corporation.  The definition for "corporation" found in Section 569
- -----------------------                                                        
of the MBCA, as the same exists or may hereafter be amended, is and shall be,
specifically excluded from application to this Article.  The indemnification and
other obligations of the Corporation set forth in this Article shall be binding
upon any resulting or surviving corporation after any merger or consolidation of
the Corporation.  Notwithstanding anything to the contrary contained herein or
in Section 569 of the MBCA, no person shall be entitled to the indemnification
and other rights set forth in this Article for acting as a director or officer
of another corporation prior to such other corporation entering into a merger or
consolidation with the Corporation.

     Section 6.11  Contract With the Corporation.  The right to indemnification
                   -----------------------------                               
conferred in this Article VI shall be deemed to be a contract between the
Corporation and each director or officer who serves in any such capacity at any
time while this Article VI is in effect, and any repeal or modification of any
such law or of this Article VI shall not affect any rights or obligations then
existing with respect to any state of facts then or theretofore existing or any
action, suit or proceeding theretofore or thereafter brought or threatened based
in whole or in part upon any such state of facts.  In the event this Article is
repealed or modified, the Corporation shall give written notice thereof to the
directors and officers and any such repeal or modification shall not be
effective for a period of sixty (60) days after such notice is delivered.

     Section 6.12  Liability Insurance.  The Corporation shall have the power to
                   -------------------                                          
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against and incurred by such
person in any such capacity or arising out of such person's status as such,
regardless of whether the Corporation would have the power to indemnify such
person against such liability under the provisions of the MBCA.

     Section 6.13  Severability.  Each and every paragraph, sentence, term and
                   ------------                                               
provision of this Article VI shall be considered severable in that, in the event
a court finds any paragraph, sentence, term or provision to be invalid or
unenforceable, the validity and enforceability, operation, or effect of the
remaining paragraphs, sentences, terms, or provisions shall not be affected, and
this

                                     -17-

<PAGE>
 
Article VI shall be construed in all respects as if the invalid or unenforceable
matter had been omitted.

     Section 6.14  Enforcement.  If a claim under this Article is not paid in
                   -----------                                               
full by the Corporation within thirty days after a written claim has been
received by the Corporation, the claimant may at any time thereafter bring suit
against the Corporation to recover the unpaid amount of the claim, and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim.  It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the MBCA for the Corporation to indemnify the claimant for the amount claimed,
but the burden of proving such defense shall be on the Corporation.  Neither the
failure of the Corporation (including its Board of Directors, a committee
thereof, independent legal counsel, or its shareholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because such claimant has met the
applicable standard of conduct set forth in the MBCA nor an actual determination
by the Corporation (including its Board of Directors, a committee thereof,
independent legal counsel, or its shareholders) that the claimant has not met
applicable standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of conduct.

                        ARTICLE VII  EXECUTION OF PAPERS
                        --------------------------------

          The officers of the Corporation may sell any or all of its holdings of
stock, bonds, or securities of other corporations, or government securities;
sign all deeds, mortgages, assignments of mortgages, discharges of mortgages,
bills of sale, leases and other conveyances and transactions of any interest in
property, real, personal or mixed, to the extent that the Board of Directors of
the Corporation may from time to time specify in resolutions approved by the
Board.  The Board may in any instance designate the officers and agents who
shall have authority to execute any contract, conveyance or other instrument on
behalf of the Corporation, and may also ratify and affirm such execution.  Any
such instrument or document shall be binding on the Corporation if executed by
the President or a Vice President.  In addition, any such instrument or document
shall be binding on the Corporation if signed by any other officer designated by
the Board on behalf of the Corporation.

                             ARTICLE VIII  BANKING
                             ---------------------

     Section 8.1  Bank Accounts.  The Board of Directors shall by resolution
                  -------------                                             
designate the bank or banks in which the funds of the Corporation shall be
deposited, and such funds shall be deposited in the name of the Corporation and

                                     -18-

<PAGE>
 
shall be subject to checks drawn as authorized by resolution of the Board of
Directors.

     Section 8.2  Borrowing.  To the extent authorized by law, the Corporation
                  ---------                                                   
may, wherever its general interests and corporate purpose require the same,
borrow money and issue its promissory notes, debentures or bonds for the
repayment thereof with interest, and may in like case mortgage, pledge or
encumber its property as security for its debts or other lawful engagements.

                 ARTICLE IX  VOTING STOCK IN OTHER CORPORATIONS
                 ----------------------------------------------

          Unless otherwise ordered by the Board of Directors, the President
shall have full power and authority on behalf of the Corporation to attend and
to act and to vote at any meetings of shareholders of any corporation in which
this Corporation may hold stock, and at any such meeting shall possess and may
exercise any and all of the rights and powers incident to the ownership of such
stock, PROVIDED, HOWEVER, that such rights shall be exercised in the best
interests of this Corporation.  The Board of Directors may, by resolution, from
time to time confer like powers upon any other person or persons, but the same
shall not be effective unless actually received by such other corporation prior
to the meeting of shareholders in which such other person is to act.  The
President, or in his absence or disability, a Vice President of the Corporation,
may authorize from time to time the signature and issuance of proxies to vote
such stock of other corporations owned by this Corporation, and all such proxies
shall be signed in the name of this Corporation by the President or Vice
President and the Secretary or Assistant Secretary, or by any two officers
authorized by the Board of Directors.

                            ARTICLE X  SUBSIDIARIES
                            -----------------------

          The Board of Directors may establish, reorganize and/or dissolve
wholly- or partly-owned subsidiaries of the Corporation.  The Articles of
Incorporation and Bylaws of any such subsidiary shall not, without approval of
the shareholders of this Corporation, substantially differ from the Articles of
Incorporation and Bylaws, respectively, of this Corporation.

                             ARTICLE XI FISCAL YEAR
                             ----------------------

          Except as from time to time otherwise provided by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of June.

                    ARTICLE XII  CORPORATE BOOKS AND RECORDS
                    ----------------------------------------

          The Corporation shall keep books and records of account and minutes of
the proceedings of its shareholders, Board of Directors and executive
committees, if any.  The books, records and minutes may be kept outside this
state.  The Corporation shall keep at its registered office, or at the office of
its

                                     -19-

<PAGE>
 
transfer agent within or without this state, records containing the names and
addresses of all shareholders, the number, class and series of shares held by
each and the dates when they respectively became holders of record thereof.  Any
of such books, records or minutes may be in written form or in any other form
capable of being converted into written form within a reasonable time.  The
Corporation shall convert into written form without charge any such record not
in such form, upon written request of a person entitled to inspect them.

                            ARTICLE XIII  AMENDMENTS
                            ------------------------

          Except as otherwise expressly provided in the Articles of
Incorporation or in these Bylaws, these Bylaws may be altered, amended or
repealed by any duly adopted resolution of the Board of Directors or at any
annual or special meeting of the shareholders.  The Board of Directors, however,
shall not adopt or alter any Bylaws fixing the number, qualifications,
classifications or term of office of Directors.  If the amendment is to be
adopted at a special meeting of the shareholders, the notice thereof shall
specify the subject matter of the proposed alteration, amendment or repeal and
the Articles of these Bylaws to be affected thereby.  Bylaws adopted by the
Directors may be altered or repealed by the Directors or shareholders.
Provided, further, that neither the time nor the place for the election of
Directors shall be changed within sixty (60) days next preceding the day on
which any election of Directors is to be held, and provided further that a
notice of any such change shall be given to each shareholder at least twenty
(20) days before the next election is held, in person or by letter mailed to his
last known post office address.

                                         ATTEST:

                                         /s/ TODD E. SIMPSON
                                         __________________________
                                         TODD E. SIMPSON, SECRETARY


Includes amendments approved through April 30, 1996



<PAGE>
 
                                                                     EXHIBIT 4.2

                           AASTROM BIOSCIENCES, INC.




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




                              AMENDED AND RESTATED
                          INVESTORS' RIGHTS AGREEMENT




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




                                 April 7, 1992


<PAGE>
 
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 
                                                           Page
                                                           ----
<S>                                                        <C>
 
SECTION 1 - Definitions..................................    2
      1.1   Certain Definitions..........................    2
 
SECTION 2 - Restrictions on Transferability of
            Securities; Compliance with Securities Act...    4
      2.1   Restrictions on Transferability..............    4
      2.2   Restrictive Legend...........................    4
      2.3   Notice of Proposed Transfers.................    5
      2.4   Requested Registration.......................    6
      2.5   Company Registration.........................    9
      2.6   Registrations on Form S-3....................   10
      2.7   Expenses of Registration.....................   11
      2.8   Registration Procedures......................   12
      2.9   Indemnification..............................   12
      2.10  Information by Holder........................   14
      2.11  Rule 144 Reporting...........................   14
      2.12  "Market Stand-off" Agreement.................   15
      2.13  Transfer of Registration Rights..............   15
      2.14  Suspension of Registration Rights............   16
      2.15  Certain Limitations in Connection with Future
             Grants of Registration Rights...............   16
 
SECTION 3 - Affirmative Covenants........................   16
      3.1   Financial Information........................   16
      3.2   Other Information............................   17
      3.3   Inspection Rights............................   18
      3.4   Assignment of Rights to Information..........   18
      3.5   Confidentiality..............................   18
      3.7   Insurance                                       19
      3.8   Board of Directors...........................   19
 
SECTION 4 - Right of First Refusal.......................   19
      4.1   Right of First Refusal.......................   19
      4.2   Waiver                                          20
 
SECTION 5 - University Warrants..........................   21
      5.1   Termination of Warrant Rights................   21
 
SECTION 6 - Miscellaneous................................   21
      6.1
   Amendment of Investors' Rights Agreement.....   21
      6.2   Governing Law................................   21
      6.3   Successors and Assigns.......................   21
      6.4   Notices                                         21
      6.5   Delays or Omissions..........................   22
      6.6   Counterparts.................................   22
</TABLE>
 

                                      i.


<PAGE>
 

<TABLE> 
      <S>                                                 <C> 
      6.7   Severability.................................   22
      6.8   Amendments...................................   22
</TABLE>



                                      ii.


<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
               AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT



     THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (the "Agreement") is
entered into as of April 7, 1992, by and among AASTROM BioSciences, Inc., a
Michigan corporation formerly doing business as Ann Arbor Stromal, Inc. (the
"Company"), the investors listed on the Schedule of Investors attached hereto as
Exhibit A (individually, an "Investor" and collectively, the "Investors"), as
that exhibit may be amended from time to time, Stephen G. Emerson, Bernhard O.
Palsson and Michael F. Clarke (individually, a "Founder" and collectively, the
"Founders"), Dr. R. Douglas Armstrong ("Armstrong") and the Regents of the
University of Michigan, a constitutional corporation of the State of Michigan
(the "University").  For the purposes of this Agreement, the Founders and
Armstrong shall be collectively referred to as the "Option Holders."

                                   RECITALS:
                                   -------- 

     A.  The Company has issued shares of its Common Stock to the University and
has granted, and may, in the future, grant, stock options to the Founders
pursuant to the Company's Stock Option Plans.

     B.  The Company has issued two million five hundred thousand (2,500,000)
shares of its Series A Preferred Stock to certain of the Investors (the "Series
A Investors") pursuant to that certain Series A Preferred Stock Purchase
Agreement, dated as of August 17, 1989.

     C.  Pursuant to that certain Investors' Rights Agreement dated August 17,
1989 among the Company, the Series A Investors, the Founders and the University
(the "Investors' Rights Agreement"), the Company granted certain rights and the
parties made certain covenants with respect to the Series A Preferred Stock and
the Common Stock of the Company.

     D.  Since the execution of the Investors' Rights Agreement, the Company has
engaged Armstrong as its president and has granted, and may, in the future,
grant, stock options to Armstrong pursuant to the Company's Stock Option Plans.

     E.  Certain of the Investors (the "Series B Investors") are purchasing
concurrently herewith three million thirty thousand (3,030,000) shares of Series
B Preferred Stock and desire to obtain the same rights as are contained in the
Investors' Rights Agreement.

     F.  The Company, the Series A Investors, the Founders and the University
desire to grant to the Series B Investors and

                                       1

<PAGE>
 
Armstrong the same rights as were granted under the Investors' Rights Agreement
and to amend and restate such Agreement.

     G.  The parties intend that this Agreement supersede the Investors' Rights
Agreement and, in that regard, the parties to the Investors' Rights Agreement
will waive certain rights contained in such Investors' Rights Agreement,
specifically (i) the right of first refusal to purchase on a pro rata basis the
shares of Series B Preferred Stock being issued concurrently herewith and (ii)
the right of the University to obtain certain warrants to purchase Common Stock.

                                   AGREEMENT:
                                   --------- 

     NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants, and conditions set forth in this Agreement and in the
agreements pursuant to which the Investors acquired their securities in the
Company, the parties mutually agree as follows:


                                   SECTION 1

                                  Definitions
                                  -----------

     1.1  Certain Definitions.  As used in this Agreement, the following terms
          -------------------                                                 
shall have the following respective meanings:

     "Commission" shall mean the Securities and Exchange Commission or any other
      ----------                                                                
federal agency at the time administering the Securities Act.

     "Securities Act" shall mean the Securities Act of 1933, as amended, or any
      --------------                                                           
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

     "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
      ------------                                                             
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.

     "Restricted Securities" shall mean the securities of the Company required
      ---------------------                                                   
to bear the legend set forth in Section 2.2 hereof.

     "Shares" shall mean the securities of the Company held by the Investors as
      ------                                                                   
described on Exhibit A.

                                       2

<PAGE>
 
     "Options" shall mean any and all stock options granted to any of the
      -------                                                            
Option Holders, as of the date hereof or thereafter, pursuant to any stock
option plan or agreement approved by the Company's Board of Directors.

     "Registrable Securities" shall mean any shares of the Company's Common
      ----------------------                                               
Stock (i) issued or issuable pursuant to the conversion of the Shares, (ii) held
as of August 17, 1989 by the University, (iii) issued or issuable upon exercise
of the Options, or (iv) issued as a dividend or other distribution with respect
to, or in exchange or in replacement of, the Shares or such Common Stock or
Preferred Stock, excluding in all cases, however (including exclusion from the
calculation of the number of outstanding Registrable Securities), any
Registrable Securities sold by a person in a transaction, including a
transaction pursuant to a registration statement under Section 2 hereof or a
transaction pursuant to Rule 144, in which such person's rights under Section 2
are not transferred.

     The terms "register," "registered" and "registration" refer to a
                --------    ----------       ------------            
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.

     "Registration Expenses" shall mean all expenses incurred by the Company in
      ---------------------                                                    
complying with Sections 2.4, 2.5 and 2.6 hereof, including, without limitation,
all registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, reasonable fees and disbursements of a single special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration other than a
registration pursuant to Section 2.4, in which event such special audit expenses
will be paid by the holders of the securities so registered pro rata on the
basis of the number of shares so registered, (but excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company).

     "Holder" shall mean any holder of outstanding Registrable Securities or
      ------                                                                
securities convertible into or exercisable for Registrable Securities.

     "Initiating Holders" shall mean the holder or holders of fifty percent
      ------------------                                                   
(50%) or more of the combination of the then outstanding Shares and Common Stock
issued upon conversion of the Shares.

     "New Securities" shall mean any Common Stock or Preferred Stock of the
      --------------                                                       
Company, whether now authorized or not, and rights, options or warrants to
purchase said Common Stock or Preferred Stock, and securities of any type
whatsoever that are, 

                                       3

<PAGE>
 
or may become, convertible into said Common Stock or Preferred Stock; provided,
however, that "New Securities" does not include (i) securities issuable upon
conversion of or with respect to the Shares; (ii) securities offered to the
public pursuant to a registration statement filed under the Securities Act;
(iii) securities issued pursuant to the acquisition of another corporation by
the Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company (or the Company's shareholders immediately
prior to such event) owns (or own, on a pro rata basis) not less than fifty-one
percent (51%) of the voting power of such corporation immediately after such
event; (iv) shares of the Company's Common Stock (or related options) issued to
employees, officers or directors of or consultants to the Company (including,
but not limited to, shares issued to the Option Holders) pursuant to any
employee stock offering, plan, or arrangement approved by the Board of
Directors; or (v) shares of the Company's Common Stock or Preferred Stock issued
in connection with any stock split, stock dividend, or recapitalization by the
Company.

                                   SECTION 2

                       Restrictions on Transferability of
                   Securities; Compliance with Securities Act
                   ------------------------------------------

     2.1  Restrictions on Transferability.  The Shares, any Common Stock into
          -------------------------------                                    
which the Shares may be convertible, the Common Stock and Options held by the
Option Holders and the University shall not be transferable except upon the
conditions specified in this Agreement, which conditions are intended to insure
compliance with the provisions of the Securities Act, or, in the case of Section
2.12 hereof, to assist in an orderly distribution.  Each Investor will cause any
proposed transferee of the Shares (or of the Common Stock into which the Shares
may be convertible) held by an Investor to agree to take and hold such
securities subject to the provisions and upon the conditions specified in this
Agreement.  Each Option Holder and the University will cause any proposed
transferee of Common Stock held by an Option Holder or the University,
respectively, to agree to take and hold such securities subject to the
provisions and upon the conditions specified in this Agreement.

     2.2  Restrictive Legend.  Each certificate representing (i) the Shares,
          ------------------                                                
(ii) shares of the Company's Common Stock issued upon conversion of the Shares,
(iii) any securities issued in respect of the Shares or such Common Stock, or
(iv) shares of the Company's Common Stock, Preferred Stock or Options held by an
Option Holder or the University shall (unless otherwise permitted by the
provisions of Section 2.3 below) be stamped or otherwise imprinted with a legend
in the following form (in addition to any legend required under applicable state
securities laws):

                                       4

<PAGE>
 
          THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
          UNDER THE SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN ISSUED
          PURSUANT TO A CLAIM OF EXEMPTION FROM THE REGISTRATION OR
          QUALIFICATION PROVISIONS OF SUCH ACT AND APPLICABLE STATE SECURITIES
          LAWS, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED,
          EXCEPT AS PERMITTED PURSUANT TO 17 C.F. R SECTION 230.144, OR THERE IS
          IN EFFECT A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
          SECURITIES LAWS COVERING SUCH SECURITIES, OR THE ISSUER RECEIVES AN
          OPINION OF COUNSEL FOR THE HOLDER OF SUCH SECURITIES REASONABLY
          SATISFACTORY TO THE ISSUER, STATING THAT SUCH SALE, TRANSFER,
          ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION,
          QUALIFICATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND
          APPLICABLE STATE SECURITIES LAWS.

          SALE OR OTHER TRANSFER OF THE SECURITIES EVIDENCED BY THIS CERTIFICATE
          IS ALSO RESTRICTED BY THE TERMS OF STOCK PURCHASE AGREEMENTS BETWEEN
          THE ISSUER AND THE PURCHASERS LISTED THEREIN AND BY THE TERMS OF THAT
          CERTAIN AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT BETWEEN THE
          ISSUER AND THE OTHER PARTIES THERETO.  COPIES OF SUCH DOCUMENTS MAY BE
          OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF THIS
          CERTIFICATE TO THE SECRETARY OF THE ISSUER AT ITS PRINCIPAL EXECUTIVE
          OFFICES.

     2.3  Notice of Proposed Transfers.  The holder of each certificate
          ----------------------------                                 
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 2.3.  Prior to any proposed
transfer of any Restricted Securities unless there is in effect a registration
statement under the Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such holder's intention to
effect such transfer.  Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall be
accompanied (except in the following cases, with respect to which the
requirements set forth in the balance of this sentence need not be complied
with: transactions in compliance with Rule 144 so long as the Company is
furnished with evidence of compliance with such Rule, including without
limitation, an opinion of counsel to such effect; transactions involving the pro
rata  distribution of Restricted Securities by any holder which is a general or
limited partnership to any of its partners, or retired partners, or to the
estate of any of its partners or retired partners; transactions involving the
transfer of Restricted Securities by any holder who is an individual to his
family members or to a trust for the benefit of such holder or his family
members; or transfers not involving a change in beneficial ownership) by which
the requirements set forth in the balance of this sentence need not be complied
with: transactions in compliance with Rule 144 so long as the Company is
furnished with evidence of compliance with such Rule, including without
limitation, an opinion of counsel to such effect; transactions involving the pro
rata distribution of Restricted Securities by any holder which is a general or
limited partnership to any of its partners, or retired partners, or to the
estate of any of its partners or retired partners; transactions involving the
transfer of Restricted Securities by any holder who is an individual to his
family members or to a trust for the benefit of such holder or his family
members; or transfers not involving a change in beneficial ownership) by 

                                       5

<PAGE>
 
either (i) an unqualified written opinion of legal counsel who shall be
reasonably satisfactory to the Company addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act, (ii) a "no action" letter from the
Commission to the effect that the distribution of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, or (iii) such other showing that may
be reasonably satisfactory to legal counsel to the Company, whereupon the holder
of such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder to
the Company. Each certificate evidencing the Restricted Securities transferred
as above provided shall bear the appropriate restrictive legend set forth in
Section 2.2 above, except that such certificate shall not bear such restrictive
legend if in the opinion of counsel for the Company such legend is not required
in order to establish compliance with any provisions of the Securities Act.

     2.4  Requested Registration.
          ---------------------- 

          (a) Request for Registration.  In case the Company shall receive from
              ------------------------                                         
Initiating Holders after the first anniversary of the Company's initial public
offering, or after January 1, 1994, whichever shall occur first, a written
request that the Company effect any registration (other than a registration on
Form S-3 or any related form of Registration Statement) covering the
registration of at least twenty percent (20%) of their Registrable Securities
(or a lesser percentage if the anticipated aggregate offering price net of
underwriting discounts and commissions, would exceed $2,000,000), the Company
will:

               (i) promptly give written notice of the proposed registration to
all other Holders; and

               (ii) as soon as practicable, use its diligent best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided that prior to the Company's initial public offering, no Initiating
Holder may make a written request that the Company effect any registration

                                       6

<PAGE>
 
unless the aggregate anticipated offering price would exceed, net of
underwriting discounts and commissions, $5,000,000; and provided further that
the Company shall not be obligated to take any action to effect any such
registration, qualification or compliance pursuant to this Section 2.4:

               (A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act; or

               (B) During the period starting with the date sixty (60) days
prior to the Company's estimated date of filing of, and ending on a date six (6)
months following the effective date of, a registration statement pertaining to
an underwritten public offering of securities filed for the account of the
Company (other than a registration relating solely to employee benefit plans or
a registration relating solely to a Commission Rule 145 transaction), provided
that the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective and the Company's estimate
of the date of filing such registration statement is made in good faith; or

               (C) After the Company has effected one registration pursuant to
this Section 2.4 and such registration has been declared or ordered effective.

     Subject to the foregoing clauses (A), (B) and (C) and to Section 2.4(c),
the Company shall file a registration statement covering the Registrable
Securities so requested to be registered as soon as practicable after receipt of
the request of the Initiating Holders.

          (b) Underwriting.  If the Holders intend to distribute the Registrable
              ------------                                                      
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to Section 2.4 and
the Company shall include such information in the written notice referred to in
Section 2.4(a)(i).  The right of any Holder to registration pursuant to Section
2.4 shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting to
the extent requested (unless otherwise mutually agreed by a majority in interest
of the Holders and such Holder) to the extent provided herein.  The Company
shall (together with all Holders proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters of recognized national standing
selected for such underwriting by the Company with the 

                                       7

<PAGE>
 
approval of a majority in interest of the participating Holders.

     Notwithstanding any other provision of this Section 2.4, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten or that applicable state law prohibits the registration of
any Holders' Registrable Securities because of the failure or lack of obligation
of such Holder to contribute to the cost of such registration and so advises the
participating Holders in writing, then the Company shall so advise all Holders
(except those Holders who have indicated to the Company their decision not to
distribute any of their Registrable Securities through such underwriting) and
the number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all such Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities owned by such Holders at the time of filing the registration
statement. No Registrable Securities excluded from the underwriting by reason of
the underwriter's marketing limitation or such state law shall be included in
such registration.

     If any Holder disapproves of the terms of the underwriting, such person may
elect to withdraw therefrom by written notice to the Company, the underwriter
and the other Holders.  The Registrable Securities and/or other securities so
withdrawn from such underwriting shall also be withdrawn from such registration;
provided, however, that, if by the withdrawal of such Registrable Securities a
greater number of Registrable Securities held by other Holders may be included
in such registration (up to the maximum of any limitation imposed by the
underwriters), then the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used above in determining the
underwriter limitation.

     If the underwriter has not limited the number of Registrable Securities to
be underwritten, the Company may include securities for its own account or the
account of others in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting will not thereby be limited.

          (c) Delay of Registration.  If the Company shall furnish to the
              ---------------------                                      
Holders a certificate signed by the President of the Company stating that, in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed on or before the date filing would be required and it is
therefore essential to defer the filing of such registration statement, then the
Company may direct that such request for registration be delayed not in excess
of one hundred 

                                       8

<PAGE>
 
and fifty (150) days, such right to delay a request to be exercised by the
Company not more than twice in any one-year period.

     2.5  Company Registration.
          -------------------- 

          (a) If at any time or from time to time, the Company shall determine
to register any of its Common Stock, for its own account or for the account of
others (other than the Holders), other than a registration relating solely to
employee benefit plans or a registration relating solely to a Commission Rule
145 transaction or a registration on any registration form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of Registrable Securities, the
Company will:

               (i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and

               (ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within twenty (20) days after receipt of such written notice from
the Company, by any Holder or Holders. The rights of a particular Holder under
this Section 2.5 shall terminate five (5) years after the effective date of the
Company's initial underwritten public offering.

          (b) Underwriting.  If the registration of which the Company gives
              ------------                                                 
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.5(a)(i).  In such event the right of any Holder to
registration pursuant to Section 2.5 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.  All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company.

     Notwithstanding any other provision of this Section 2.5, if the underwriter
determines that marketing factors require a limitation of the number of shares
to be underwritten, the underwriter may exclude some or all Registrable
Securities from such registration and underwriting.  The Company shall so advise

                                       9

<PAGE>
 
all Holders (except those Holders who have indicated to the Company their
decision not to distribute any of their Registrable Securities through such
underwriting), and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among such
Holders in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities owned by such Holders at the time of filing the
registration statement. No Registrable Securities excluded from the underwriting
by reason of the underwriter's marketing limitation shall be included in such
registration.

     If any Holder disapproves of the terms of any such underwriting, such
person may elect to withdraw therefrom by written notice to the Company and the
underwriter. The Registrable Securities and/or other securities so withdrawn
from such underwriting shall also be withdrawn from such registration; provided,
however, that, if by the withdrawal of such Registrable Securities a greater
number of Registrable Securities held by other Holders may be included in such
registration (up to the maximum of any limitation imposed by the underwriters),
then the Company shall offer to all Holders who have included Registrable
Securities in the registration the right to include additional Registrable
Securities in the same proportion used above in determining the underwriter
limitation.

     2.6  Registrations on Form S-3.
          ------------------------- 

          (a) If (i) Holders of Registrable Securities request in writing
(specifying that the request is being made pursuant to this Section 2.6) that
the Company file a registration statement on Form S-3 (or any successor form to
Form S-3 regardless of its designation) for a public offering of shares of
Registrable Securities the reasonably anticipated aggregate proceeds of which
would exceed $500,000, and (ii) the Company is a registrant entitled to use Form
S-3 to register such shares, and (iii) the Company has not filed a registration
statement pursuant to this Section 2.6 within the twelve (12) months immediately
prior to the requested filing date, then the Company shall cause such shares,
and any additional shares included pursuant to Section 2.6(b), to be registered
on Form S-3 (or any successor form to Form S-3).

          (b) Prior to effecting a registration of Registrable Securities
pursuant to Section 2.6(a), the Company shall (i) give to each Holder written
notice of the intended registration and (ii) include in such registration any
additional Registrable Securities specified in any written request or requests
by additional Holders received within fifteen (15) days after such written
notice is given.

                                       10

<PAGE>
 
          (c) All expenses incurred in connection with any registrations
requested pursuant to this Section 2.6 including, without limitation, all
registration, qualification, printing, and accounting fees, and fees and
disbursements of counsel for the Company, shall be borne by the Holder or
Holders participating in such registration on the basis of the amount of
securities so registered.

          (d) The Holders' rights to registration under this Section 2.6 are in
addition to, and not in lieu of, their rights to registration under Sections 2.4
and 2.5.

     2.7  Expenses of Registration.
          ------------------------ 

          (a) All Registration Expenses (exclusive of underwriting discounts and
commissions and more than a single special counsel to the selling shareholders)
incurred in connection with the first registration pursuant to Section 2.4 shall
be borne by the Company. The Company shall not, however, be required to pay for
expenses of any registration proceeding begun pursuant to Section 2.4, the
request of which has been subsequently withdrawn by the Initiating Holders
(unless the withdrawal is based upon material adverse information concerning the
Company of which the Initiating Holders were not aware at the time of such
request and the Holders of a majority of Registrable Securities agree to forfeit
their right to one requested registration pursuant to Section 2.4 in which event
such right shall be forfeited by all Holders), in which case such expenses shall
be borne by the holders of securities (including Registrable Securities)
requesting such registration in proportion to the number of shares for which
registration was requested and such registration shall not be counted as a
registration pursuant to Section 2.4 for purposes of Section 2.4(a)(ii)(B).

          (b) All Registration Expenses (exclusive of underwriting discounts and
commissions and more than a single special counsel to the selling shareholders)
incurred in connection with the first two registrations pursuant to Section 2.5
shall be borne by the Company.  In each subsequent registration of Registrable
Securities effected pursuant to Section 2.5, the Holders who include Registrable
Securities in such registration shall bear any additional registration and
qualification fees and expenses (including underwriters' discounts and
commissions), and any additional costs and disbursements of counsel for the
Company that result from the inclusion of the Registrable Securities in such
registration, with such additional expenses of the registration being borne by
all such Holders pro rata on the basis of the amount of Registrable Securities
so registered; provided, however, that if any such cost or expense is
attributable solely to one selling Holder and does not constitute a normal cost
or expense of such a 

                                       11

<PAGE>
 
registration, such cost or expense shall be allocated to that selling Holder. In
addition, each selling Holder shall bear the fees and costs of its own counsel.

     2.8  Registration Procedures.  In the case of each registration,
          -----------------------                                    
qualification or compliance effected by the Company pursuant to this Section 2,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:

          (a) Keep such registration, qualification or compliance effective for
a period of one hundred and twenty (120) days or until the Holder or Holders
have completed the distribution described in the registration statement relating
thereto, whichever first occurs; and

          (b) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request.

     2.9  Indemnification.
          --------------- 

          (a) The Company will indemnify each Holder, each of its officers,
directors, employees, agents, partners and legal counsel, and each person
controlling such Holder, with respect to which registration, qualification or
compliance has been effected pursuant to this Section 2, and each underwriter,
if any, and each person who controls any underwriter against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on (i) any untrue statement (or alleged untrue statement) of a material fact
contained in any prospectus, offering circular or other similar document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to skate therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, or (ii) any violation by
the Company of any federal, state or common law rule or regulation applicable to
the Company in connection with any such registration, qualification or
compliance, and will reimburse each such Holder, each of its officers,
directors, employees, agents, partners and legal counsel, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, as incurred, provided that the Company will not be liable
in any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company 

                                       12

<PAGE>
 
by an instrument duly executed by such Holder or underwriter and specifically
for use therein.

          (b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Company, each of its directors,
officers, employees and agents each legal counsel and independent accountant of
the Company, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of the Securities Act, and each other such
Holder, each of its officers, directors, and partners and each person
controlling such Holder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other similar document, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made, and will reimburse the
Company, such Holders, such directors, officers, employees, agents, persons,
underwriters or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as incurred, in each case to the extent, but only
to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and specifically for use therein; provided,
however, that the obligations of such Holders hereunder shall be limited to an
amount equal to the proceeds to each such Holder of Registrable Securities sold
as contemplated herein.

          (c) Each party entitled to indemnification under this Section 2.9 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has received written notice of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld).  The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying Party
shall bear the expense of such defense of the Indemnified Party if
representation of both parties by the same counsel would be inappropriate due to
actual or potential conflicts of 

                                       13

<PAGE>
 
interest. The failure of any Indemnified Party to give notice as provided herein
shall relieve the Indemnifying Party of its obligations under this Section 2
only to the extent that such failure to give notice shall materially adversely
prejudice the Indemnifying Party in the defense of any such claim or any such
litigation. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation (without any obligation of performance or admission by the
Indemnified Party).

          (d) Notwithstanding anything contained in this Section 2.9 to the
contrary, the Company shall have the right and the ability to provide the
necessary undertakings to the Commission in connection with any registration.

     2.10 Information by Holder.  The Holder or Holders of Registrable
          ---------------------                                       
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders and the distribution proposed by
such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 2.

     2.11 Rule 144 Reporting.  With a view to making available the benefits of
          ------------------                                                  
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to:

          (a) Use its best efforts to facilitate the sale of the Restricted
Securities to the public, without registration under the Securities Act,
pursuant to Rule 144 under the Securities Act, provided that this shall not
require the Company to file reports under the Securities Act and the Exchange
Act at any time prior to the Company's being otherwise required to file such
reports.

          (b) Use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144 under the
Securities Act at all times after ninety (90) days after the effective date of
the first registration under the Securities Act filed by the Company for an
offering of its securities to the general public;

          (c) Use its best efforts to then file with the Commission in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange 

                                       14

<PAGE>
 
Act, as amended (at any time after it has become subject to such reporting
requirements);

          (d) So long as any Holder holds any Restricted Securities to furnish
to the Holder forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as a Holder may reasonably request in availing itself of
any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.

     2.12 "Market Stand-off" Agreement.  Each Holder of more than one percent
           ---------------------------                                       
(1%) of the Company's outstanding voting stock agrees not to sell or otherwise
transfer or dispose of any Common Stock (or other securities) of the Company
held by it during the one hundred fifty (150) day period following the effective
date of a registration statement of the Company filed under the Securities Act
if so requested by the Company and underwriter of Common Stock (or other
securities) of the Company, provided that:

          (a) such agreement shall apply only to the first underwritten
registered public offering of the Company; and

          (b) all officers and directors of the Company and all other holders of
at least one percent (1%) of the Company's voting securities enter into similar
agreements.  The Company may impose stop-transfer instructions with respect to
the shares (or securities) subject to the foregoing restriction until the end of
such period.

     2.13 Transfer of Registration Rights.  The rights to cause the Company to
          -------------------------------                                  
register securities granted under this Section 2 may be assigned or otherwise
conveyed by (i) any Holder (other than an Option Holder) only to a transferee or
assignee in a private transaction to whom not less than 100,000 shares of
Registrable Securities are conveyed (as presently constituted and subject to
subsequent adjustments for stock splits, stock dividends, reverse stock splits,
and the like) or (ii) an Option Holder in the manner set forth above or
otherwise only to another Holder or to a family member or to a trust for the
benefit of such Option Holder or family members in a private transaction to whom
not less than 20,000 shares of Registrable Securities are conveyed (as presently
constituted and subject to subsequent adjustments as set forth above); provided
that the Company is given written notice by such transferee at the time of or
within 

                                       15

<PAGE>
 
a reasonable time after said transfer, stating the name and address of said
transferee and said transferee's agreement to be bound by the provisions of this
Agreement.

     2.14 Suspension of Registration Rights.  The registration rights granted
          ---------------------------------                                  
pursuant to this Section 2 shall not be exercisable by any Holder during the
period in which such Holder has the ability to sell all of the Shares held by
such Holder under Rule 144 or Rule 144A during a single ninety (90) day period.

     2.15 Certain Limitations in Connection with Future Grants of Registration
          --------------------------------------------------------------------
Rights.  From and after the date of this Agreement, the Company shall not enter
- ------                                                                         
into any agreement with any holder or prospective holder of any securities of
the Company providing for the granting to such holder of registration rights
unless such agreement:

          (a) includes the equivalent of Section 2.12 as a term; and

          (b) contains provisions substantially similar to those contained in
Sections 2.4(b) and 2.5(b) with respect to the allocation of Registrable
Securities to be included in an underwritten public offering if marketing
factors require a limitation on the number of such securities to be included.

     Notwithstanding the foregoing, from and after the date hereof the Company
shall not enter into any agreement with any person or persons providing for the
granting to such holder registration rights superior to those granted to Holders
pursuant to this Section 2, or of registration rights which might cause a
reduction in the number of shares includable by the Holders in any offering
pursuant to Section 2.4 or in any offering subject to Section 2.5.


                                   SECTION 3

                             Affirmative Covenants
                             ---------------------

          Notwithstanding any provision of the Company's Bylaws regarding
delivery or non-delivery of financial information to shareholders of the
Company, the Company hereby covenants and agrees as follows:

          3.1  Financial Information.  The Company will furnish the following
               ---------------------                                         
information to each Holder (other than the Option Holders) for so long as it is
a holder of any Shares or Common Stock issued upon conversion thereof, or of
450,000 shares or more of Common Stock:

                                       16

<PAGE>
 
               (a) As soon as practicable after the end of each fiscal year, and
in any event within one hundred and twenty (120) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as of the end of such
fiscal year, and consolidated statements of income, shareholders' equity and
cash flows of the Company and its subsidiaries, if any, for such year, prepared
in accordance with generally accepted accounting principles and setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail and with an audit opinion thereon from independent public
accountants of recognized national standing selected by the Company.

               (b) As soon as practicable after the end of the first, second and
third quarterly accounting periods in each fiscal year of the Company, and in
any event within forty-five (45) days thereafter, a consolidated balance sheet
of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income, shareholders' equity
and cash flows of the Company and its subsidiaries, if any, for such period and
for the current fiscal year to date, prepared in accordance with generally
accepted accounting principles, with the exception that no notes need be
attached to such statements and year-end audit adjustments may not have been
made. Said financial statements shall be signed by an officer of the Company who
shall state that such financial statements are in accordance with generally
accepted accounting principles, with the exception that no notes need be
attached to such statements and year-end audit adjustments may not have been
made.

          3.2  Other Information.  The Company shall furnish the following
               -----------------                                          
information to each Holder (other than the Option Holders) for so long as it
(together with its affiliates) holds 450,000 or more Shares (on an as-converted-
to-Common-Stock basis) or shares of Common Stock.

               (a) As soon as practicable after the end of each fiscal month,
and in any event within thirty (30) days thereafter, a consolidated balance
sheet of the Company and its subsidiaries, if any, as at the end of such month,
and a consolidated statement of income of the Company and its subsidiaries, if
any, for such month, and for the current fiscal year to date, in each case
setting forth in comparative form the Company's and its subsidiaries', if any,
projected consolidated balance sheets and projected consolidated statements of
income for the corresponding periods as set forth in the annual budget (as
prepared pursuant to Section 3.2(b)), prepared in accordance with generally
accepted accounting principles, all in reasonable detail and certified subject
to changes resulting from year-end audit adjustments, by the principal financial
officer of the Company; provided, however, that any financial statements
provided hereunder need not contain any footnotes. To such 

                                       17

<PAGE>
 
financial statements there shall be appended a discussion and analysis, in
reasonable detail, of such financial statements and the general business
condition and prospects of the Company by management of the Company so as to
assist the recipients in understanding and interpreting such financial
statements.

               (b) After adoption by the Board of Directors, but not later than
thirty (30) days prior to beginning of each fiscal year, an annual budget for
such year which shall include monthly capital and operating expense budgets,
cash flow statements, projected balance sheets and profit and loss statements
for each month and for the end of such year itemized in such detail as the Board
of Directors may reasonably determine.  Approval of such budgets, statements and
projections shall be required by a majority of the Board of Directors.

               (c) Within thirty (30) days after a material change has been made
in the annual budget specified in Section 3.2(b) previously delivered, revised
budgets, statements or projections (as so specified).

               (d) Copies of all reports, registration statements and other
material filed by the Company or any subsidiary with the Commission or with any
national securities exchange on which securities of the Company or any
subsidiary may be listed.

               (e) The covenants provided in this Section 3.2 shall be suspended
for so long as the Company is subject to the reporting requirements of Section
13(a) or 15(d) of the Exchange Act.

          3.3  Inspection Rights.  Each holder (other than the Option Holders)
               -----------------                                              
of any Shares or Common Stock issued upon conversion thereof, or of 450,000 or
more shares of Common Stock shall have the right to visit and inspect any of the
properties of the Company or any of its subsidiaries, and to discuss their
affairs, finances and accounts with their officers, all at such reasonable times
and as often as may be reasonably requested.

          3.4  Assignment of Rights to Information.  The rights granted pursuant
               -----------------------------------                              
to Sections 3.1, 3.2 and 3.3 may be assigned or otherwise conveyed by any Holder
or by any subsequent transferee of any such rights; provided that the Company is
given notice of the assignment or conveyance; and provided further that if the
Company reasonably believes that it is necessary to protect proprietary
information, the Company may edit such information delivered to a transferee.

          3.5  Confidentiality.  Each Holder agrees that it will keep
               ---------------                                       
confidential and will not, except as required by law, including without
limitation freedom of information acts, disclose or divulge any confidential,
proprietary or secret information which 

                                       18

<PAGE>
 
such Holder may obtain from the Company, and which the Company has prominently
marked "confidential", "proprietary" or "secret" or has otherwise identified as
being such, pursuant to financial statements, reports and other materials
submitted by the Company as required hereunder, or pursuant to visitation or
inspection rights granted hereunder unless such information is or becomes known
to the Holder from a source other than the Company (unless such Holder knows
that such information was improperly obtained from the Company) or is or becomes
publicly known, or unless the Company gives its written consent to the Holder's
release of such information, except that no such written consent shall be
required (and Holder shall be free to release such information) if such
information is to be provided to Holder's lawyer or accountant, or to an
officer, director or partner of a Holder.

          3.6  Employee Agreements.  Those current and future employees and
               -------------------                                         
officers of and consultants to the Company designated by the Board of Directors
shall be required to execute a proprietary information agreement substantially
in the form attached hereto as Exhibit B with such amendments thereto as the
Board of Directors may from time to time deem appropriate.

          3.7  Insurance.  As soon as possible after the date hereof the Company
               ---------                                                        
shall obtain and keep adequate insurance on its properties, by financially sound
and reputable insurers, of a character and in such amounts and on such terms
usually insured by corporations engaged in the same or a similar business
against loss or damage resulting from fire or other risks insured against by
extended coverage and of the kind customarily insured against by such
corporations, and maintain in full force and effect public liability insurance
against claims for personal injury, death or property damage occurring upon, in,
about or in connection with the use of any of its properties, and maintain such
other insurance as may be required by law or other agreements to which the
Company is or shall become a party.

          3.8  Board of Directors.  The Company shall reimburse directors of the
               ------------------                                               
Company for their reasonable expenses (including travel, meals and lodging)
incurred in the service of the Company, including the attendance at Board of
Directors meetings, pursuant to policies established by the Board of Directors.


                                 SECTION 4

                            Right of First Refusal
                            ----------------------

          4.1  Right of First Refusal.  The Company hereby grants to each Holder
               ----------------------                                           
the right of first refusal to purchase, pro rata, New Securities that the
Company may, from time to time, propose to sell and issue.  Each Holder's pro
rata share, for purposes of this right of first refusal, is the ratio of the
number of 

                                       19

<PAGE>
 
shares of Common Stock (and shares of Common Stock issuable upon conversion of
securities convertible into shares of Common Stock), excluding the number of
shares of Common Stock which may be issued upon exercise of any Option, actually
held by such Holder, to the total number of outstanding shares of Common Stock
(calculated on a fully diluted basis) of the Company. This right of first
refusal shall be subject to the following provisions:

          (a) In the event that the Company proposes to undertake an issuance of
New Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, the price, and the general terms upon
which the Company proposes to issue the same.  Each Holder shall have ten (10)
business days from the date of receipt of any such notice to agree to purchase
its pro rata share of such New Securities for the price and upon the general
terms specified in the notice by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased.  Each Holder
shall have a right of over allotment such that if any Holder fails to exercise
its right hereunder to purchase its pro rata portion of New Securities, the
Company shall so notify the other Holders and the other Holders may purchase the
non-purchasing Holder's portion on a pro rata basis, within ten (10) days from
the date of such notice.

          (b) In the event that a Holder fails to exercise in full the right of
first refusal within said ten (10) day period (plus ten (10) day period, if
applicable) the Company shall have ninety (90) days thereafter to sell the New
Securities respecting which the Holders' rights were not exercised, at a price
and upon general terms no more favorable to the purchasers thereof than
specified in the Company's notice.  In the event the Company has not sold the
New Securities within such ninety (90) day period, the Company shall not
thereafter issue or sell any New Securities, without first offering such
securities to the Holders in the manner provided above.

          (c) The right of first refusal granted under this Agreement shall
expire upon the closing of the first firmly underwritten public offering of
Common Stock of the Company pursuant to a registration statement filed with, and
declared effective by, the Commission under the Securities Act, covering the
offer and sale of Common Stock to the public at a per-share price (prior to
underwriters' commissions and expenses) of at least $5.00 (as adjusted for any
combinations, consolidations, stock distributions or stock dividends with the
respect to such stock) and at an aggregate offering price of not less than
$10,000,000.

          (d) This right of first refusal is assignable only in connection with
a sale of Shares or Common Stock issued on conversion thereof.

                                       20

<PAGE>
 
          4.2  Waiver.  The Series A Investors, the Founders and the University
               ------                                                          
each hereby waive their respective rights under Section 4.1 of the Investors'
Rights Agreement to purchase their pro rata share of the Series B Preferred
Stock being issued to the Series B Investors pursuant to that certain Series B
Preferred Stock Purchase Agreement of even date herewith (the "Series B
Agreement").


                                   SECTION 5

                              University Warrants
                              -------------------

          5.1  Termination of Warrant Rights.  The right of the University to
               -----------------------------                                 
obtain warrants to purchase Common Stock of the Company, contained in Section
5.1 of the Investors' Rights Agreement, is hereby terminated.


                                   SECTION 6

                                 Miscellaneous
                                 -------------

          6.1  Amendment of Investors' Rights Agreement.  Effective and
               ----------------------------------------                
contingent upon the closing of the sale of the Series B Preferred Stock pursuant
to the Series B Agreement, all of the provisions of the Investors' Rights
Agreement shall be null and void and superseded by this Agreement.  The parties
to such Investors' Rights Agreement forever release, waive and disclaim any and
all rights under such Agreement.  The parties hereto further agree that this
Agreement constitutes the full and entire understanding and agreement between
the parties with regard to the subjects hereof and thereof, except that no
provision, condition or term of this Agreement, including but not limited to
Section 6.8 below, is intended to explicitly or implicitly alter or allow to be
altered any provision, condition or term of the UM-Ann Arbor Stromal Agreement.

          6.2  Governing Law.  This agreement shall be governed by and construed
               -------------                                                    
in accordance with the laws of the State of Michigan applicable to contracts
between Michigan residents entered into and to be performed entirely within the
State of Michigan.

          6.3  Successors and Assigns.  Except as otherwise provided herein, the
               ----------------------                                           
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.

          6.4  Notices.  All notices and other communications required or
               -------                                                   
permitted hereunder shall be in writing and shall be effective five (5) days
after mailed by first-class mail, postage prepaid, 

                                       21

<PAGE>
 
or otherwise delivered by hand or by messenger, addressed (a) if to an Investor
at such Investor's address set forth on Exhibit A, or at such other address as
such Investor shall have furnished to the Company in writing, or (b) if to any
other Holder, at such address as such Holder shall have furnished the Company in
writing, or, until any such Holder so furnishes an address to the Company, then
to and at the address of the last holder of such Registerable Securities who has
so furnished an address to the Company, or (c) if to the Company, at such
address as the Company shall have furnished to each Holder in writing.

          6.5  Delays or Omissions.  No delay or omission to exercise any right,
               -------------------                                              
power or remedy accruing to any holder of any Registerable Securities, upon any
breach or default of the Company under this Agreement, shall impair any such
right, power or remedy of such Holder nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, or of or in any
similar breach or default thereunder occurring; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
theretofore or thereafter occurring.  Any waiver, permit, consent or approval of
any kind or character on the part of any holder of any breach or default under
this Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing.  All remedies, either under
this agreement, or by law or otherwise afforded to any Holder, shall be
cumulative and not alternative.

          6.6  Counterparts.  This Agreement may be executed in any number of
               ------------                                                  
counterparts, each of which may be executed by less than all of the Holders,
each of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.

          6.7  Severability.  In the case any provision of this Agreement shall
               ------------                                                    
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.

          6.8  Amendments.  The provisions of this Agreement may be amended at
               ----------                                                     
any time and from time to time, and particular provisions of this Agreement may
be waived, with and only with an agreement or consent in writing signed by the
Company and by the Holders of a majority of the number of shares of Registrable
Securities (or securities convertible into Registrable Securities) outstanding
as of the date of such amendment or waiver.  Each party to this Agreement
acknowledges that by the operation of this Section the holders of a majority of
the outstanding Registrable Securities may have the right and power to diminish
or eliminate all rights of such holder under this Agreement.

                                       22

<PAGE>
 
          IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the date first above written.

                                 COMPANY:

                                 AASTROM BIOSCIENCES, INC.


                                 By  /s/ R. DOUGLAS ARMSTRONG
                                     -----------------------------------
                                 Dr. R. Douglas Armstrong
                                 President



                                 INVESTORS:

                                 H&Q LIFE SCIENCE TECHNOLOGY FUND I


                                 By     /s/ JACKIE BERTERRETCHE
                                        --------------------------------

                                 Title  Attorney-In-Fact
                                        --------------------------------


                                 H&Q LONDON VENTURES


                                 By     /s/ JACKIE BERTERRETCHE
                                        ---------------------------------

                                 Title  Attorney-In-Fact
                                        ---------------------------------


                                 STATE TREASURER OF THE STATE OF MICHIGAN
                                 CUSTODIAN OF PUBLIC SCHOOL EMPLOYEES'
                                 RETIREMENT SYSTEM; STATE EMPLOYEES'
                                 RETIREMENT SYSTEM; MICHIGAN STATE POLICE
                                 RETIREMENT SYSTEM; JUDGES' RETIREMENT
                                 SYSTEM; AND PROBATE JUDGES' RETIREMENT
                                 SYSTEM


                                 By     /s/ PAUL E. RICE
                                        ---------------------------------

                                 Title  Paul E. Rice, Administrator
                                        ---------------------------------
                                        Venture Capital and LBO Division
                                       
                                      23

<PAGE>
 
                                 BRENTWOOD ASSOCIATES V, L.P.
                                 By:  Brentwood V Ventures, L.P.
                                      Its General Partner

                                 By /s/ G. BRADFORD JONES
                                    ------------------------------------

                                 WIND POINT PARTNERS II, L.P.


                                 By /s/ ROBERT CUMMINGS 
                                    ------------------------------------

                                 Title  General Partner
                                       ---------------------------------

                                 GC&H PARTNERS


                                 By /s/ EDWIN E. HUDDLESON, JR.
                                    ------------------------------------

                                 Title  General Partner
                                       ---------------------------------
                                  
                                 /s/ MICHAEL B. STAEBLER
                                 ---------------------------------------
                                 Michael B. Staebler, Esq.


                                 OPTION HOLDERS:



                                 /s/ STEPHEN G. EMERSON
                                 ---------------------------------------
                                 Stephen G. Emerson


                                 /s/ BERNHARD O. PALSSON
                                 ---------------------------------------
                                 Bernhard O. Palsson


                                 /s/ MICHAEL F. CLARKE
                                 ---------------------------------------
                                 Michael F. Clarke


                                 /s/ R. DOUGLAS ARMSTRONG
                                 ---------------------------------------
                                 R. Douglas Armstrong

                                       26

<PAGE>
 
                                 THE REGENTS OF THE UNIVERSITY OF MICHIGAN:


                                 By  /s/ NORMAN G. HERBERT
                                    ---------------------------------------
                                         Norman G. Herbert

                                 Title   Investment Officer/Treasurer
                                       ------------------------------------


                                 By  /s/ C.W. MATTHEWS
                                    ---------------------------------------
                                         C.W. Matthews

                                 Title   Associate Vice President for 
                                       ------------------------------------
                                         Finance and Controller
                                       ------------------------------------

                                       34

<PAGE>
 
                                   EXHIBIT A
                                   ---------

<TABLE>
<CAPTION>
 
Series A Investors                           Shares
- ------------------                         ---------
<S>                                        <C>
H&Q Life Science Technology Fund I           875,000
One Bush Street, 18th Floor
San Francisco, CA  94104
H&Q London Ventures                          875,000
One Bush Street, 18th Floor
San Francisco, CA  94104
State Treasurer of the State of              750,000
 Michigan, Custodian of Certain
 Retirement Systems
c/o Venture Capital Division
430 West Allegan, First Floor
Treasury Building
Lansing, MI  48933
                                           ---------
TOTAL                                      2,500,000
 
Series B Investors                           Shares
- -------------------                        ---------
Brentwood Associates, V., L.P.               850,000
11150 Santa Monica, Blvd.
Suite 1200
Los Angeles, CA  90025
Attn:  Brad Jones

Wind Point II, L.P.                          750,000
321 North Clark Street
Chicago, IL  60610
Attn:  Robert Cummings

H&Q Life Science Technology Fund I           540,000
One Bush Street, 18th Floor
San Francisco, CA  94104
Attn:  Robert Kunze

H&Q London Ventures                          360,000
One Bush Street, 18th Floor
San Francisco, CA  94104
Attn:  Robert Kunze
</TABLE>



                                      i.


<PAGE>
 

<TABLE> 
<S>                                        <C> 
State Treasurer of the State                 500,000
of Michigan, Custodian of
Certain Retirement Systems
c/o Venture Capital Division
430 West Allegan
Lansing, Michigan  48992
Attn:  Joseph Taylor

GC&H Partners                                 25,000
c/o Cooley Godward Castro
  Huddleson & Tatum
One Maritime Plaza
20th Floor
San Francisco, CA  94111
Attn:  Jeanne Meyer

Michael B. Staebler, Esq.                      5,000
c/o Pepper, Hamilton & Scheetz
100 Renaissance Center
Suite 3600
Detroit, Michigan  48243
                                           ---------
TOTALS                                     3,030,000
 
</TABLE>



                                      ii.


<PAGE>
 
                                  EXHIBIT "A"
                                  -----------

AASTROM BIOSCIENCES, INC.
P.O. Box 130469
Ann Arbor, Michigan 48113-0469

Gentlemen:

     1.     The following is a complete list of all inventions or improvements 
relevant to the subject matter of my service as a director of AASTROM 
BIOSCIENCES, INC. (the "Company") that have been made or conceived or first 
reduced to practice by me alone or jointly with others prior to my becoming a 
director of the Company:

     _____ No inventions or improvements.

     _____ See below:

     _________________________________________________________________________

     _________________________________________________________________________

     _________________________________________________________________________

     _________________________________________________________________________

     _____ Due to confidentiality agreements with prior employer, I cannot 
           disclose certain inventions that would otherwise be included on the
           above-described list.

     _____ Additional sheets attached.

     2.     I propose to bring to my service as a director the following 
devices, materials and documents of a former employer or other person to whom I 
have an obligation of confidentiality that are not generally available to the 
public, which materials and 

                                      A-1


<PAGE>
 
documents may be used in my service as a director pursuant to the express 
written authorization of my former employer or such other person (a copy of 
which is attached hereto):

     _____ No materials.

     _____ See below.

     ________________________________________________________________________

     ________________________________________________________________________

     ________________________________________________________________________

     ________________________________________________________________________

     _____ Additional sheets attached.


Dated:  ____________________, 19____.


                                     Very truly yours,

 
                                     ________________________________________

                                      A-2

<PAGE>
 
                                   EXHIBIT B

                           AASTROM BIOSCIENCES, INC.

           DIRECTOR PROPRIETARY INFORMATION AND INVENTION AGREEMENT
           --------------------------------------------------------

     In consideration of my service as a director or continued service as a 
director of AASTROM Biosciences, Inc. ("the Company"), I hereby agree as 
follows:

     1.     Recognition of Company's Rights; Nondisclosure. At all times during 
            ----------------------------------------------
the term of my service as a director and thereafter, I will hold in strictest 
confidence and will not disclose or use any of the Company's Proprietary 
Information (defined below), except as such disclosure or use may be required in
connection with my work for the Company, or unless an officer of the Company 
expressly authorizes such disclosure or use. I assign to the Company any rights 
I may have or acquire in such Proprietary information and recognize that all 
Proprietary information shall be the sole property for the Company and its 
successors and assigns, and the Company and its successors and assigns shall be 
the sole owner of all patents, copyrights, and other rights in connection 
therewith.

     The term "Proprietary Information" shall mean all of the confidential or 
proprietary information of the Company, including, but not limited to:

          a.     inventions, trade secrets, ideas, processes, formulas, source 
codes, data, programs, other original works or authorship, know-how, 
improvements, discoveries, developments, designs and techniques, (hereinafter 
collectively referred to as "Inventions"); and

          b.     plans for research, development, new products, marketing and 
selling; financial statements; licenses; prices and costs; information 
concerning suppliers and customers; and information regarding the skills and 
compensations of employees of the Company.

     Notwithstanding the foregoing, Proprietary information shall not include:
                                                            ---------

          a.     information which at the time of disclosure to the undersigned 
is in the public domain,
 
          b.     information which was received by the undersigned from a third 
party having the legal right to transmit the same to the undersigned, or

          c.     information which was independently developed by the 
undersigned without reliance on any information received from the Company.


<PAGE>
 
     I understand, in addition, that the Company has received and in the future 
will receive from third parties confidential or proprietary information ("Third 
Party Information") subject to a duty on the Company's part to maintain the 
confidentiality of such information and to use it only for certain limited 
purposes. During the term of my service as director and thereafter, I will hold 
Third Party Information in the strictest confidence and will not disclose or use
Third Party Information except as permitted by the agreement between the Company
and such third party, unless expressly authorized to act otherwise by an officer
of the Company.

     2.     Assignment of Proprietary Rights. I hereby assign to the Company and
            --------------------------------
its successors and assigns all my right, title and interest in and to any and 
all inventions whether or not patentable or registrable under copyright or 
similar statutes, made or conceived or reduced to practice or learned by me, 
either alone or jointly with others, during the term of my service as a director
with the Company. I agree that all such inventions are the sole property of the 
Company and its successors and assigns.

     I also assign to or as directed by the Company all my right, title and 
interest in and to any and all inventions, full title to which is required to be
in the United States by a contract between the Company and the United States or 
any of its agencies. Inventions assigned to or as directed by the Company by 
this paragraph 2 are hereinafter referred to as "Company Inventions."

     Provided however, the foregoing assignment of inventions applies only to 
inventions related to the technology and business of the Company, but not to any
                                                                      ---
other inventions which I may make independent from my service with the Company, 
or that I may make as part of a formalized collaboration with the Company that 
is outside of my role as a director (any such collaboration being established
and mutually agreed to in writing).

     3.     Enforcement of Proprietary Rights. I will assist the Company in 
            ---------------------------------
every proper way to obtain and from time to time enforce United States and 
foreign patents, copyright and other rights and protections relating to Company 
inventions in any and all countries. To that end I will execute, verify and 
deliver such documents and perform such other acts (including appearances as a 
witness) as the Company may reasonably request for use in applying for, 
obtaining, sustaining and enforcing such patents, copyrights and other rights 
and protections on Company inventions. In addition, I will execute, verify and 
deliver assignments of such patents, copyrights, and other rights and 
protections to the Company or its designee. My obligation to assist the Company 
in obtaining and enforcing patents, copyrights, and other rights and protections
relating to such Company Inventions in any and all countries shall continue 
beyond the termination of my service as a director, but the Company shall 
compensate me at a reasonable 

                                      -2-


<PAGE>
 
rate after my termination for the time actually spent by me at the Company's 
request on such assistance.

     In the event the Company is unable, after reasonable effort, to secure my 
signature on any document needed to apply for or prosecute any patent, 
copyright, or other right or protection relating to a Company Invention, I 
hereby irrevocably designate and appoint the Company and its duly authorized 
officers and agents as my agent and attorney in fact, to act for an in my behalf
to execute, verify and file any such applications and to do all other lawfully 
permitted acts to further the prosecution and issuance of patents, copyrights, 
and other rights and protections thereon with the same legal force and effect as
if executed by me.

     4.     Obligation to Keep Company Informed. During the term of my service 
            -----------------------------------
as a director, I will disclose to the Company promptly, fully and in writing any
and all inventions. in addition, after termination of my service as a director, 
I will disclose all patent applications filed by me within a year after 
termination of my service as a director. I agree that any patent application 
filed within a year after termination of my service as a director shall be 
presumed to relate to an invention made during the term of my service as a 
director unless I can sustain the burden of proving the contrary.

     5.     Prior Inventions. Inventions if any, patented or unpatented, which I
            ----------------
made prior to the commencement of my service as a director with the Company, are
excluded from the scope of this Agreement. To preclude any possible uncertainty,
I have set forth on Exhibit A attached hereto, a complete list of all inventions
that I have, alone or jointly with other, conceived, developed or reduced to 
practice or caused to be conceived, developed, or reduced to practice, prior to 
the commencement of my service as a director with the Company, that I consider 
to not be Company property and that I wish to have excluded from the scope of 
this Agreement.

     6.     No Improper Use of Materials. During my service as a director at the
            ----------------------------
Company, I will not improperly use or disclose any confidential information or 
trade secrets, if any, of any former or current employer, and I will not bring 
onto the premises of the Company any unpublished documents or any property 
belonging to any former or current employer unless consented to in writing by 
that employer.

     7.     No Conflicting Obligation. I represent that my performance of all 
            -------------------------
terms of this Agreement and as a director of the Company does not and will not 
breach any agreement to keep in confidence information acquired by me in 
confidence or in trust prior to my service as a director by the Company. I have 
not 

                                      -3-


<PAGE>
 
entered into, and I agree I will not enter into, any agreement either written or
oral in conflict herewith.

     8.     Effect of Termination. Upon the termination of my service as a 
            ---------------------
director with the Company, I understand that the Company and I shall be released
from all obligations and liabilities to the other occurring or arising after the
date of such termination, except that any termination of my service as a 
director with the Company shall not relieve me of my obligations under Sections 
1, 2, 3, 4, and 6 hereof, nor shall any such termination relieve me or the 
Company from any liability arising from any breach of the provisions contained 
herein. When I discontinue my service as a director of the Company, I will 
deliver to the Company any and all drawings, notes, memoranda, specifications, 
devices, documents, together with all copies thereof, and any other material 
containing or disclosing any Company Inventions, Third Party Information or 
Proprietary Information of the Company.

     9.     Legal and Equitable Remedies. Because my services are personal and 
            ----------------------------
unique and because I may have access to and become acquainted with the 
Proprietary Information of the Company, the Company shall have the right to 
enforce this Agreement and any of its provisions by injunction, specific 
performance or other equitable relief without prejudice to any other rights and 
remedies that the Company may have for a breach of this Agreement.

     10.    Notices. Any notices required or permitted hereunder shall be given 
            -------
to the appropriate party at the address specified below or at such other address
as the party shall specify in writing.

     Such notice shall be deemed given upon personal delivery to the appropriate
address or sent by certified or registered mail, three days after the date of 
mailing.

     11.    Miscellaneous. I agree that, with respect to the subject matter 
            -------------
hereof, this Agreement constitutes my entire agreement with the Company, 
superseding any previous oral or written communications, representations, 
understandings, or agreements with the Company or any officer or representative 
thereof. This Agreement shall inure to the benefit of the successors and assigns
of the company, and shall be binding upon my successors and assigns. To the 
extent that any of the agreements set forth herein, or any word, phrase, clause,
or sentence hereof shall be found to be illegal or unenforceable for any reason,
such agreement, word, phrase, clause, or sentence shall be modified or deleted 
in such a manner so as to make the Agreement, as modified, legal and enforceable
under applicable laws. This Agreement shall be governed by the laws of the State
of Michigan, as those laws are applied by Michigan courts to 

                                      -4-

<PAGE>
 
contracts between Michigan residents made and to be performed within the state 
of Michigan, which state shall have jurisdiction of the subject matter hereof. 
This Agreement may not be changed, modified, released, discharged, abandoned, or
otherwise amended, in whole or in part, except by an instrument in writing 
signed by the company and me.

     This Agreement shall be effective as of the first day of my service as a 
director with the company, namely:  _____________________, 19_____.

Date: ___________________  ___________________________________________________

                           ___________________________________________________
                           Address
                           ___________________________________________________

                           ___________________________________________________

                                      -5-



<PAGE>
 
                                                                    EXHIBIT 10.1

                           INDEMNIFICATION AGREEMENT


     This Agreement is made as of __________, between Aastrom Biosciences, Inc.,
a Michigan corporation (the "Company"), and those certain officers and directors
of the Company designated on the signature page of this Agreement as Indemnitees
(hereinafter referred to individually as an "Indemnitee" and collectively as the
"Indemnitees").

                                    RECITALS

          A.  It is essential to the Company to attract and retain as directors
and officers the most capable persons available.

          B.  Both the Company and Indemnitees recognize the increased risk of
litigation and other claims being asserted against directors and officers of
companies in today's environment.

          C.  While basic protection against undue risk of personal liability of
directors and officers may be provided through insurance coverage, it has become
increasingly difficult to obtain such insurance on terms providing reasonable
protection at reasonable cost.
 
          D.  The Restated Articles of Incorporation and the Bylaws of the
Company permit the Company to indemnify and advance expenses to its directors
and officers to the full extent permitted by law; and Indemnitees have been
serving and continue to serve as directors and officers
 of the Company in part
in reliance on such Restated Articles of Incorporation and Bylaws.

          E.  In recognition of Indemnitees' need for substantial protection
against personal liability, the increasing difficulty in obtaining satisfactory
insurance coverage, and Indemnitees' reliance on the aforesaid Restated Articles
of Incorporation and Bylaws, and in part to provide Indemnitees with specific
contractual assurance that the protection promised by the Restated Articles of
Incorporation and Bylaws will be available to Indemnitees (regardless of, among
other things, any amendment to or revocation of such Restated Articles of
Incorporation or Bylaws or any change in the composition of the Company's Board
of Directors), the Company wishes to provide in this Agreement for the
indemnification of and the advancing of expenses to Indemnitees to the fullest
extent permitted by law and as set forth in this Agreement, and, to the extent
insurance coverage is maintained, for the continued coverage of Indemnitees
under the Company's directors' and officers', liability insurance policies.

     NOW, THEREFORE, in consideration of Indemnitees' service to the

<PAGE>
 
Company, or Indemnitees' service to another enterprise at the request of the
Company, the parties hereto agree as follows:

          1.  Certain Definitions.  As used herein, the following terms shall
              -------------------
refer to the following events or have the following meanings, as the case may
be:

               a.  Change in Control is an event which shall be deemed to have
                   -----------------
occurred if any one or more of the following events occur: (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended) hereafter becomes the "beneficial owner" (as defined in Rule
13d-3 under said Act), directly or indirectly, of securities of the Company
representing twenty percent or more of the total voting power represented by the
Company's then outstanding Voting Securities, excluding, however, a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
or a corporation owned directly or indirectly by the shareholders of the Company
in substantially the same proportions as their ownership of stock of the
Company; or (ii) during any period of two consecutive years, individuals who, at
the beginning of such period, constitute the Board of Directors of the Company
and any new director whose election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a vote of at least two-
thirds of the directors then still in office, cease for any reason to constitute
a majority of the Board of Directors; or (iii) the shareholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in the Voting Securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting Securities of
the surviving entity) at least 80 percent of the total voting power represented
by the Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or (iv) the shareholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company (in one transaction or a series of
transactions) of all or substantially all the Company's assets.

               b.  Claim means (i) any threatened, pending or completed action,
                   -----
suit or proceeding, whether civil, criminal, administrative or investigative, or
(ii) any inquiry or investigation, whether instituted by the Company or any
other party, that any of the Indemnitees in good faith believes might lead to
the institution of any such action, suit or proceeding.

               c.  Expenses means, without limitation, attorneys' fees and all
                   --------
other costs, expenses and obligations paid or incurred in connection with (i)
investigating, defending, being a witness in or participating in (including on
appeal), any Claim relating to any Indemnifiable Event, or (ii) preparing to
defend, be a witness in or participate in any Claim relating to any
Indemnifiable Event.

<PAGE>
 
               d.  Indemnifiable Event means any event or occurrence related to
                   -------------------
the fact that any of the Indemnitees is or was a director, officer, employee,
agent, trustee or fiduciary of the Company, or is or was serving at the request
of the Company as a director, officer, employee, trustee, agent or fiduciary of
another corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by any of the
Indemnitees in any such capacity for which under applicable law a California
corporation may indemnify Indemnitees, as such law exists from time to time.

               e.  Indemnitees means the officers and directors of the Company
                   -----------
as of the date of this Agreement and any future duly elected officers and
directors of the Company designated on and executing the signature page of this
Agreement as Indemnitees. "Indemnitee" means any one of the Indemnitees.

               f.  Independent Legal Counsel means an attorney or firm of
                   -------------------------
attorneys, selected in accordance with the provisions of Section 3, who shall
not have otherwise performed services within the last three years for the
Company or the Indemnitee seeking indemnification (other than services with
respect to matters concerning the rights of any of the Indemnitees under this
Agreement).

               g.  Reviewing Party means (i) Independent Legal Counsel or (ii)
                   ---------------
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
who is not a party to the particular Claim for which Indemnitee is seeking
indemnification.

               h.  Voting Securities means any securities of the Company
                   -----------------                                    
which entitle their holders to vote generally in the election of directors.

          2.   Basic Indemnification Arrangement.
               --------------------------------- 

               a.  Indemnification.  In the event Indemnitee was, is or
                   ---------------                                     
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, a Claim by reason of an
Indemnifiable Event, the Company shall indemnify Indemnitee, to the fullest
extent permitted by law and as soon as practicable (but in any event no later
than thirty days after written demand is presented to the Company), against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim.  If requested by Indemnitee, the
Company shall advance (within two business days of such request) any and all
Expenses to Indemnitee (an "Expense Advance").

               b.  Exception; Determination That Indemnification or
                   --------------------------------------------- --
Advances Not Permitted.  Except as provided in Section 2(c), the obligations of
- ----------------------                                                         
the Company

<PAGE>
 
under Section 2(a) shall be subject to the condition that a Reviewing Party
shall not have determined that Indemnitee would not be permitted to be
indemnified under applicable law.  Except as provided in Section 2(c), the
obligation of the Company under Section 2(a) to make an Expense Advance shall be
subject to the condition that, if, when and to the extent a Reviewing Party
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Indemnitee shall reimburse the Company for all such Expense
Advances theretofore paid.  For purposes of this Section 2(b), if the Reviewing
Party is Independent Legal Counsel, then any such determination shall be
rendered in the form of a written opinion.

               c.  Initiation of Action Concerning Right to Indemnification. In
                   --------------------------------------------------------
the event Indemnitee has commenced or thereafter commences legal proceedings in
a court of competent jurisdiction to secure a determination that Indemnitee
should be indemnified under applicable law, any determination made by a
Reviewing Party that Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding and Indemnitee shall not be required to
reimburse the Company for any Expense Advance until a final judicial
determination is made with respect thereto. Indemnitee shall have the right to
commence litigation in any court in the State of Michigan having subject matter
jurisdiction and in which venue is proper in order to seek an initial
determination by the court as to whether Indemnitee is entitled to
indemnification and Expense Advances hereunder or in order to challenge an
unfavorable determination by a Reviewing Party, including the legal or factual
bases for such unfavorable determination. The Company hereby consents to service
of process and to appear in any such proceeding. Unless contested by the
Indemnitee as contemplated by this Section 2(c), any determination by a
Reviewing Party shall be conclusive and binding on the Company and Indemnitee.

               d.  Reviewing Party.  For purposes of this Section 2, the
                   ---------------                                      
Reviewing Party shall be selected by the Board of Directors in circumstances
where there has not been a Change in Control.  In circumstances where there has
been a Change in Control (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the Independent
Legal Counsel referenced in Section 3.

          3.   Change in Control.  The Company agrees that if there is a Change
               -----------------                                               
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), then with respect to all matters
thereafter arising concerning the rights of Indemnitee under this Agreement or
any other agreement or Company Bylaw now or hereafter in effect relating to
Claims for Indemnifiable Events, the Company shall seek legal advice only from
Independent Legal Counsel selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld).  Such Independent Legal
Counsel, among other things, shall render its

<PAGE>
 
written opinion to the Company and Indemnitee as to whether and to what extent
the Indemnitee would be permitted to be indemnified under applicable law.  The
Company agrees to pay the reasonable fees of Independent Legal Counsel and to
fully indemnify such counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement or such counsel's engagement pursuant hereto.

          4.  Indemnification for Additional Expenses.  In connection with any
              ---------------------------------------                         
action brought by Indemnitee for (i) indemnification or advance payment of
Expenses under this Agreement or any other agreement or Company Bylaw now or
hereafter in effect relating to Claims for Indemnifiable Events and/or (ii)
recovery under any directors' and officers' liability insurance policy
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advance payment of Expenses
or insurance recovery, as the case may be, the Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) which are
incurred by Indemnitee and, if requested by Indemnitee, shall (within two
business days of such request) advance such expenses to Indemnitee.

          5.  Partial Indemnity; Expenses.  If Indemnitee is entitled under
              ---------------------------                                  
any provision of this Agreement to indemnification by the Company for some or a
portion of Expenses, judgments, fines, penalties or amounts paid in settlement
of a Claim but not, however, for all of the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for the portion to which Indemnitee is
entitled.  Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense (including dismissal without prejudice) of any or all Claims relating in
whole or in part to an Indemnifiable Event, or in defense of any issue or matter
relating in whole or in part to an Indemnifiable Event, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith.

          6.  Burden of Proof.  In connection with any determination by a
              ---------------                                            
Reviewing Party as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not entitled to indemnification.

          7.  No Presumptions.  For purposes of this Agreement, the
              ---------------                                      
termination of any claim, action, suit or proceeding by judgment, order,
settlement (whether with or without court approval) or conviction, or upon a
plea of nolo contendere or its equivalent, shall not create a presumption that
Indemnitee did not meet any particular standard of conduct or did have any
particular belief or that a court has determined that indemnification is not
permitted by applicable law.  Neither the failure of a Reviewing Party to have
made a determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by a Reviewing
Party that Indemnitee has not met such standard of conduct or did not have

<PAGE>
 
such belief, prior to the commencement of legal proceedings by Indemnitee as
contemplated in Section 2(c), shall be a defense to Indemnitee's claim or create
a presumption that Indemnitee has not met any particular standard of conduct or
did not have any particular belief.

          8.  Nonexclusivity, Etc.  The rights of the Indemnitees hereunder
              --------------------                                         
shall be in addition to any other rights Indemnitees may have under the
Company's Restated Articles of Incorporation, Bylaws, the applicable corporate
law, or otherwise.  To the extent that a change in the applicable corporate law
(whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under the Company's Restated Articles
of Incorporation, Bylaws and this Agreement, it is the intent of the parties
hereto that Indemnitees shall enjoy by this Agreement the greater benefits so
afforded by such change.

          9.  Liability Insurance.  To the extent the Company maintains an
              -------------------                                         
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitees shall be covered by such policy or policies, in
accordance with its or their terms, to the maximum extent of the coverage
available for any Company director or officer.

         10.  Period of Limitations.  No legal action shall be brought and no
              ---------------------                                          
claim or cause of action shall be asserted by or in the right of the Company
against any of the Indemnitees, Indemnitees' spouses, heirs, executors or
personal or legal representatives after the expiration of two years from the
date of accrual of such claim or cause of action. Any claim or cause of action
of the Company shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such two-year period; provided, however,
that if any shorter period of limitations is otherwise applicable to any such
claim or cause of action, such shorter period shall govern.

         11.  Amendments, Etc.  Any amendment to this Agreement necessitated
              ---------------                                               
by the election of a person who is not a party to this Agreement to the position
of director and/or officer of the Company need only by executed by the Company
and such person as an Indemnitee; provided, however, that no other supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by all of the parties hereto.  No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.

         12.  Subrogation.  In the event of payment under this Agreement, the
              -----------                                                    
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of any of the Indemnitees.  Indemnitees shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company
effectively to bring suit to enforce such rights.

<PAGE>
 
         13.  No Duplication of Payments.  The Company shall not be liable
              --------------------------                                  
under this Agreement to make any payment in connection with any Claim made
against any of the Indemnitees to the extent any of the Indemnitees has
otherwise actually received payment (under any insurance policy, Bylaw or
otherwise) of the amounts otherwise indemnifiable hereunder.

         14.  Binding Effect, Etc.  This Agreement shall be binding upon and
              --------------------                                          
inure to the benefit of and be enforceable by the parties hereto and their
respective successors (including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company), assigns, spouses, heirs, executors and personal
and legal representatives.  This Agreement shall continue in effect regardless
of whether Indemnitees continue to serve as officers and directors of the
Company or of any other enterprise at the Company's request.

         15.  Severability.  The provisions of this Agreement shall be
              ------------                                            
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) is held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect. The validity and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
and shall remain enforceable to the fullest extent permitted by laws.

         16.  Counterparts.  This Agreement may be executed in any number of
              ------------                                                  
identical counterparts, each of which shall be deemed to be an original, and all
of which together shall be deemed to be one and the same instrument when each
party has signed one such counterpart.

         17.  Governing Law.  This Agreement shall be governed by and
              -------------                                          
construed and enforced in accordance with the laws of the State of Michigan.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.

                                   AASTROM BIOSCIENCES, INC.           
                                                                       
                                                                       
                                   By:________________________________ 
                                   R. Douglas Armstrong, Ph.D.,        
                                   President                            

<PAGE>
 
     The following officers and directors are covered by this Agreement as
Indemnitees:



______________________________            ______________________________
Name:                                     Name:                         
Title:                                    Title:                        
                                                                        
                                                                        
                                                                        
______________________________            ______________________________
Name:                                     Name:                         
Title:                                    Title:                        
                                                                        
                                                                        
                                                                        
______________________________            ______________________________
Name:                                     Name:                         
Title:                                    Title:                         



<PAGE>
 
                                                                  EXHIBIT 10.2
                            ANN ARBOR STROMAL, INC.

                            1989 STOCK OPTION PLAN

                            Adopted August 15, 1989


     1.     PURPOSE.

            (a)     The purpose of the Plan is to provide a means which selected
key employees and directors (if declared eligible under paragraph 4) of and 
consultants to Ann Arbor Stromal, Inc., a Michigan corporation (the "Company"), 
and its Affiliates, as defined in subparagraph 1(b), may be given an opportunity
to purchase stock of the Company.

            (b)     The word "Affiliate" as used in the Plan means any parent 
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 425(e) and (f), respectively, of the Internal Revenue Code of 1986, 
as amended from time to time (the "Code").

            (c)     The Company, by means of the Plan, seeks to retain the 
services of persons now employed by or serving as consultants or directors to 
the Company, to secure and retain the services of new employees/persons capable 
of filling such positions, and to provide incentives for such persons to exert 
maximum efforts for the success of the Company.

            (d)     The Company intends that the options issued under the Plan 
shall, in the discretion of the Board of Directors of the Company (the "Board") 
or any committee to which responsibility for administration of the Plan has been

delegated

                                      1.



<PAGE>
 
pursuant to subparagraph 2(c), be either incentive stock options as that term is
used in Section 422A of the Code ("Incentive Stock Options"), or options which 
do not qualify as incentive stock options ("Supplemental Stock Options"). All 
options shall be separately designated Incentive Stock Options or Supplemental 
Stock Options at the time of grant, and in such form as issued pursuant to 
paragraph 5, and a separate certificate or certificates shall be issued for 
shares purchased on exercise of each type of option. An option designated as a 
Supplemental Stock Option shall not be treated as an incentive stock option.

     2.     ADMINISTRATION.
            --------------

            (a)     The Plan shall be administered by the Board unless and until
the Board delegates administration to a committee, as provided in subparagraph 
2(c). Whether or not the Board has delegated administration, the Board shall 
have the final power to determine all questions of policy and expediency that 
may arise in the administration of the Plan.

            (b)     The Board shall have the power, subject to, and within the 
limitations of, the express provisions of the Plan:

                    (1)     To determine from time to time which of the persons 
eligible under the Plan shall be granted options; when and how the option shall 
be granted; whether the option will be an Incentive Stock Option or a 
Supplemental Stock Option; the provisions of each option granted (which need not
be identical), including the time or times during the term of each option within
which all or portions of such option may be exercised; and the

                                      2.

<PAGE>
 
number of shares for which an option shall be granted to each such person.

                    (2)     To construe and interpret the Plan and options 
granted under it, and to establish, amend and revoke rules and regulations for 
its administration. The Board, in the exercise of this power, may correct any 
defect, omission or inconsistency in the Plan or in any option agreement, in a 
manner and to the extent it shall deem necessary or expedient to make the Plan 
fully effective.

                    (3)     To amend the Plan as provided in paragraph 10.

                    (4)     Generally, to exercise such powers and to perform 
such acts as the Board deems necessary or expedient to promote the best 
interests of the Company.

            (c)     The Board may delegate administration of the Plan to a 
committee composed of not fewer than three (3) members (the "Committee"), all of
the members of which Committee shall be disinterested persons, if required and 
as defined by the provisions of subparagraph 2(d). If administration is 
delegated to a Committee, the Committee shall have, in connection with the 
administration of the Plan, the powers theretofore possessed by the Board, 
subject, however, to such resolutions, not inconsistent with the provisions of 
the Plan, as may be adopted from time to time by the Board. The Board may 
abolish the Committee at any time and revest in the Board the administration of 
the Plan. Additionally, prior to the date of the first 

                                      3.

<PAGE>
 
registration of an equity security of the Company under Section 12 of the 
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 
notwithstanding anything to the contrary contained herein, the Board may 
delegate administration of the Plan to any person or persons and the term 
"Committee" shall apply to any person or persons to whom such authority has been
delegated.

            (d)     The term "disinterested person," as used in this Plan, shall
mean an administrator of the Plan, whether a member of the Board or of any 
Committee to which responsibility for administration of the Plan has been 
delegated pursuant to subparagraph 2(c): (i) who is not at the time he or she 
exercises discretion in administering the Plan eligible and has not at any time 
within one year prior thereto been eligible for selection as a person to whom 
stock may be allocated or to whom stock options or stock appreciation rights may
be granted pursuant to the Plan or any other plan of the Company or any of its 
affiliates entitling the participants therein to acquire stock, stock options or
stock appreciation rights of the Company or any of its affiliates; or (ii) who 
is otherwise considered to be a "disinterested person" in accordance with the 
rules, regulations or interpretations of the Securities and Exchange Commission.
Any such person shall otherwise comply with the requirements of Rule 16b-3 
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").

                                      4.

<PAGE>
 
            (e)     Any requirement that an administrator of the Plan be a 
"disinterested person" shall not apply (i) prior to the date of the first 
registration of an equity security of the Company under Section 12 of the 
Exchange Act, or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply.

     3.     SHARES SUBJECT TO THE PLAN.
            --------------------------

            (a)     Subject to the provisions of paragraph 9 relating to 
adjustments upon changes in stock, the stock that may be sold pursuant to 
options granted under the Plan shall not exceed in the aggregate one million 
three hundred sixty-three thousand six hundred thirty-six (1,363,636) shares of 
the Company's common stock. If any option granted under the Plan shall for any 
reason expire or otherwise terminate without having been exercised in full, the 
stock not purchased under such option shall again become available for the Plan.

            (b)     The stock subject to the Plan may be unissued shares or 
reacquired shares, bought on the market or otherwise.

            (c)     An Incentive Stock Option may be granted to an eligible 
person under the Plan only if the aggregate fair market value (determined at the
time the option is granted) of the stock with respect to which incentive stock 
options (as defined in the Code) granted after 1986 are exercisable for the 
first time by such optionee during any calendar year under all incentive stock 
option plans of the Company and its Affiliates does not exceed one hundred 
thousand dollars ($100,000). Should it be determined 

                                      5.

<PAGE>
 
that an option granted under the Plan exceeds such maximum for any reason other 
than the failure of a good faith attempt to value the stock subject to the 
option, such option shall be considered a Supplemental Stock Option to the 
extent, but only to the extent, of such excess; provided, however, that should 
it be determined that an entire option or any portion thereof does not qualify 
for treatment as an incentive stock option by reason of exceeding such maximum, 
such option or the applicable portion shall be considered a Supplemental Stock 
Option.

     4.     ELIGIBILITY.
            -----------

            (a)     Incentive Stock Options may be granted only to employees 
(including officers) of the Company or its Affiliates. A director of the Company
shall not be eligible to receive Incentive Stock Options unless such director is
also an employee (including an officer) of the Company or any Affiliate. 
Supplemental Stock Options may be granted only to key employees (including 
officers) of, directors of or consultants to the Company or its Affiliates. A 
director of the Company shall not be eligible for a Supplemental Stock Option 
unless such director is also a key employee (including an officer) of or 
consultant to the Company or any Affiliate.

            (b)     A director shall in no event be eligible for the benefits of
the Plan unless and until such director is expressly declared eligible to 
participate in the Plan by action of the Board or the Committee, and only if, at
any time discretion is exercised by the Board in the selection of a director as 
a person 

                                      6.

<PAGE>
 

 
to whom options may be granted, or in the determination of the number of shares 
which may be covered by options granted to a director: (i) a majority of the 
Board and a majority of the directors acting in such matter are disinterested 
persons, as defined in subparagraph 2(d); (ii) the Committee consists solely of 
"disinterested persons" as defined in subparagraph 2(d); or (iii) the Plan 
otherwise complies with the requirements of Rule 16b-3 promulgated under the 
Exchange Act, as from time to time in effect. The Board shall otherwise comply 
with the requirements of Rule 16b-3 promulgated under the Exchange Act, as from 
time to time in effect. This subparagraph 4(b) shall not apply prior to the date
of the first registration of an equity security of the Company under Section 12 
of the Exchange Act.

            (c)     No person shall be eligible for the grant of an option under
the Plan if, at the time of grant, such person owns (or is deemed to own 
pursuant to Section 425(d) of the Code) stock possessing more than ten percent 
(10%) of the total combined voting power of all classes of stock of the Company 
or of any of its Affiliates unless the exercise price of such option is at least
one hundred ten percent (110%) of the fair market value of such stock at the 
date of grant and the term of the option does not exceed five (5) years from the
date of grant.

     5.     OPTION PROVISIONS.
            -----------------

            Each option shall be in such form and shall contain such terms and 
conditions as the Board or the Committee shall deem appropriate. The provisions 
of separate options need not be 

                                      7.

<PAGE>
 
identical, but each option shall include (through incorporation of provisions 
hereof by reference in the option or otherwise) the substance of each of the 
following provisions:

            (a)     The term of any option shall not be greater than twelve (12)
years from the date it was granted.

            (b)     The exercise price of each Incentive Stock Option shall be 
not less than one hundred percent (100%) of the fair market value of the stock 
subject to the option on the date the option is granted. The exercise price of 
each Supplemental Stock Option shall be not less than eighty-five percent (85%) 
of the fair market value of the stock subject to the option on the date the 
option is granted.

            (c)     The purchase price of stock acquired pursuant to an option 
shall be paid, to the extent permitted by applicable statutes and regulations, 
either (i) in cash at the time the option is exercised, or (ii) at the 
discretion of the Board or the Committee, either at the time of the grant or 
exercise of the option, (A) by delivery to the Company of other common stock of 
the Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other 
common stock of the Company) with the person to whom the option is granted or to
whom the option is transferred pursuant to subparagraph 5(d), or (C) in any 
other form of legal consideration that may be acceptable to the Board or the 
Committee.

                                      8.

<PAGE>
 
     In the case of any deferred payment arrangement, interest shall be payable 
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred 
payment arrangement.

            (d)     An option shall not be transferable except by will or by the
laws of descent and distribution, and shall be exercisable during the lifetime 
of the person to whom the option is granted only by such person.

            (e)     The total number of shares of stock subject to an option 
may, but need not, be allotted in periodic installments (which may, but need 
not, be equal). From time to time during each of such installment periods, the 
option may become exercisable ("vest") with respect to some or all of the shares
allotted to that period, and may be exercised with respect to some or all of the
shares allotted to such period and/or any prior period as to which the option 
was not fully exercised. During the remainder of the term of the option (if its 
term extends beyond the end of the installment periods), the option may be 
exercised from time to time with respect to any shares then remaining subject to
the option. The provisions of this subparagraph 5(e) are subject to any option 
provisions governing the minimum number of shares as to which an option may be 
exercised.

                                      9.

<PAGE>
 
            (f)     The Company may require any optionee, or any person to whom 
an option is transferred under subparagraph 5(d), as a condition of exercising 
any such option, (1) to give written assurances satisfactory to the Company as 
to the optionee's knowledge and experience in financial and business matters 
and/or to employ a purchaser representative reasonably satisfactory to the 
Company who is knowledgeable and experienced in financial and business matters, 
and that he or she is capable of evaluating, alone or together with the 
purchaser representative, the merits and risks of exercising the option; and 
(2) to give written assurances satisfactory to the Company stating that such 
person is acquiring the stock subject to the option for such person's own 
account and not with any present intention of selling or otherwise distributing 
the stock. These requirements, and any assurances given pursuant to such 
requirements, shall be inoperative if (i) the issuance of the shares upon the 
exercise of the option has been registered under a then currently effective 
registration statement under the Securities Act of 1933, as amended (the 
"Securities Act"), or (ii) as to any particular requirement, a determination is 
made by counsel for the Company that such requirement need not be met in the 
circumstances under the then applicable securities laws.

            (g)     An option shall terminate three (3) months after termination
of the optionee's employment or relationship as a consultant or director with 
the Company or an Affiliate, unless (i) such termination is due to such person's
permanent and total 

                                      10.

<PAGE>
 
disability, within the meaning of Section 422A(c)(7) of the Code, in which case 
the option may, but need not, provide that it may be exercised at any time 
within one (1) year following such termination of employment or relationship as 
a consultant or director; or (ii) the optionee dies while in the employ of or 
while serving as a consultant or director to the Company or an Affiliate, or 
within not more than three (3) months after termination of such relationship, in
which case the option may, but need not, provide that it may be exercised at any
time within eighteen (18) months following the death of the optionee by the 
person or persons to whom the optionee's rights under such option pass by will 
or by the laws of descent and distribution; or (iii) the option by its terms 
specifies either (a) that it shall terminate sooner than three (3) months after 
termination of the optionee's employment or relationship as a consultant or 
director, or (b) that it may be exercised more than three (3) months after 
termination of the relationship with the Company or an Affiliate. This 
subparagraph 5(g) shall not be construed to extend the term of any option or to 
permit anyone to exercise the option after expiration of its term, nor shall it 
be construed to increase the number of shares as to which any option is 
exercisable from the amount exercisable on the date of termination of the 
optionee's employment or relationship as a consultant or director.

            (h)     The option may, but need not, include a provision whereby 
the optionee may elect at any time during the term of his 

                                      11.

<PAGE>
 
or her employment or relationship as a consultant or director with the Company 
or any Affiliate to exercise the option as to any part or all of the shares 
subject to the option prior to the stated vesting date of the option or of any 
installment or installments specified in the option. Any shares so purchased 
from any unvested installment or option may be subject to a repurchase right in 
favor of the Company or to any other restriction the Board or the Committee 
determines to be appropriate.

            (i)     To the extent provided by the terms of an option, the 
optionee may satisfy any federal, state or local tax withholding obligation 
relating to the exercise of such option by any of the following means or by a 
combination of such means: (1) tendering a cash payment; (2) authorizing the 
Company to withhold from the shares of the common stock otherwise issuable to 
the participant as a result of the exercise of the stock option a number of 
shares having a fair market value less than or equal to the amount of the 
withholding tax obligation; or (3) delivering to the Company owned and 
unencumbered shares of the common stock having a fair market value less than or 
equal to the amount of the withholding tax obligation.

     6.     COVENANTS OF THE COMPANY.
            ------------------------

            (a)     During the terms of the options granted under the Plan, the 
Company shall keep available at all times the number of shares of stock required
to satisfy such options.

                                      12.

<PAGE>
 
            (b)     The Company shall seek to obtain from each regulatory 
commission or agency having jurisdiction over the Plan such authority as may be 
required to issue and sell shares of stock upon exercise of the options granted 
under the Plan; provided, however, that this undertaking shall not require the 
Company to register under the Securities Act either the Plan, any option granted
under the Plan or any stock issued or issuable pursuant to any such option. If, 
after reasonable efforts, the Company is unable to obtain from any such 
regulatory commission or agency the authority which counsel for the Company 
deems necessary for the lawful issuance and sale of stock under the Plan, the 
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such options unless and until such authority is obtained.

     7.     USE OF PROCEEDS FROM STOCK.
            --------------------------

            Proceeds from the sale of stock pursuant to options granted under 
the Plan shall constitute general funds of the Company.

     8.     MISCELLANEOUS.
            -------------

            (a)     The Board or the Committee shall have the power to 
accelerate the time during which an option may be exercised or the time during 
which an option or any part thereof will vest pursuant to subparagraph 5(e), 
notwithstanding the provisions in the option stating the time during which it 
may be exercised or the time during which it will vest.

                                      13.

<PAGE>
 
            (b)     Neither an optionee nor any person to whom an option is 
transferred under subparagraph 5(d) shall be deemed to be the holder of, or to 
have any of the rights of a holder with respect to, any shares subject to such 
option unless and until such person has satisfied all requirements for exercise 
of the option pursuant to its terms.

            (c)     Throughout the term of any option granted pursuant to the 
Plan, the Company shall make available to the holder of such option, not later 
than one hundred twenty (120) days after the close of each of the Company's 
fiscal years during the option term, upon request, such financial and other 
information regarding the Company as comprises the annual report to the 
shareholders of the Company provided for in the bylaws of the Company.

            (d)     Nothing in the Plan or any instrument executed or option 
granted pursuant thereto shall confer upon any eligible employee or optionee any
right to continue in the employ of the Company or any Affiliate (or to continue 
acting as a consultant or director) or shall affect the right of the Company or 
any Affiliate to terminate the employment or consulting relationship or 
directorship of any eligible employee or optionee with or without cause. In the 
event that an optionee is permitted or otherwise entitled to take a leave of 
absence, the Company shall have the unilateral right to (i) determine whether 
such leave of absence will be treated as a termination of employment for 
purposes of paragraph 5(g) hereof and corresponding provisions of 

                                      14.

<PAGE>
 
any outstanding options, and (ii) suspend or otherwise delay the time or times 
at which the shares subject to the option would otherwise vest.

     9.     ADJUSTMENTS UPON CHANGES IN STOCK.

            (a)   If any change is made in the stock subject to the Plan, or 
subject to any option granted under the Plan (through merger, consolidation, 
reorganization, recapitalization, stock dividend, dividend in property other 
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding 
options will be appropriately adjusted in the class(es) and maximum number of 
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding options.

            (b)     In the event of: (1) a dissolution or liquidation of the 
Company; (2) a merger or consolidation in which the Company is not the surviving
corporation; or (3) a reverse merger in which the Company is the surviving 
corporation but the shares of the Company's common stock outstanding 
immediately preceding the merger are converted by virtue of the merger into 
other property, whether in the form of securities, cash or otherwise then to the
extent permitted by applicable law: (i) any surviving corporation shall assume 
any options outstanding under the Plan or shall substitute similar options for 
those outstanding under the Plan, or (ii) such options shall continue in full 
force and effect. In the event any surviving corporation 

                                      15.

<PAGE>
 
refuses to assume or continue such options, or to substitute similar options for
those outstanding under the Plan, then, with respect to options held by persons 
then performing services as employees or as consultants or directors for the 
Company as the case may be, the time during which such options may be exercised 
shall be accelerated and the options terminated if not exercised prior to such 
event.

     10.    AMENDMENT OF THE PLAN.
            ---------------------

            (a)     The Board at any time, and from time to time, may amend the 
Plan. However, except as provided in paragraph 9 relating to adjustments upon 
changes in stock, no amendment shall be effective unless approved by the 
shareholders of the Company within twelve (12) months before or after the 
adoption of the amendment, where the amendment will:

                    (i)     Increase the number of shares reserved for options 
under the Plan;

                    (ii)    Modify the requirements as to eligibility for 
participation in the Plan (to the extent such modification requires shareholder 
approval in order for the Plan to satisfy the requirements of Section 422A(b) of
the Code); or

                    (iii)   Modify the Plan in any other way if such 
modification requires shareholder approval in order for the Plan to satisfy the 
requirements of Section 422A(b) of the Code or to comply with the requirements 
of Rule 16b-3 promulgated under the Exchange Act.

                                      16.

<PAGE>
 
            (b)     It is expressly contemplated that the Board may amend the 
Plan in any respect the Board deems necessary or advisable to provide optionees 
with the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to employee incentive 
stock options and/or to bring the Plan and/or incentive stock options granted 
under it into compliance therewith.

            (c)     Rights and obligations under any option granted before 
amendment of the Plan shall not be altered or impaired by any amendment of the 
Plan unless (i) the Company requests the consent of the person to whom the 
option was granted and (ii) such person consents in writing.

     11.    TERMINATION OR SUSPENSION OF THE PLAN.
            -------------------------------------

            (a)     The Board may suspend or terminate the Plan at any time. 
Unless sooner terminated, the Plan shall terminate ten (10) years from the date 
the Plan is adopted by the Board or approved by the shareholders of the Company,
whichever is earlier. No options may be granted under the Plan while the Plan is
suspended or after it is terminated.

            (b)     Rights and obligations under any option granted while the 
Plan is in effect shall not be altered or impaired by suspension or termination 
of the Plan, except with the consent of the person to whom the option was 
granted.

     12.    EFFECTIVE DATE OF PLAN.
            ----------------------

            The Plan shall become effective as determined by the Board, but no 
options granted under the Plan shall be exercised 

                                      17.

<PAGE>
 
unless and until the Plan has been approved by the shareholders of the Company.

                                      18.

<PAGE>
 
                       INCENTIVE STOCK OPTION AGREEMENT
   
                                            OPTIONEE:

          AASTROM Biosciences, Inc., formerly known as Ann Arbor Stromal, Inc., 
(the "Company"), pursuant to its 1989 Stock Option Plan (the "Plan"), hereby 
grants to you, the Optionee named above, an option to purchase shares of the 
common stock of the Company ("Common Stock").  This option is intended to 
qualify as an "incentive stock option" within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended from time to time (the "Code").  The 
date of grant of this option is ____________.

          The grant hereunder is in connection with and in furtherance of the 
Company's compensatory benefit plan for participation of the Company's employees
(including officers), directors or consultants and is intended to comply with 
the provisions of Rule 701 promulgated by the Securities and Exchange 
Commission under the Securities Act of 1933, as amended (the "Act").

          The details of your option are as follows:

          1.  The total number of shares of Common Stock subject to this option
              is ___________. Subject to the limitations contained herein, this
              option shall be exercisable with respect to each installment shown
              below on or after the date of vesting applicable to such
              installment, as follows:

              Number of Shares                  Date of Earliest Exercise
              ----------------                  -------------------------
               (Installment)                            (Vesting)






provided, however, you will be entitled to exercise this option with respect to
all of the shares of Common Stock subject to this

                                     -1- 


                

<PAGE>
 
Incentive Stock Option Agreement
Page 2
 
     option is your employment by the Company is terminated upon or at any time
     within six (6) months after the date of a "change of control" of the
     Company (as defined below), unless such termination is for cause (as
     defined below). For purposes of this Agreement, a "change of control" shall
     be deemed to have occurred if in a single transaction or a series of
     related transactions occurring within a twelve month period: all or
     substantially all of the business or assets of the Company is sold,
     transferred or leased; the Company is merged into or consolidated with
     another entity and, as a result, the shareholders of the Company
     immediately prior to the merger own less than 51% of the voting capital
     stock of the successor corporation; there is a change of control of 51% or
     more of the outstanding capital stock of the Company on a fully diluted
     basis; or a new shareholder acquires the right to elect a majority of the
     board of directors. The date of such "change of control" for purposes of
     this Agreement shall be the date of the closing of the transaction which is
     deemed to constitute a change of control under the foregoing sentence, or
     if a series of related transactions is deemed to constitute a change of
     control, the date of the closing of the last transaction in the series. For
     purposes of this Agreement, "cause" shall include disclosure of any
     proprietary information of the Company or of any third party in violation
     of the Proprietary Information and Invention Agreement between you and the
     Company; any commission of a felony; willful misconduct; or any commission
     of any act or series of acts of dishonesty which are injurious to the best
     interests of the Company.

2.   a. The exercise price of this option is ________ per share, being not less
        than the fair market value of the Common Stock on the date of grant of
        this option.

     b. Payment of the exercise price per share is due in full in cash
        (including check) upon exercise of the option with respect to all or
        any part of each installment which has become exercisable by you.
        Notwithstanding the foregoing, this option may be exercised pursuant to
        a program developed under Regulation T as promulgated by the Federal
        Reserve Board which results in the receipt of cash (or

                                      -2-

<PAGE>
 
Incentive Stock Option Agreement
Page 3

             check) by the Company prior to the issuance of
             Common Stock.  

     3.  The minimum number of shares with respect to which this option may be
         exercised at any one time is one hundred (100) except (a) as to an
         installment subject to exercise, as set forth in paragraph 1, which
         amounts to fewer than one hundred (100) shares, in which case, as to
         the exercise of that installment, the number of shares in such
         installment shall be the minimum number of shares, and (b) with respect
         to the final exercise of this option this paragraph 3 shall not apply.

     4.  Notwithstanding anything to the contrary contained herein, this option
         may not be exercised unless the shares issuable upon exercise of this
         option are then registered under the Act or if such shares are not then
         so registered, the Company has determined that such exercise and
         issuance is exempt from the registration requirements of the Act.

     5.  The term of this option commences on the date hereof and, unless sooner
         terminated as set forth below or in the Plan, terminates ten (10) years
         from the date this option is granted. This option shall terminate prior
         to the expiration of its term as follows: this option shall terminate
         three (3) months after the termination of your employment with the
         Company or an affiliate of the Company (as defined in the Plan) for any
         reason or for no reason (including without limitation a termination in
         connection with a "change of control" of the Company, as defined in
         paragraph 1 hereof) unless:

         a.  such termination of your employment is due to your permanent and
             total disability (within the meaning of Section 422A(c)(7) of the
             Code), in which event the option shall terminate on the earlier of
             the termination date set forth above or one (1) year following such
             termination of employment; or

         b.  such termination of employment is due to your death, in which event
             the option shall terminate on the earlier of the termination date
             set forth above or eighteen (18) months after your death; or

         c.  during any part of such three (3) month period the option is not
             exercisable solely because of the condition set forth in paragraph
             4 above, in which

                                      -3-
 




<PAGE>
 
Incentive Stock Option Agreement
Page 4

             event the option shall not terminate until the earlier of the
             termination date set forth above or until it shall have been
             exercisable for an aggregate period of three (3) months after
             termination of employment; or
 
         d.  exercise of the option within three (3) months after termination of
             your employment with the Company or with an affiliate would result
             in liability under section 16(b) of the Securities Exchange Act of
             1934, in which case the option will terminate on the earlier of (i)
             the termination date set forth above, (ii) the tenth (10th) day
             after the last date upon which exercise would result in such
             liability or (iii) six (6) months and ten (10) days after the
             termination of your employment with the Company or an affiliate.

             However, this option may be exercised following termination of
             employment only as to that number of shares as to which it was
             exercisable under the provisions of paragraph 1 of this option on
             the date of termination of employment.

     6.  a.  This option may be exercised, to the extent specified above, by
             delivering a notice of exercise (in a form designated by the
             Company) together with the exercise price to the Secretary of the
             Company, or to such other person as the Company may designate,
             during regular business hours, together with such additional
             documents as the Company may then require pursuant to subparagraph
             5(f) of the Plan.

         b.  By exercising this option you agree that:

             (i)  The Company may require you to enter an arrangement providing
                  for the payment by you to the Company of any tax withholding
                  obligation of the Company arising by reason of (1) the
                  exercise of this option; (2) the lapse of any substantial risk
                  of forfeiture to which the shares are subject at the time of
                  exercise; or (3) the disposition of shares acquired upon such
                  exercise;

            (ii)  you will notify the Company in writing within fifteen (15)
                  days after the date of any

                                     -4- 


<PAGE>
 
Incentive Stock Option Agreement
Page 5


               disposition of any of the shares of the Common Stock issued upon
               exercise of this option that occurs within two (2) years after
               the date of grant of the option hereunder or within one (1) year
               after such shares of Common Stock are transferred upon exercise
               of this option; and

     (iii)     the Company (or a representative of the underwriters) may, in
               connection with the first underwritten registration of the
               offering of any securities of the Company under the Act, require
               that you do not sell or otherwise transfer or dispose of any
               shares of Common Stock or other securities of the Company during
               such period (not to exceed one hundred fifty (150) days)
               following the effective date (the "Effective Date") of the
               registration statement of the Company filed under the Act as may
               be requested by the Company or the representative of the
               underwriters; provided, however, that such restriction shall
               apply only if, on the Effective Date, you are an officer,
               director, or owner of more than one percent (1%) of the
               outstanding securities of the Company. For purposes of this
               restriction, you will be deemed to own securities which (i) are
               owned directly or indirectly by you, including securities held
               for your benefit by nominees, custodians, brokers or pledgees;
               (ii) may be acquired by you within sixty (60) days of the
               Effective Date; (iii) are owned directly or indirectly, by or for
               your brothers or sisters (whether by whole or half blood),
               spouse, ancestors and lineal descendants; or (iv) are owned,
               directly or indirectly, by or for a corporation, partnership,
               estate or trust of which you are a shareholder, partner or
               beneficiary but only to the extent of your proportionate interest
               therein as a shareholder, partner or beneficiary thereof. You
               further agree that the Company may impose stop-transfer
               instructions with respect to securities subject to the foregoing
               restrictions until the end of such period.

                                     -5- 


<PAGE>
 
Incentive Stock Option Agreement
Page 6


     7.   This option is not transferable, except by will or by the laws of
          descent and distribution, and is exercisable during your life only by
          you.

     8.   This option is not an employment contract and nothing in this option
          shall be deemed to create in any way whatsoever any obligation on your
          part to continue in the employ of the Company, or of the Company to
          continue your employment with the Company.

     9.   Any notices provided for in this option or the Plan shall be given in
          writing and shall be deemed effectively given upon receipt or, in the
          case of notices delivered by the Company to you, five (5) days after
          deposit in the United States mail, postage prepaid, addressed to you
          at the address specified below or at such other address as you
          hereafter designate by written notice to the Company.

     10.  This option is subject to all the provisions of the Plan, a copy of
          which is attached hereto and its provisions are hereby made a part of
          this option, including without limitation the provisions of paragraph
          5 of the Plan relating to option provisions, and is further subject to
          all interpretations, amendments, rules and regulations which may from
          time to time be promulgated and adopted pursuant to the Plan. In the
          event of any conflict between the provisions of this option and those
          of the Plan, the provisions of the Plan shall control; provided,
          however, that you shall be entitled to receive stock options on
          additional shares of the Corporation's common stock to protect you
          against dilution of your share holding to the full extent provided by
          your Employment Agreement with the Company.

     Dated as of the ____ day of ___________, 19__.


                                       Very truly yours,

                                       AASTROM BIOSCIENCES, INC.


                                       By:
                                          --------------------------------------

                                       Duly authorized on behalf of 
                                       the Board of Directors.

                                      -6-

<PAGE>
 
Incentive Stock Option Agreement
Page 7


     The undersigned:


          a.   Acknowledges receipt of the foregoing and the attachments
               referenced therein and understands that all rights and
               liabilities with respect to this option are set forth in the
               option and the Plan; and

          b.   Acknowledges that as of the date of grant of this option, it sets
               forth the entire understanding between the undersigned optionee
               and the Company and its affiliates regarding the acquistion of
               stock in the Company and supersedes all prior oral and written
               agreements on that subject.

            
                                            -------------------------
                                            OPTIONEE

                                            Address:



Attachment:

1989 Stock Option Plan

Stock Transfer Restriction and Buy-Out Agreement



                                      -7-



<PAGE>
 
                                                                    EXHIBIT 10.3

                          ANCILLARY STOCK OPTION PLAN

          THIS ANCILLARY STOCK OPTION PLAN (the "Ancillary Plan") is made as of
August 6, 1991, by Aastrom Biosciences, Inc. (the "Company"), with respect to
the facts set forth below.

                                    RECITALS

          A.   On August 15, 1989, the Company formally approved the 1989 Stock
Option Plan (the "1989 Plan"), pursuant to which the Board of Directors of the
Company (the "Board") is authorized to grant tax qualified "incentive stock
options" to employees of the Company or its affiliates and tax nonqualified
"supplemental stock options" to employees, officers, employed directors and
consultants of the Company or its affiliates.

          B.   In order to advance the growth and prosperity of the Company, the
Board believes that it is in the best interests of the Company to also grant
stock options on certain occasions to certain parties and persons selected by
the Board who are not otherwise eligible to receive stock options under the
terms of the 1989 Plan.

                                   AGREEMENT

          NOW, THEREFORE, Company hereby authorizes and establishes this
Ancillary Plan, pursuant to the terms and conditions set forth below.

          1.   Purpose.  The purpose of the Ancillary Plan is to advance the
growth and prosperity of the Company and its shareholders by providing

incentives to certain parties and persons selected by the Board who are not
otherwise eligible to receive stock options under the 1989 Plan.  The stock
options granted pursuant to this Ancillary Plan shall be treated as
"nonqualified tax options" under the U.S. Internal Revenue Code.

          2.   Term.     The term of this Ancillary Plan shall commence on the
date set forth above and shall terminate upon resolution by the Board.

          3.   Shares of Stock Subject to this Ancillary Plan.  The shares of
Common Stock which may be issued pursuant to the Ancillary Plan upon exercise of
stock options shall not exceed in the aggregate Fifty Thousand (50,000) shares
of the Company's Common Stock, unless otherwise approved by the Board by vote of
not less than two thirds (2/3) of the Board.  Such shares of Common Stock shall
be authorized and unissued shares.  The shares allocated to this Ancillary Plan
and the stock options granted pursuant to this Ancillary Plan are in addition
to, and not part of, the shares allocated to and granted pursuant to the 1989
Plan.

<PAGE>
 
          4.   Administration of the Plan.  The Board shall administer the
Ancillary Plan, select the persons to whom stock options shall be granted,
determine the number of shares of Common Stock to be optioned and awarded,
determine the purchase price per share of Common Stock deliverable upon the
exercise of a stock option, determine the method of payment upon the exercise of
an option, and interpret, construe and implement the provisions of this
Ancillary Plan.  An option may be exercisable at any time from time to time,
subject to such timing, performance criteria, conditions and restrictions as
determined by the Board on a case by case basis for each option as set forth in
the Stock Option Agreements.

          5.   Stock Option Agreements.  The granting of stock options shall be
evidenced by a Stock Option Agreement, containing such terms and conditions as
the Board of Directors shall deem appropriate.  The provisions of the Stock
Option Agreements granted pursuant to this Ancillary Plan need not be identical,
may be similar to or different from the form of Stock Option Agreements granted
under the 1989 Plan, and may be customized as determined by the Board on a case
by case basis.

          6.   Amendment of this Ancillary Plan.  This Ancillary Plan may, at
any time or from time to time, be terminated, modified or amended by the Board.

          7.   Approval.  Approved by the Board on August 6, 1991.



 
                                                /s/ R. DOUGLAS ARMSTRONG
                                                --------------------------
                                                R. Douglas Armstrong, Ph.D
                                                             President/CEO

<PAGE>
 
                       ANCILLARY STOCK OPTION AGREEMENT

                                           Optionee:

     AASTROM Biosciences, Inc., formerly known as Ann Arbor Stromal, Inc., (the 
"Company"), pursuant to its Ancillary Stock Option Plan dated August 6, 1991 
(the "Plan"), has granted to you, the Optionee named above, an option to 
purchase shares of the common stock of the Company ("Common Stock").  This 
option is not intended to qualify and will not be treated as an "incentive stock
option" within the meaning of Section 422A of the Internal Revenue code of 1986,
as amended from time to time (the "Code").  The date of grant of this option is 
as of _________________, ____.

     The grant hereunder is a matter of separate inducement and agreement in 
connection with your services to the Company and not in lieu of any other 
compensation for services, and is intended to comply with the provisions of Rule
701 promulgated by the Securities and Exchange Commission under the Securities 
Act of 1933, as amended (the "Act"), and applicable state law exemptions from 
registration.

     The details of your option are as follows:

     1.   The total number of shares of Common Stock subject to this option is
          _____________________.  Subject to the limitations contained herein,
          including without limitation Section 5 hereof, this option shall be
          exercisable with respect to each installment shown below on or after
          the date of vesting applicable to such installment, as follows:

          Number of Shares                             Date of Earliest Exercise
          ----------------                             ------------------------
           (Installment)                                       (Vesting)

<PAGE>
 
Ancillary Stock Option Agreement
Page 2


     2.   a.   The exercise price of this option is ___________ per share, being
               not less than the fair market value of the Common Stock on the
               date of grant of this option.

          b.   Payment of the exercise price per share is due in full in cash
               (including check) upon exercise of all or any part of each
               installment which has become exercisable by you.  Notwithstanding
               the foregoing, this option may be exercised pursuant to a program
               developed under Regulation T as promulgated by the Federal 
               Reserve Board which results in the receipt of cash (or check) by
               the Company prior to the issuance of Common Stock.

     3.   The minimum number of shares with respect to which this option may be
          exercised at any one time is one hundred (100) except (a) as to an
          installment subject to exercise, as set forth in paragraph 1, which
          amounts to fewer than one hundred (100) shares, in which case, as to
          the exercise of that installment, the number of shares in such
          installment shall be the minimum number of shares, and (b) with
          respect to the final exercise of this option this paragraph 3 shall
          not apply.

     4.   Notwithstanding anything to the contrary contained herein, this option
          may not be exercised unless the shares issuable upon exercise of this
          option are then registered under the Act or if such shares are not
          then so registered, the exercise and issuance of such shares would be
          exempt from the registration requirements of the Act.

     5.   The term of this option commences on the date hereof and, unless
          sooner terminated as set forth below, terminates twelve (12) years
          from the date this option is granted. This option shall terminate
          prior to the expiration of its term as follows: this option shall
          terminate three (3) months after the termination of your participation
          in the University of Michigan ex vivo bone marrow project more fully
          described in that certain Option Agreement dated March 24, 1989,
          between the Company, the University of Michigan and H&Q Life Science
          Technology Fund 1 (hereinafter such participation in the ex vivo bone
          marrow project

<PAGE>
 
Ancillary Stock Option Agreement
Page 3



               shall be referred to as "Employment") for any
               reason or for no reason unless:

               a.  such termination of your Employment is due to
                   your permanent and total disability (within
                   the meaning of Section 422A(c)(7) of the
                   Code), in which event the option shall
                   terminate on the earlier of the termination
                   date set forth above or one (1) year
                   following such termination of Employment; or

               b.  such termination of Employment is due to your
                   death, in which event the option shall
                   terminate on the earlier of the termination
                   date set forth above or eighteen (18) months
                   after your death; or

               c.  during any part of such three (3) month
                   period the option is not exercisable solely
                   because of the condition set forth in
                   paragraph 4 above, in which event the option
                   shall not terminate until the earlier of the
                   termination date set forth above or until it
                   shall have been exercisable for an aggregate
                   period of three (3) months after the
                   termination of Employment; or

               d.  exercise of the option within three (3)
                   months after termination of your Employment
                   would result in liability under section 16
                   (b) of the Securities Exchange Act of 1934,
                   in which case the option will terminate on
                   the earlier of (i) the tenth (10th) day after
                   the last date upon which exercise would
                   result in such liability or (ii) six (6)
                   months and ten (10) days after the
                   termination of your Employment; or

               e.  such termination of your Employment is a
                   temporary leave of absence occasioned by your
                   resuming studies at the University of
                   Michigan toward a doctorate degree, in which
                   event vesting of installments of this option
                   as set forth in Section 1 scheduled for any
                   date after the date on which the leave of
                   absence commenced (the "Leave Date") will be
                   suspended, and the vesting schedule set forth
                   in Section 1 shall be deemed to have been
                   amended as follows.  Should you Employment
       

<PAGE>
 
Ancillary Stock Option Agreement
Page 4



             resume at any time during the two (2) year
             period after the Leave Date, vesting of
             installments of this option will resume, with
             the first suspended installment vesting on
             the date that your Employment resumes, the
             second suspended installment vesting 3 months
             thereafter, and so on, so that each
             succeeding suspended installment vests 3
             months after the date on which the previous
             suspended installment vested.  If your
             Employment does not resume during the two (2)
             year period after the Leave Date, this option
             will be deemed to have terminated on the
             Leave Date, and only those shares that vested
             on or prior to the Leave Date will be
             exercisable.

         f.  The termination of this option pursuant to
             this Section 5 shall apply only to those
             shares not yet vested according to the
             schedule contained in Section 1 herein, and
             any provision herein or in the Plan
             notwithstanding, shall not apply to such
             vested shares.  Any shares that have vested
             hereunder shall remain exercisable for the
             twelve (12) year period specified in this
             Section 5.

             However, this option may be exercised
             following termination of Employment only as
             to that number of shares as to which it was
             exercisable under the provisions of paragraph
             1 of this option on the date of termination
             of Employment.

     6.  a.  This option may be exercised, to the extent
             specified above, by delivering a notice to
             exercise (in a form designated by the
             Company) together with the exercise price to
             the Secretary of the Company, or to such
             other person as the Company may designate,
             during regular business hours, together with
             such additional documents as the Company may
             then require pursuant to subparagraph 5(f) of
             the Plan.

<PAGE>
 
Ancillary Stock Option Agreement
Page 5



         b.  By exercising this option you agree that:

             (i)   the Company may require you to enter an arrangement providing
                   for the cash payment by you to the Company of any tax
                   withholding obligation of the Company arising by reason of
                   (1) the exercise of this option; (2) the lapse of any
                   substantial risk of forfeiture to which the shares are
                   subject at the time of exercise; or (3) the disposition of
                   shares acquired upon such exercise;

             (ii)  the Company (or a representative of the underwriters) may, in
                   connection with the first underwritten registration of the
                   offering of any securities of the Company under the Act,
                   require that you not sell or otherwise transfer or dispose of
                   any shares of Common Stock or other securities of the Company
                   during such period (not to exceed one hundred fifty (150)
                   days) following the effective date (the "Effective Date") of
                   the registration statement of the Company filed under the Act
                   as may be requested by the Company or the representative of
                   the underwriters; provided, however, that such restriction
                   shall apply only if, on the Effective Date, you are an
                   officer, director, or owner of more than one percent (1%) of
                   the outstanding securities of the Company. For purposes of
                   this restriction, you will be deemed to own securities which
                   (i) are owned directly or indirectly by you, including
                   securities held for your benefit by nominees, custodians,
                   brokers or pledgees; (ii) may be acquired by you within sixty
                   (60) days of the Effective Date; (iii) are owned directly or
                   indirectly, by or for your brothers or sisters (whether by
                   whole or half blood), spouse, ancestors and lineal
                   descendants; or (iv) are owned, directly or indirectly, by or
                   for a corporation, partnership, estate or trust of which you
                   are a shareholder, partner or
                   





<PAGE>
 
Ancillary Stock Option Agreement
Page 6



                  beneficiary, but only to the extent of your proportionate
                  interest therein as a shareholder, partner or beneficiary
                  thereof. You further agree that the Company may impose stop-
                  transfer instructions with respect to securities subject to
                  the foregoing restrictions until the end of such period.

     7.  This option is not transferable, except by will or by the laws of
         descent and distribution, and is exercisable during your life only by
         you.

     8.  Upon exercise of the option in whole or in part, you will be required
         to execute a Stock Transfer Restriction and Buy-Out Agreement
         substantially in the form attached hereto, which sets forth
         restrictions on transfer of the Stock and gives the Company the right
         to purchase the Stock under certain circumstances.

     9.  This option is not an employment contract and nothing in this option
         shall be deemed to create in any way whatsoever any obligation on your
         part to continue Employment, or of the Company to employ you.

     10. Any notices provided for in this option or the Plan shall be given in
         writing and shall be deemed effectively given upon receipt or, in the
         case of notices delivered by the Company to you, five (5) days after
         deposit in the United States mail, postage prepaid, addressed to you at
         the address specified below or at such other address as you hereafter
         designate by written notice to the Company.

     11. This option is subject to all the provisions of the Plan, a copy of
         which is attached hereto and its provisions are hereby made a part of
         this option, including without limitation the provisions of paragraph 5
         of the Plan relating to stock option agreements, and is further subject
         to all interpretations, amendments, rules and regulations which may
         from time to time be promulgated and adopted pursuant to the Plan. In
         the event of any conflict between the provisions of this option and
         those of the Plan, the provisions of the Plan shall control.
 

<PAGE>
 
Ancillary Stock Option Agreement
Page 7


     Dated as of the ____ day of _______________________, 19__.

                                       Very truly yours,

                                       AASTROM BIOSCIENCES, INC.



                                       By: 
                                          --------------------------------------
                                          R. Douglas Armstrong, Ph.D.
                                          President/CEO


                                       Duly authorized on behalf of the
                                       Board of Directors



The undersigned:

     a.   Acknowledges receipt of this Agreement and the attachments referenced
          therein and understands that all rights and liabilities with respect
          to this option are set forth in this Agreement and the Plan; and

     b.   Acknowledges that as of the date of grant of this option, this 
          Agreement sets forth the entire understanding between the undersigned
          optionee and the Company its affiliates regarding the acquisition of
          stock in the Company and supersedes all prior oral and written 
          agreements on that subject.


                                       -----------------------------------------
                                       OPTIONEE

                                       

                                       Address: 
                                               ---------------------------------

Attachments:

Ancillary Stock Option Plan dated August 6, 1991

Stock Transfer Restriction and Buy-Out Agreement



<PAGE>
 
                                                                    EXHIBIT 10.4
                             --------------------

                                 MERRILL LYNCH

                                  ----------
                                    SPECIAL
                                  ----------

                               PROTOTYPE DEFINED

                               CONTRIBUTION PLAN

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

                                  401(k) PLAN

                              EMPLOYEE THRIFT PLAN

                              PROFIT-SHARING PLAN

                               ADOPTION AGREEMENT



THIS PROTOTYPE PLAN AND ADOPTION AGREEMENT ARE IMPORTANT LEGAL INSTRUMENTS WITH
LEGAL AND TAX IMPLICATIONS FOR WHICH THE SPONSOR, MERRILL LYNCH, PIERCE, FENNER
& SMITH, INCORPORATED DOES NOT ASSUME RESPONSIBILITY. THE EMPLOYER IS URGED TO
CONSULT WITH ITS OWN ATTORNEY WITH REGARD TO THE ADOPTION OF THIS PLAN AND ITS
SUITABILITY TO ITS CIRCUMSTANCES.

<PAGE>
 
 
ADOPTION OF PLAN
- ----------------

        The Employer named below hereby establishes or restates a profit-sharing
plan that includes a [X] 401(k), [_] profit-sharing and/or [_] thrift plan 
feature (the "Plan") by adopting the Merrill Lynch Special Prototype Defined
Contribution Plan and Trust as modified by the terms and provisions of this
Adoption Agreement.

EMPLOYER AND PLAN INFORMATION
- -----------------------------

        Employer Name:*    Aastrom Biosciences. Inc.
                           -----------------------------
        Business Address:  P.O. Box 376
                           -----------------------------
                           Ann Arbor. MI 48106
                           -----------------------------
        Telephone Number:  (313) 930-5555
                           -----------------------------
        Employer Taxpayer I.D. Number: 94-3096597
                                       -----------------
        Employer Taxable Year ends on: June 30th
                                       -----------------
        Plan Name: Aastrom Biosciences, Inc. 401(k) Plan
                   -------------------------------------
        Plan Number: 001
                     ---

<TABLE> 
<CAPTION> 
                                      401(k)    PROFIT-   THRIFT
                                                SHARING
<S>                                 <C>       <C>       <C>
        Effective Date of Adoption:  01/01/94   
                                     --------   -------   -------
        Tax Reform
 Act of 1986
          Restatement Date:          
                                     --------   -------   -------
        Original Effective Date:
                                     --------   -------   -------
</TABLE>


IF THIS PLAN IS A CONTINUATION OR AN AMENDMENT OF A PRIOR PLAN, ALL OPTIONAL
FORMS OF BENEFITS PROVIDED IN THE PRIOR PLAN MUST BE PROVIDED UNDER THIS PLAN TO
ANY PARTICIPANT WHO HAD AN ACCOUNT BALANCE, WHETHER OR NOT VESTED, IN THE PRIOR
PLAN.


- -----------------
*   If there are any Participating Affiliates in this Plan, list below the
    proper name of each Participating Affiliate.

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

                                      -2-

<PAGE>
 
                             ARTICLE I. DEFINITIONS
                                        -----------
A.  "COMPENSATION"
     -------------

    (1) With respect to each Participant except as provided below, Compensation
        shall mean the (select all those applicable for each column):


<TABLE> 
<CAPTION> 
401(k) AND/   PROFIT
 OR THRIFT    SHARING
<C>           <S>     
  [X]          [_] (a) amount reported in the "Wages Tips and Other
                       Compensation" Box on Form W-2 for the applicable period
                       selected in Item 5 below.

  [_]          [_] (b) compensation for Code Section 415 safe-harbor purposes
                       (as defined in section 3.9.1(H)(i) of basic plan
                       document #03) for the applicable period selected in Item
                       5 below.

  [_]          [_] (c) amount reported pursuant to Code Section 3401 (a) for the
                       applicable period selected in Item 5 below.

  [_]          [_] (d) all amounts received (under either option (a) or (b)
                       above) for personal services rendered to the Employer but
                       excluding (select one):

                       [_] overtime
                       [_] bonuses 
                       [_] commissions
                       [_] amounts in excess of $
                                                 ----------------------
                       [_] other (specify)
                                           -----------------------------------.
</TABLE>


    (2)  Treatment of Elective Contributions (select one):

         [X] (a)  For purposes of contributions, Compensation shall include
                  Elective Deferrals and amounts excludable from the gross
                  income of the Employee under Code Section 125, Code Section
                  402(e)(3), Code Section 402(h) or Code Section 403(b)
                  ("elective contributions").

         [_] (b)  For purposes of contributions, Compensation shall not include
                  "elective contributions."

    (3)  CODA Compensation (select one):

         [X] (a)  For purposes of the ADP and ACP Tests, Compensation shall
                  include "elective contributions."

         [_] (b)  For purposes of the ADP and ACP Tests, Compensation shall not
                  include "elective contributions."

                                       3

<PAGE>
 
    (4)  With respect to Contributions to an Employer Contributions Account,
         Compensation shall include all Compensation (select one):


         [_]  (a) during tile Plan Year in which the Participant enters the 
                  Plan.

         [X]  (b) after the Participant's Entry Date.

    (5)  The applicable period for determining Compensation shall be (select
         one):

          [X]  (a) the Plan Year.

          [_]  (b) the Limitation Year.

          [_]  (c) the consecutive 12-month period ending on _________________.

B.  "DISABILITY"
    ------------

    (1)  Definition
          ----------

    Disability shall mean a condition which results in the Participant's
    (select one):

    [_]  (a)  inability to engage in any substantial gainful activity by reason
              of any medically determinable physical or mental impairment that
              can be expected to result in death or which has lasted or can be
              expected to last for a continuous period of not less than 12
              months.

    [_]  (b)  total and permanent inability to meet the requirements of the
              Participant's customary employment which can be expected to last
              for a continuous period of not less than 12 months.

    [_]  (c)  qualification for Social Security disability benefits.

    [X]  (d)  qualification for benefits under the Employer's long-term
              disability plan.

    (2)  Contributions Due to Disability (select one):
         -------------------------------
    [X] (a)  No contributions to an Employer Contributions Account will be made
              on behalf of a Participant due to his or her Disability.

    [_] (b)  Contributions to an Employer Contributions Account will be made on
             behalf of a Participant due to his or her Disability provided that
                                                                  -------------
             the Employer elected option (a) or (c) above as the definition of
             Disability, contributions are not made on behalf of a Highly
             Compensated Employee, the contribution is based on the Compensation
             each such Participant would have received for the Limitation Year
             if the Participant had been paid at the rate of Compensation paid
             immediately before his or her Disability, and contributions made on
             behalf of such Participant will be nonforfeitable when made.

                                       4

<PAGE>
 
C  "EARLY RETIREMENT" is (select one):
    --------------------

   [_]  (1)  not permitted.

   [X]  (2)  permitted if a Participant terminates Employment before Normal
             Retirement Age and has (select one):

             [_] (a)  attained age     .
                                  -----
             [X] (b)  attained age 55 and completed 10 Years of Service.
                                   --               --
             [_] (c)  attained age       and completed      Years of Service
                                   -----               -----
                      as a Participant.

D.  "ELIGIBLE EMPLOYEES" (select one):
    -------------------

    [X]  (1)  All Employees are eligible to participate in the Plan.

    [_]  (2)  The following Employees are not eligible to participate in the
              Plan (select all those applicable):

           [_] (a)  Employees included in a unit of Employees covered by a
                    collective bargaining agreement between the Employer or a
                    Participating Affiliate and the Employee representatives
                    (not including any organization more than half of whose
                    members are Employees who are owners, officers, or
                    executives of the Employer or Participating Affiliate) in
                    the negotiation of which retirement benefits were the
                    subject of good faith bargaining, unless the bargaining
                    agreement provides for participation in the Plan.

           [_] (b)  non-resident aliens who received no earned income from the
                    Employer or a Participating Affiliate which constitutes 
                    income from sources within the United States.

           [_] (c)  Employees of an Affiliate.

           [_] (d)  Employees employed in or by the following specified
                    division, plant, location, job category or other 
                    identifiable individual or group of Employees:
                    
                    -----------------------------------------------------
                    -----------------------------------------------------

                                       5

<PAGE>
 
B.  "ENTRY DATE"
    ------------

    Entry Date shall mean (select as applicable):


<TABLE>
<CAPTION>
 
401(k)
AND/OR  PROFIT-
THRIFT  SHARING
<C>     <S>
 [_]      [_]  (1) If the initial Plan Year is less than twelve months, the 
                           day of      and thereafter:
                    ------        -----
 [_]      [_]  (2) the first day of the Plan Year following the date the
                   Employee meets the eligibility requirements. if the Employer
                   elects this option (2) establishing only one Entry Date, the
                   eligibility "age and service" requirements elected in Article
                   II must be no more than age 20-1/2 and 6 months of service.

 [X]      [_]  (3) the first day of the month following the date the Employee
                   meets the eligibility requirements.

 [_]      [_]  (4) the first day of the Plan Year and the first day of the
                   seventh month of the Plan Year following the date the
                   Employee meets the eligibility requirements.

 [_]      [_]  (5) the first day of the Plan Year, the first day of the fourth
                   month of the Plan Year, the first day of the seventh month of
                   the Plan Year, and the first day of the tenth month of the
                   Plan Year following the date the Employee meets the
                   eligibility requirements.

 [_]      [_]  (6) other: 
                          ------------------------------------------------------
                   -------------------------------------------------------------
                   provided that the Entry Date or Dates selected are no later
                   than any of the options above.
</TABLE>


F.  "HOURS OF SERVICE"
    ------------------

    Hours of Service for the purpose of determining a Participant's Period of
    Severance and Year of Service shall be determined on the basis of the method
    specified below:

    (1) Eligibility Service: For purposes of determining whether a Participant
        -------------------  
        has satisfied the eligibility requirements, the following method shall
        be used (select one):

401(k)
AND/OR  PROFIT-
THRIFT  SHARING

  [X]     [_]  (a) elapsed time method
  [_]     [_]  (b) hourly records method


                                       6

<PAGE>
 
    (2)  Vesting Service: A Participant's nonforfeitable interest shall be
         ----------------
         determined on the basis of the method specified below (select one):

         [_] (a)  elapsed time method
         [X] (b)  hourly records method
         [_] (c)  if this item (c) is checked, the Plan only provides for
                  contributions that are always 100% vested and this item (2)
                  will not apply.

    (3) Hourly Records: For the purpose of determining Hours of Service under
        --------------
        the hourly record method (select one):

        [X] (a)  only actual hours for which an Employee is paid or entitled to
                 payment shall be counted.

        [_] (b)  an Employee shall be credited with 45 Hours of Service if such
                 Employee would be credited with at least 1 Hour of Service 
                 during the week.

G. "INTEGRATION LEVEL"
   -------------------

           [X] (1) This Plan is not integrated with Social Security.

           [_] (2) This Plan is integrated with Social Security. The Integration
                   Level shall be (select one):

               [_] (a) the Taxable Wage Base.
               [_] (b) $      (a dollar amount less than the Taxable Wage Base).
                        ------
               [_] (c)      % of the Taxable Wage Base (not to exceed 100%). 
                      ------
               [_] (d) the greater of $10,000 or 20% of the Taxable Wage Base.

H. "LIMITATION COMPENSATION"
   -------------------------

   For purposes of Code Section 415, Limitation Compensation shall be
   compensation as determined for purposes of (select one):

           [_] (1) Code Section 415 Safe-Harbor as defined in Section 
                   3.9.1(H)(i) of basic plan document #03.

           [X] (2) the "Wages, Tips and Other Compensation" Box on Form W-2.

           [_] (3)  Code Section 3401(a) Federal Income Tax Withholding.

I. "LIMITATION YEAR"
   -----------------

   For purposes of Code Section 415, the Limitation Year shall be (select one):

   [X] (1) the Plan Year.
   [_] (2) the twelve consecutive month period ending on the      day of the
                                                             ----
           month of       .
                    ------

                                       7

<PAGE>
 
J. "NET PROFITS" are (select one):
   -------------

         [X] (1) not necessary for any contribution. 

         [_] (2) necessary for (select all those applicable):

              [_] (a) Profit-Sharing Contributions. 
              [_] (b) Matching 401(k) Contributions. 
              [_] (c) Matching Thrift Contributions.

K. "NORMAL RETIREMENT AGE"
   -----------------------

   Normal Retirement Age shall be (select one):

     [X] (1)  attainment of age 65 (not more than 65) by the Participant.

     [_] (2)  attainment of age    (not more than 65) by the Participant or the
                               ----
                    anniversary (not more than the 5th) of the first day of the
              -----
              Plan Year in which the Eligible Employee became a Participant
              whichever is later.

     [_] (3)  attainment of age     (not more than 65) by the Participant or
                               ----
              the      anniversary (not more than the 5th) of the first day on
                 -----
              which the Eligible Employee performed an hour of Service, 
              whichever is later.

L. "PARTICIPANT DIRECTED ASSETS" are:
   ----------------------------------


<TABLE> 
<CAPTION> 
401(k) AND/  PROFIT-
OR THRIFT    SHARING
<C>          <S>
   [X]        [_] (1) permitted.

   [_]        [_] (2) not permitted.
</TABLE>


M. "PLAN YEAR"
   -----------

   The Plan Year shall end on the 31ST day of DECEMBER.

N. "PREDECESSOR SERVICE"
   ---------------------

   Predecessor service will be credited (select one):

      [X] (1) only as required by the Plan.

      [_] (2) to include, in addition to the Plan requirements and subject to
              the limitations set forth below, service with the following
              predecessor employer(s) determined as if such predecessors were 
              the Employer:
                           ------------------------------------------------

                                       8

<PAGE>
 
              Service with such predecessor employer applies [select either or
              both (a) and/or (b); (c) is only available in addition to (a)
              and/or (b)]:

                 [_] (a) for purposes of eligibility to participate;
                 [_] (b) for purposes of vesting;
                 [_] (c) except for the following service:
                                                          --------------------- 
O.  "VALUATION DATE"
    ----------------
 
    Valuation Date shall mean (select one for each column, as applicable):


<TABLE> 
<CAPTION> 
401(k) AND/  PROFIT-
OR THRIFT    SHARING
<C>          <S>
   [_]         [_] (1) the last business day of each month.

   [_]         [_] (2) the last business day of each quarter within the Plan 
                       Year.

   [_]         [_] (3) the last business day of each semi-annual period within 
                       the Plan Year.

   [_]         [_] (4) the last business day of the Plan Year. 

   [X]         [_] (5) other: DAILY.
</TABLE>


                           ARTICLE II. PARTICIPATION
                                       -------------
    PARTICIPATION REQUIREMENTS
    --------------------------
An Eligible Employee must meet the following requirements to become a
Participant (select one or more for each column, as applicable):


<TABLE> 
<CAPTION> 
401(k) AND/   PROFIT-
OR THRIFT     SHARING
<C>           <S>
  [_]           [_] (1) Performance of one Hour of Service.

  [_]           [_] (2) Attainment of age   (maximum 20 1/2) and completion of
                                         ---
                              (not more than 1/2) Years of Service. If this 
                        -----
                        item is selected, no Hours of Service shall be counted.

  [X]           [_] (3) Attainment of age    (maximum 21) and completion of 1/4
                                         ---                                ---
                        Year(s) of Service. if more than one Year of Service is
                        selected, tile immediate 100% vesting schedule must be
                        selected in Article VII of this Adoption Agreement.
</TABLE>


                                       9

<PAGE>
 

<TABLE> 
<CAPTION> 
<C>            <S>
  [_]           [_] (4) Attainment of age     (maximum 21) and completion of
                                         ----
                            Years of Service. If more than one Year of Service
                        ---
                        is selected, the immediate 100% vesting schedule must be
                        selected in Article VII of this Adoption Agreement.

  [X]           [_] (5) Each Employee who is an Eligible Employee on 01/01/94 
                                                                     --------
                        will be deemed to have satisfied the participation
                        requirements on the effective date without regard to
                        such Eligible Employee's actual age and/ or service.
</TABLE>



           ARTICLE III. 401(k) CONTRIBUTIONS AND ACCOUNT ALLOCATION
                        ------------------------------------------- 
A. ELECTIVE DEFERRALS
   ------------------

If selected below, a Participant's Elective Deferrals will be (select all
applicable):

   [X] (1) a dollar amount or a percentage of Compensation, as specified by
           the Participant on his or her 401(k) Election form, which may not
           exceed 15% of his or her Compensation.

   [_] (2) with respect to bonuses, such dollar amount or percentage as
           specified by the Participant on his or her 401(k) Election form with
           respect to such bonus.

B. MATCHING 401(k) CONTRIBUTIONS
   -----------------------------
   If selected below, the Employer may make Matching 401(k) Contributions for
   each Plan Year (select one):

   [X] (1) Discretionary Formula:

              Discretionary Matching 401(k) Contribution equal to such a dollar
              amount or percentage of Elective Deferrals, as determined by the
              Employer, which shall be allocated (select one):

              [_] (a) based on the ratio of each Participant's Elective Deferral
                      for the Plan Year to the total Elective Deferrals of all
                      Participants for the Plan Year. If inserted, Matching
                      40l(k) Contributions shall be subject to a maximum amount
                      of $         for each Participant or    % of each 
                          ---------                       ----
                      Participant's Compensation.

                                      10

<PAGE>
 
              [X] (b) in an amount not to exceed     % of each Participants
                                                 ----
                      first    % of Compensation contributed as Elective
                            ---
                      Deferrals for the Plan Year. If any Matching 40l(k)
                      Contribution remains, it is allocated to each such
                      Participant in an amount not to exceed     % of the next
                                                             ----
                          % of each Participant's Compensation contributed as 
                      ----
                      Elective Deferrals for the Plan Year.

    Any remaining Matching 40l(k) Contribution shall be allocated to each such
    Participant in the ratio that such Participant's Elective Deferral for the
    Plan Year bears to the total Elective Deferrals of all such Participants for
    the Plan Year. If inserted, Matching 40l(k) Contributions shall be subject
    to a maximum amount of $         for each Participant or     % of each
                            --------                        -----
    Participant's Compensation.

    [_] (2) Nondiscretionary Formula:

           A nondiscretionary Matching 40l(k) Contribution for each Plan Year
           equal to (select one):

              [_] (a)       % of each Participant's Compensation contributed as
                      ------
                      Elective Deferrals. If inserted, Matching 40l(k)
                      Contributions shall be subject to a maximum amount of 
                      $      for each Participant or     % of each Participant's
                       ------                       -----
                      Compensation.

              [_] (b)      % of the first      % of the Participant's
                      -----              ------
                      Compensation contributed as Elective Deferrals and      %
                                                                        ------
                      of the next      % of the Participant's Compensation
                                 ------
                      contributed as Elective Deferrals. If inserted, Matching
                      40l(k) Contributions shall be subject to a maximum amount
                      of $       for each Participant or      % of each 
                          -------                       ------
                      Participant's Compensation.

C. PARTICIPANTS ELIGIBLE FOR MATCHING 401(k) CONTRIBUTION ALLOCATION
   -----------------------------------------------------------------

   The following Participants shall be eligible for an allocation to their
   Matching 401(k) Contributions Account (select all those applicable):

   [_] (1) Any Participant who makes Elective Deferrals.

   [_] (2) Any Participant who satisfies those requirements elected by the
           Employer for an allocation to his or her Employer Contributions
           Account as provided in Article IV Section C.

   [_] (3) Solely with respect to a Plan in which Matching 40l(k)
           Contributions are made quarterly (or on any other regular interval
           that is more frequent than annually) any Participant whose 40l(k)
           Election is in effect throughout such entire quarter (or other
           interval).

                                       11

<PAGE>
 
D. QUALIFIED MATCHING CONTRIBUTIONS
   --------------------------------

   If selected below, the Employer may make Qualified Matching Contributions for
   each Plan Year (select all those applicable):

         (1) In its discretion, the Employer may make Qualified Matching
             Contributions on behalf of (select one):

              [_] (a) all Participants who make Elective Deferrals in that Plan
                      Year.

              [X] (b) only those Participants who are Nonhighly Compensated
                      Employees and who make Elective Deferrals for that Plan
                      Year.

         (2) Qualified Matching Contributions will be contributed and allocated
             to each Participant in an amount equal to:

              [_] (a)     % of the Participant's Compensation contributed as
                      ----
                      Elective Deferrals. If inserted, Qualified Matching
                      Contributions shall not exceed      % of the Participant's
                                                     -----
                      Compensation.

              [X] (b) Such an amount determined by the Employer, which is
                      needed to meet the ACP Test.

         (3) In its discretion, the Employer may elect to designate all or any
             part of Matching 401(k) Contributions as Qualified Matching
             Contributions that are taken into account as Elective Deferrals --
             included in the ADP Test and excluded from the ACP Test -- on 
             behalf of (select one):

              [_] (a) all Participants who make Elective Deferrals for that
                      Plan Year.

              [X] (b) Only Participants who are Nonhighly Compensated Employees
                      who make Elective Deferrals for that Plan Year.

E.  QUALIFIED NONELECTIVE CONTRIBUTIONS
    -----------------------------------

    If selected below, the Employer may make Qualified Nonelective Contributions
    for each Plan Year (select all those applicable):

    (1) In its discretion, the Employer may make Qualified Nonelective
        Contributions on behalf of (select one):

              [_] (a) all Eligible Participants.

              [X] (b) only Eligible Participants who are Nonhighly Compensated
                      Employees.

                                      12

<PAGE>
 
     (2) Qualified Nonelective Contributions will be contributed and allocated
         to each Eligible Participant in an amount equal to (select one):

         [_] (a)      % (no more than 15%) of the Compensation of each Eligible
                  ----
                  Participant eligible to share in the allocation.

         [X] (b) Such an amount determined by the Employer, which is needed to
                 meet either the ADP Test or ACP Test.

     (3) At the discretion of the Employer, as needed and taken into account
         as Elective Deferrals included in the ADP Test on behalf of (select
         one):

         [_] (a) all Eligible Participants.

         [X] (b) only those Eligible Participants who are Nonhighly Compensated
                 Employees.

F. ELECTIVE DEFERRALS USED IN ACP TEST (select one):
   -----------------------------------

   [X] (1) At the discretion of the Employer, Elective Deferrals may be used
           to satisfy tile ACP Test.

   [_] (2) Elective Deferrals may not be used to satisfy the ACP Test.

G. MAKING AND MODIFYING A 401(k) ELECTION
   --------------------------------------

   An Eligible Employee shall be entitled to increase, decrease or resume his or
   her Elective Deferral percentage with the following frequency during the Plan
   Year (select one):

        [_] (1) annually. 
        [_] (2) semi-annually.
        [X] (3) quarterly.
        [_] (4) monthly 
        [_] (5) other (specify):         .
                                 --------
   Any such increase, decrease or resumption shall be effective as of the first
   payroll period coincident with or next following the first day of each period
   set forth above. A Participant may completely discontinue making Elective
   Deferrals at any time effective for the payroll period after written notice
   is provided to the Administrator.

                                      13

<PAGE>
 
                   ARTICLE IV. PROFIT-SHARING CONTRIBUTIONS
                               ----------------------------
                             AND ACCOUNT ALLOCATION
                             ----------------------

A. PROFIT-SHARING CONTRIBUTIONS
   ----------------------------

   If selected below, the following contributions for each Plan Year will be
   made:

   Contributions to Employer Contributions Accounts (select one):

   [_] (a) Such an amount, if any, as determined by the Employer. 
   [_] (b)       % of each Participant's Compensation.
           ------

B. ALLOCATION OF CONTRIBUTIONS TO EMPLOYER CONTRIBUTIONS ACCOUNTS (select one):
   --------------------------------------------------------------

   [_] (1) Non-Integrated Allocation

           The Employer Contributions Account of each Participant eligible to
           share in the allocation for a Plan Year shall be credited with a
           portion of the contribution, plus any forfeitures if forfeitures are
           reallocated to Participants, equal to the ratio that the
           Participant's Compensation for the Plan Year bears to the
           Compensation for that Plan Year of all Participants entitled to share
           in the contribution.

   [_] (2) Integrated Allocation

           Contributions to Employer Contributions Accounts with respect to a
           Plan Year, plus any forfeitures if forfeitures are reallocated to
           Participants, shall be allocated to the Employer Contributions
           Account of each eligible Participant as follows:

                (a) First, in the ratio that each such eligible Participant's
                Compensation for the Plan Year bears to the Compensation for
                that Plan Year of all eligible Participants but not in excess of
                3% of each Participant's Compensation.

                (b) Second, any remaining contributions and forfeitures will be
                allocated in the ratio that each eligible Participant's
                Compensation for the Plan Year in excess of the Integration
                Level bears to all such Participants' excess Compensation for
                the Plan Year but not in excess of 3%.

                                     -14-

<PAGE>
 
                (c) Third, any remaining contributions and forfeitures will be
                allocated in the ratio that the sum of each Participant's
                Compensation and Compensation in excess of the Integration Level
                bears to the sum of all Participants' Compensation and
                Compensation in excess of the Integration Level, but not in
                excess of the Maximum Profit-Sharing Disparity Rate (defined
                below). 

                (d) Fourth, any remaining contributions or forfeitures
                will be allocated in the ratio that each Participant's
                Compensation for that year bears to all Participants'
                Compensation for that year.

            The Maximum Profit-Sharing Disparity Rate is equal to the lesser of:

                (a) 2.7% or 

                (b) Tile applicable percentage determined in accordance with the
                following table:


<TABLE> 
<CAPTION> 
   IF THE INTEGRATION
   LEVEL IS (AS A % OF                   THE APPLICABLE
THE TAXABLE WAGE BASE ("TWB")).          PERCENTAGE IS:
<S>                                      <C>
20% (or $10,000 if greater)
or less of the TWB                             2.7%

More than 20% (but not less 
than $10,001 ) but not more
than 80% of the TWB                            1.3%

More than 80% but not less
than 100% of the TWB                           2.4%

100% of the TWB                                2.7%

</TABLE>

                                      -15-

<PAGE>
 
C. PARTICIPANTS ELIGIBLE FOR EMPLOYER CONTRITION ALLOCATION
   --------------------------------------------------------

   The fo11owing Participants shall be eligible for an allocation to their
   Employer Contributions Account (select all those applicable):

   [_] (1) Any Participant who was employed during the Plan Year. 

   [_] (2) In the case of a Plan using the hourly record method for determining
           Vesting Service, any Participant who was credited with a Year of 
           Service during the Plan Year.

   [_] (3) Any Participant who was employed on the last day of the Plan Year. 

   [_] (4) Any Participant who was on a leave of absence on the last day of the
           Plan Year.

   [_] (5) Any Participant who during the Plan Year died or became Disabled
           while an Employee or terminated employment after attaining Normal
           Retirement Age.

   [_] (6) Any Participant who was credited with at least 501 Hours of Service
           whether or not employed on the last day of the Plan Year.

   [_] (7) Any Participant who was credited with at least 1,000 Hours of
           Service and was employed on the last day of the Plan Year.


                       ARTICLE V. THRIFT CONTRIBUTIONS 
                                  --------------------

                        THIS ARTICLE IS NOT APPLICABLE

A. EMPLOYEE THRIFT CONTRIBUTIONS
   -----------------------------

   If selected below, Employee Thrift Contributions, which are required for
   Matching Thrift Contributions, may be made by a Participant in an amount
   equal to (select one):

   [_] (1) A dollar amount or a percentage of the Participant's Compensation
           which may not be less than     % nor may not exceed   % of his or her
                                      ----                     --
           Compensation.

   [_] (2) An amount not less than    % of and not more than    % of each
                                   ---                       ---
           Participant's Compensation.


                                      -16-

<PAGE>
 
B. MAKING AND MODIFYING AN EMPLOYEE THRIFT CONTRIBUTION ELECTION
   -------------------------------------------------------------
 
   A Participant shall be entitled to increase, decrease or resume his or her
   Employee Thrift Contribution percentage with the following frequency during
   the Plan Year (select one):

   [_] (1) annually
   [_] (2) semi-annually
   [_] (3) quarterly
   [_] (4) monthly
   [_] (5) other (specify)
                          -----------------------

   Any such increase, decrease or resumption shall be effective as of the first
   payroll period coincident with or next following the first day of each period
   set forth above. A Participant may completely discontinue making Employee
   Thrift Contributions at any time effective for the payroll period after
   written notice is provided to the Administrator.

C. THRIFT MATCHING CONTRIBUTIONS
   -----------------------------

   If selected below, the Employer will make Matching Thrift Contributions for
   each Plan Year (select one):

   [_] (1) Discretionary Formula:

           A discretionary Matching Thrift Contribution equal to such a dollar
           amount or percentage as determined by the Employer, which shall be
           allocated (select one):    

           [_] (a) based on the ratio of each Participant's Employee Thrift
               Contribution for the Plan Year to the total Employee Thrift
               Contributions of all Participants for the Plan Year. If inserted,
               Matching Thrift Contributions shall be subject to a maximum
               amount of $        for each Participant or      % of each
                          -------                         -----
               Participant's Compensation.

           [_] (b) in an amount not to exceed      % of each Participant's first
                                              -----
                     % of Compensation contributed as Employee Thrift
               ------
               Contributions for the Plan Year. If any Matching Thrift
               Contribution remains, it is allocated to each such Participant
               in an amount not to exceed    % of the next    % of each
                                          ---              ---
               Participant's Compensation contributed as Employee Thrift
               Contributions for the Plan Year.

               Any remaining Matching Thrift Contribution shall be allocated to
               each such Participant in the ratio that such Participant's
               Employee Thrift Contributions for the Plan Year bears to the
               total Employee Thrift Contributions of all such Participants for
               the Plan Year. If inserted, Matching Thrift Contributions shall 
               be subject to a maximum amount of $      for each Participant or 
                                                  -----
                     % of each Participant's Compensation.
               ------

                                      -17-

<PAGE>
 
   [_] (2) Nondiscretionary Formula:

          A nondiscretionary Matching Thrift Contribution for each Plan Year
          equal to (select one):

          [_] (a)       % of each Participant's Compensation contributed as
                  ------
                  Employee Thrift Contributions. If inserted, Matching Thrift
                  Contributions shall be subject to a maximum amount of 
                  $      for each Participant or    % of each Participant's 
                   ------                       ----
                  Compensation.

          [_] (b)      % of the first    % of the Participant's Compensation
                  -----              ----
                  contributed as Employee Thrift Contributions and     % of the
                                                                   ----
                  next      % of the Participant's Compensation contributed as 
                      ------
                  Employee Thrift Contributions. If inserted, Matching Thrift 
                  Contributions shall be subject to a maximum amount of $
                                                                         ------
                  for each Participant or      % of each Participant's 
                                          -----
                  Compensation.

D. QUALIFIED MATCHING CONTRIBUTIONS
   --------------------------------

   If selected below, the Employer may make Qualified Matching Contributions
   for each Plan Year (select all those applicable):

         (1) In its discretion, the Employer may make Qualified Matching
             Contributions on behalf of (select one):

             [_] (a) all Participants who make Employee Thrift Contributions.

             [_] (b) only those Participants who are Nonhighly Compensated
                     Employees and who make Employee Thrift Contributions.

         (2) Qualified Matching Contributions will be contributed and allocated
             to each Participant in an amount equal to:

             [_] (a)     % of the Participant's Employee Thrift Contributions. 
                     ----
                     If inserted, Qualified Matching Contributions shall not 
                     exceed       % of the Participant's Compensation.
                            ------

             [_] (b) such an amount, determined by the Employer, which is
                     needed to meet the ACP Test.


                     ARTICLE VI. PARTICIPANT CONTRIBUTIONS
                                 -------------------------

PARTICIPANT VOLUNTARY NONDEDUCTIBLE CONTRIBUTIONS 
- -------------------------------------------------
Participant Voluntary Nondeductible Contributions are (select one):

       [_] (a) permitted.

       [X] (b) not permitted.

                                       18

<PAGE>
 
                              ARTICLE VII. VESTING
                                           -------

A. EMPLOYER CONTRIBUTION ACCOUNTS
   ------------------------------

(1) A Participant shall have a vested percentage in his or her Profit-Sharing
    Contributions, Matching 401(k) Contributions and/or Matching Thrift
    Contributions, if applicable, in accordance with the following schedule
    (Select one):


<TABLE>
<CAPTION>
 
 
MATCHING 401(k)
AND/OR MATCHING
THRIFT            PROFIT-SHARING
CONTRIBUTIONS     CONTRIBUTIONS
- -------------     --------------
<C>               <S>     
   [_]            [_] (a) 100% vesting immediately upon participation.

   [_]            [_] (b) 100% after     (not more than 5) years of Vesting 
                                     ---
                          Service.

   [X]            [X] (c) Graded vesting schedule:

    0%             0% after 1 year of Vesting Service;
   --             --  
   20%            20% after 2 years of Vesting Service;
   --             --
   40%            40% (not less than 20%) after 3 years of Vesting Service;
   --             --
   60%            60% (not less than 40%) after 4 years of Vesting Service;
   --             --
   80%            80% (not less than 60%) after 5 years of Vesting Service;
   --             --
  100%           100% (not less than 80%) after 6 years of Vesting Service;
  ---            ---
</TABLE>

                    100% after 7 years of Vesting Service.

                                       19

<PAGE>
 
(2) Top Heavy Plan


<TABLE> 
<CAPTION> 
MATCHING 401(k)
AND/OR MATCHING
THRIFT            PROFIT-SHARING
CONTRIBUTIONS     CONTRIBUTIONS
- -------------     --------------
<C>               <S>
                              Vesting Schedule (Select one):

    [_]           [_] (a) 100% vesting immediately upon participation.

    [_]           [_] (b) 100% after ___ (not more than 3) years of 
                          Vesting Service.

    [X]           [X] (c) Graded vesting schedule:

      0%           0% after 1 year of Vesting Service;
     --           --  
     20%          20% (not less than 20%) after 2 years of Vesting Service.
     --           --  
     40%          40% (not less than 40%) after 3 years of Vesting Service.
     --           --  
     60%          60% (not less than 60%) after 4 years of Vesting Service.
     --           --
     80%          80% (not less than 80%) after 5 years of Vesting Service.
     --           --
</TABLE>

                    100% after 6 years of Vesting Service.

Top Heavy Ratio:

     (a) If the adopting Employer maintains or has ever maintained a qualified
         defined benefit plan, for purposes of establishing present value to
         compute the top-heavy ratio, any benefit shall be discounted only for
         mortality and interest based on the following:

                  Interest Rate:        8 %
                                    ------
                  Mortality Table:  UP' 84
                                    ------

      (b) For purposes of computing the top-heavy ratio, the valuation date
          shall be the last business day of each Plan Year.


                                       20

<PAGE>
 
B.  ALLOCATION OF FORFEITURES
    -------------------------

    Forfeitures shall be (select one from each applicable column):


<TABLE> 
<CAPTION> 
MATCHING 401(k)
AND/OR MATCHING   
THRIFT             PROFIT-SHARING
CONTRIBUTIONS      CONTRIBUTIONS
- -------------      -------------
<C>               <S>
     [X]           [_] (1) used to reduce Employer contributions for succeeding
                                Plan Year.

     [_]           [_] (2) allocated in the succeeding Plan Year in the ratio
                                which the Compensation of each Participant for
                                the Plan Year bears to the total Compensation of
                                all Participants entitled to share in the
                                Contributions. If the Plan is integrated with
                                Social Security, forfeitures shall be allocated
                                in accordance with the formula elected by the
                                Employer.
</TABLE>


C. VESTING SERVICE
   ---------------

   For purposes of determining Years of Service for Vesting Service [select (1)
   or (2) and/or (3)]:

   [X] (1) All Years of Service shall be included.

   [_] (2) Years of Service before the Participant attained age 18 shall be
           excluded.

   [_] (3) Service with the Employer prior to the effective date of the Plan
           shall be excluded.

               ARTICLE VIII. DEFERRAL OF BENEFIT DISTRIBUTIONS,
                       IN-SERVICE WITHDRAWALS AND LOANS
                       --------------------------------

A. DEFERRAL OF BENEFIT DISTRIBUTIONS
   ---------------------------------

<TABLE> 
<CAPTION> 
   401(k) AND/   PROFIT-
   OR THRIFT     SHARING
   -----------   -------
<C>              <S>
      [_]          [_] If this item is checked, a Participant's vested benefit
   in his or her Employer Accounts shall be payable as soon as practicable 
   after the earlier of: (1) the date the Participant terminates Employment 
   due to Disability or (2) the end of the Plan Year in which a terminated 
   Participant attains Early Retirement Age, if applicable, or Normal 
   Retirement Age.
</TABLE>

                                       21

<PAGE>
 
B. IN-SERVICE DISTRIBUTIONS
   ------------------------

   [X] (1) In-service distributions may be made from any of the Participant's
           vested Accounts, at any time upon or after the occurrence of the
           following events (select all applicable):

           [X] (a) a Participant's attainment of age 59-1/ 2.
           [X] (b) due to hardships as defined in Section 5.9 of the Plan.

   [_] (2) In-service distributions are not permitted.

C.  LOANS ARE:
    ---------

<TABLE> 
<CAPTION> 
401(k) AND/  PROFIT-
OR THRIFT    SHARING
- -----------  -------
<C>          <S>
   [X]       [_] (1) permitted.

   [_]       [_] (2) not permitted.
</TABLE>


                            ARTICLE IX. GROUP TRUST
                                        -----------

[_]  If this item is checked, the Employer elects to establish a Group Trust
     consisting of such Plan assets as shall from time to time be transferred to
     the Trustee pursuant to Article X of the Plan. The Trust Fund shall be a
     Group Trust consisting of assets of this Plan plus assets of the following
     plans of the Employer or of an Affiliate:

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

                           ARTICLE X. MISCELLANEOUS
                                      -------------

A. IDENTIFICATION OF SPONSOR
   -------------------------
   The address and telephone number of the Sponsor's authorized representative
   is 800 Scudders Mill Road, Plainsboro, New Jersey 08536; (609) 282-2272. This
                                                                  --------
   authorized representative can answer inquiries regarding the adoption of the
   Plan, the intended meaning of any Plan provisions, and the effect of the
   opinion letter.

   The Sponsor will inform the adopting Employer of any amendments made to the
   Plan or the discontinuance or abandonment of the Plan.

                                       22

<PAGE>
 
B. PLAN OF REGISTRATION
   --------------------
   1. Initial Registration
      --------------------

            This Plan must be registered with the Sponsor, Merrill Lynch,
      Pierce, Fenner & Smith Incorporated, in order to be considered a
      Prototype Plan by the Sponsor. Registration is required so that the
      Sponsor is able to provide the Administrator with documents, forms and
      announcements relating to the administration of the Plan and with Plan
      amendments and other documents, all of which relate to administering the
      Plan in accordance with applicable law and maintaining compliance of the
      Plan with the law.

            The Employer must complete and sign the Adoption Agreement. Upon
      receipt of the Adoption Agreement, the Plan will be registered as a
      Prototype Plan of Merrill Lynch, Pierce, Fenner & Smith Incorporated. The
      Adoption Agreement will be countersigned by an authorized representative
      and a copy of the countersigned Adoption Agreement will be returned to the
      Employer.

   2. Registration Renewal
      --------------------

            Annual registration renewal is required in order for the Employer to
      continue to receive any and all necessary updating documents. There is an
      annual registration renewal fee in the amount set forth with the initial
      registration material. The adopting Employer authorizes Merrill Lynch,
      Pierce, Fenner & Smith Incorporated, to debit the account established for
      the Plan for payment of agreed upon annual fee; provided, however, if the
      assets of an account are invested solely in Participant-Directed Assets, a
      notice for this annual fee will be sent to the Employer annually. The
      Sponsor reserves the right to change this fee from time to time and will
      provide written notice in advance of any change.

C. PROTOTYPE REPLACEMENT PLAN
   --------------------------

        This Adoption Agreement is a replacement prototype plan for the (1)
   Merrill Lynch Special Prototype Defined Contribution Plan and Trust -
   40l(k) Plan #03-004 and (2) Merrill Lynch Asset Management, Inc., Special
   Prototype Defined Contribution Plan and Trust - 401 (k) Plan Adoption
   Agreement #03-004.

D. RELIANCE
   --------

        The adopting Employer may not rely on the opinion letter issued by the
    National Office of the Internal Revenue Service as evidence that this Plan
    is qualified under Code Section 401. In order to obtain reliance, the
    Employer must apply to the appropriate date Key District Director of the
    Internal Revenue Service for a determination letter with respect to the
    Plan.

                                      -23-

<PAGE>
 
                                          EMPLOYER
Dated:    1/3  , 1994        By: /s/ R. Douglas Armstrong
       --------    --                ------------------------------------------

                              To be executed by the sole proprietor, an
                              authorized partner or corporate officer, as
                              appropriate.


                                            R. DOUGLAS ARMSTRONG
                              -------------------------------------------------
                                                Print Name

                                             PRESIDENT and CEO 
                              -------------------------------------------------
                                      Title, if a corporate officer
                              -------------------------------------------------



SPONSOR ACCEPTANCE
- ------------------

    Subject to the terms and conditions of the Prototype Plan and this Adoption
Agreement, this Adoption Agreement is accepted by Merrill Lynch, Pierce, Fenner
& Smith Incorporated as the Prototype Sponsor.

Authorized Signature: /s/  Rebecca Freberg
                      ---------------------------------------------------------

                                      -24-

<PAGE>
 
                 MERRILL LYNCH TRUST COMPANY IS NOT A TRUSTEE

ACCEPTANCE BY TRUSTEE(S)

A. This Trustee Acceptance is to be completed only if the Employer appoints one
   or more Trustees and does not appoint a Merrill Lynch Trust Company as
   Trustee.

   The undersigned hereby accept all of the terms, conditions, and obligations
   of appointment as Trustee under the Plan. If the Employer has elected a Group
   Trust in this Adoption Agreement, the undersigned Trustee(s) shall be the
   Trustee(s) of the Group Trust.


<TABLE> 
<CAPTION> 
<S>                                        <C>
                                                 as TRUSTEE

     /s/ R. DOUGLAS R. ARMSTRONG           R. DOUGLAS ARMSTRONG
     ---------------------------           --------------------
 
          (Signature)                      (print or type name)

                                               as TRUSTEE

     /s/ TODD E. SIMPSON                    TODD E. SIMPSON
     ---------------------------           --------------------
           (Signature)                     (print or type name)

                                                as TRUSTEE

     ---------------------------           --------------------
           (Signature)                     (print or type name)

                                                as TRUSTEE

     ---------------------------           --------------------
           (Signature)                     (print or type name)



  Dated:            , 19
        ------------    --

</TABLE>

                                     -25-

<PAGE>
 
                    MERRILL LYNCH TRUST COMPANY AS TRUSTEE

   This Trustee Acceptance and designation of Investment Committee are to be
   completed only when a Merrill Lynch Trust Company is appointed as Trustee.

   The undersigned hereby accept all of the terms, conditions, and obligations
   of appointment as Trustee under the Plan, If the Employer has elected a Group
   Trust in this Adoption Agreement, the undersigned Trustee(s) shall be the
   Trustee(s) of the Group Trust.

   SEAL                                        MERRILL LYNCH TRUST COMPANY

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

Dated:           , 19                By:
      -----------    --                 -------------------------------



DESIGNATION OF INVESTMENT COMMITTEE

   The Investment Committee for the Plan is (print or type name):

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

                                     -26-

<PAGE>
 
               MERRILL LYNCH TRUST COMPANY IS ONE OF THE TRUSTEES

    This Trustee Acceptance is to be completed only if, in addition to a Merrill
    Lynch Trust Company as Trustee, the Employer appoints an additional Trustee
    of a second trust fund.

    The undersigned hereby accept all of the terms, conditions, and obligations
    of appointment as Trustee under the Plan. If the Employer has elected a
    Group Trust in this Adoption Agreement, the undersigned Trustee(s) shall
    be the Trustee(s) of the Group Trust.

                                                  as TRUSTEE

    --------------------------------     ----------------------------------
              (Signature)                      (print or type name)

   Dated:            , 19
         ------------     --

   SEAL                                  MERRILL LYNCH TRUST COMPANY

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

Dated:           , 19             By:
      -----------    ---              ---------------------------------


DESIGNATION OF INVESTMENT COMMITTEE

    The Investment Committee for the Plan is (print or type name):

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

                                      -27-



<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                              AMENDED AND RESTATED
                               1992 INCENTIVE AND
                        NON-QUALIFIED STOCK OPTION PLAN
                    (AS AMENDED EFFECTIVE OCTOBER 30, 1996)


     Section 1.  Purpose.
 
     The purpose of the 1992 Incentive and Non-qualified Stock Option Plan (the
"Plan") of Aastrom Biosciences, Inc. (the "Company") is to encourage stock
ownership by directors, officers, employees of and consultants to the Company
and its Affiliates and others who directly or indirectly provide goods or
services to the Company and its Affiliates by issuing options to purchase shares
of the Company's stock ("Options," and individually an "Option"), enabling such
persons to acquire or increase their proprietary interest in the Company and
thereby encouraging them to remain in the employ or remain directors of or
consultants to the Company and its Affiliates or continue providing goods or
services to the Company and its Affiliates. The term "Affiliates" as used herein
shall include any parent corporation or subsidiary corporation as defined in
Sections 424(e) and (f) respectively of the Internal Revenue Code of 1986, as
amended (the "Code"). The Options issued pursuant to the Plan are intended to
constitute either incentive stock options within the meaning of
 Section 422 of
the Code, or non-qualified stock options, at the discretion of the Option
Committee (as hereinafter defined) of the board of directors of the Company (the
"Board of Directors") at the time of grant. The type of Options granted will be
specified in the letter of grant to the person who is granted the Options (the
"Optionee"). The terms of this Plan shall be incorporated in the grant letter.

     Section 2.  Administration.
 
     The Plan will be administered by the Board of Directors or a committee of
two or more members of the Board or Directors (such member or the Board of
Directors acting as Plan administrators shall be referred to herein as the
"Option Committee"). If the Company or an Affiliate is a "publicly held
corporation" within the meaning of Section 162(m) of the Code, the Board may
establish a Committee of "outside directors" within the meaning of Section
162(m) to approve the grant of any Option which might reasonably be anticipated
to result in the payment of employee remuneration that would otherwise exceed
the limit on employee remuneration deductible for income tax purposes pursuant
to Section 162(m).


<PAGE>
 
     The interpretation and construction by the Option Committee of any
provision of the Plan will be final. Anything herein to the contrary
notwithstanding, no member of the Board of Directors or the Option Committee
will be liable for any action or determination made in good faith with respect
to the Plan or any Option granted under it.

     Section 3.  Eligibility.

     Directors, officers and employees of the Company and its Affiliates who are
expected to make significant contributions to the long term success of the
Company are eligible to receive incentive stock options under the Plan, as may
be determined from time to time by the Option Committee. Directors, officers and
employees of and consultants to the Company and its Affiliates, and others who
directly or indirectly provide goods or services to the Company and its
Affiliates, are eligible to receive non-qualified options under the Plan, as may
be determined from time to time by the Option Committee. A director, officer,
employee, consultant or other person who is granted an Option is an Optionee
(which term also includes the Optionee's legal representative under Section 5(g)
hereof). An Optionee may be granted more than one Option.

     For purposes of the foregoing paragraph, "employees" shall include
prospective employees to whom Options are granted in connection with written
offers of employment with the Company or one of its Affiliates, and
"consultants" shall include prospective consultants to whom Options are granted
in connection with written offers of engagement with the Company or one of its
Affiliates.

     Any person who is not an employee on the date of Option grant may only be
granted a non-qualified stock option. A director who is not an employee or
officer of or consultant to the Company or its Affiliates, or who does not
directly or indirectly provide goods or services to the Company or its
Affiliates, shall not be eligible to receive non-qualified stock options.

     Notwithstanding the foregoing, no director of the Company who is not also
an employee of the Company may be granted an Option at any time that any class
of equity security of the Company is registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").

     Section 4.  Stock.

     The stock subject to an Option will be shares of the Company's authorized
but unissued or reacquired Common Stock, no par value (the "Shares").  Options
shall not be issued with respect to more than One Million 

                                      -2-

<PAGE>
 
Nine Hundred Thousand (1,900,000) Shares, after giving effect to the two-for-
three reverse stock split approved by the Board of Directors on April 30, 1996,
and subject to further adjustment as provided in Section 5(i) hereof. If an
outstanding Option for any reason expires or is terminated or canceled or Shares
acquired, subject to repurchase, upon the exercise of an Option are repurchased
by the Company, the Shares allocable to the unexercised portion of such Option,
or such repurchased Shares, shall again be available for issuance under the
Plan.

     Section 5.  Terms and Conditions of Options.

     Each Option granted pursuant to the Plan will be authorized by the Option
Committee and will be evidenced by a notice (the "Option Notice") in such form
as the Option Committee may from time to time determine. Each Option Notice will
include the information required in subparagraphs (a), (b) and (c) of this
Section 5 and will be in conformity with and will incorporate by reference all
other terms and conditions of the Plan, including the following terms and
conditions:

          (a) Number of Shares.  The number of Shares subject to the Option will
be stated in the Option Notice.

          (b) Exercise Price.  In the case of incentive stock options, the price
per Share payable on the exercise of the Option will be stated in the Option
Notice and will be not less than 100% of the fair market value per share of the
outstanding shares of Common Stock of the Company on the date the Option is
granted, without regard to any restriction other than a restriction which will
never lapse. In the case of a non-qualified stock option, the price per Share
payable upon exercise of the Option shall be stated in the Option Notice and
will be not less than 85% of the fair market value per share of the outstanding
shares of Common Stock of the Company on the date the Option is granted, without
regard to any restriction other than a restriction which will never lapse.
Unless the Company's Common Stock is quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or listed on a
recognized securities exchange, the fair market value, for purposes of complying
with the foregoing sentence with respect to incentive stock options, shall be as
determined by the Option Committee in its sole discretion. If the Company's
Common Stock is either quoted on NASDAQ or listed on a recognized securities
exchange, the fair market value shall be the representative closing price of the
stock as obtained from NASDAQ or such recognized securities exchange on the date
of the grant of the Option, or if there is no such quotation on the date of the
grant of the Option on the preceding business day.

          (c) Form of Option.  The Option Notice will state whether the Option
granted is an incentive stock option or a non-qualified stock 

                                      -3-

<PAGE>
 
option, and will constitute a binding determination as to the form of Option
granted. At the discretion of the Option Committee, the Option Notice may
require the Optionee to execute a Stock Transfer Restriction and Buy-Out
Agreement, or such other agreements as the Option Committee considers
appropriate.

          (d) Payment.  The price payable on the exercise of the Option in whole
or in part will be equal to the Option price multiplied by the number of Shares
as to which the Option is exercisable, and shall be paid in full upon exercise
of any Option, either (i) in cash, (ii) at the discretion of the Option
Committee either at the time the Option is granted or exercised, by delivering
to the Company Shares having a fair market value, as of the close of business on
the day preceding such delivery, equal to the aggregate exercise price of the
Shares being purchased on exercise of the Options, (iii) by a combination of
such cash and shares, or (iv) any other form of legal consideration that may be
acceptable to the Option Committee. In the case of any deferred payment
arrangement, interest shall be payable at least annually at the minimum
applicable federal rate under Section 1274(d) of the Code to avoid imputed
interest to the Company under the Code.

     Anything to the contrary herein notwithstanding, all payments required to
be made by the Company hereunder to an Optionee, his legal representative, his
heir or devisee, shall be subject to the withholding of such amounts as the
Company may determine that it is required to withhold pursuant to any applicable
federal, state or local law or regulation. To the extent provided in the terms
of the Option, and to the extent allowed under the Exchange Act, the Optionee
may satisfy any federal, state or local tax withholding obligation relating to
the exercise of such Option by one or more of the following: (1) tender of a
cash payment; (2) authorization of the Company to withhold Shares otherwise to
be issued pursuant to the Option of a value not in excess of the withholding tax
obligation; or (3) delivering to the Company unencumbered Shares owned by the
Optionee of a value not in excess of the withholding tax obligation.

          (e) Notwithstanding any other provision of this Plan:

               (i) No Option shall be granted under this Plan more than ten (10)
years after April 30, 1996. Notwithstanding the foregoing, if the maximum number
of Shares issuable pursuant to the Plan as provided in Section 4 has been
increased at any time (other than pursuant to Section 5(i)), all Options shall
be granted, if at all, no later than the last day preceding the tenth (10th)
anniversary of the earlier of (a) the date on which the latest such increase in
the maximum number of Shares issuable under the Plan was approved by the
stockholders of the Company or (b) the date such amendment was adopted by the
Board of Directors.

                                      -4-

<PAGE>
 
               (ii)   No incentive stock option granted under this Plan shall be
exercisable later than ten (10) years from the date of grant.

               (iii)  No Option granted to any Optionee shall be treated as an
incentive stock option, to the extent such Option would cause the aggregate fair
market value (determined as of the date of grant of each such Option) of the
Shares with respect to which incentive stock options are exercisable by such
Optionee for the first time during any calendar year to exceed $100,000. For
purposes of determining whether an incentive stock option would cause the
aggregate fair market value of the Shares to exceed the $100,000 limitation,
such incentive stock options shall be taken into account in the order granted.
For purposes of this subsection, incentive stock options include all incentive
stock options under all plans of the Company (or one of its Affiliates) that are
incentive stock option plans within the meaning of Section 422 of the Code. If
the Code is amended to provide for a different limitation from that set forth in
this subsection, such different limitation shall be deemed incorporated herein
effective as of the date and with respect to such Options as required or
permitted by such amendment to the Code.

               (iv) Options granted pursuant to this Plan may be exercised in
any order elected by the Optionee whether or not the Optionee holds any
unexercised Options under this Plan or any other Plan of the Company.

               (v)   Notwithstanding any provision herein to the contrary, no
incentive stock option shall be granted under this Plan to any person who, at
the time of the grant of such Option, owns stock possessing more than 10% of the
total combined voting power of all classes of the stock of the Company or any
affiliate, unless the option price at the time the Option is granted is at least
110 percent (110%) of the fair market value of the stock, and subject to the
condition that the Option expires five years from the Option grant date.

               (vi)  No Option granted under this Plan may be transferred except
by will or by the laws of descent and distribution.

          (f)  Term and Exercise of Options.

               (i)  Subject to the provisions of Section 5(e)(i), (ii) and (v)
hereof, Options granted hereunder may be exercisable in whole or in part at such
time or times as the Option Committee shall designate when granting such
Options. However, no Option granted to a prospective employee or prospective
consultant may become exercisable prior to the date on which such person
commences service with the Company or one of its Affiliates.

                                      -5-

<PAGE>
 
               (ii)  Unless sooner terminated as provided in this Plan, each
Option shall expire no later than ten years from the date of grant and shall be
void and unexercisable thereafter. An Option may be exercised only by the
Optionee and may not be exercised by any other person except as provided in
Section 5(g) hereof.

          (g) Termination of Options Granted to Employees and Directors.

               (i)  Except as provided herein and unless otherwise specified in
the Option Notice, Options shall terminate when the Optionee ceases to be
employed by the Company or ceases to be a director of the Company.

               (ii)  Unless otherwise specified in the Option Notice, upon the
death of an Optionee while in the employ of the Company or while a director of
the Company, Options held by such Optionee which are exercisable on the date of
his or her death shall be exercisable by his or her executor(s) or
administrator(s) for a period of eighteen (18) months following the date of such
Optionee's death.

               (iii)  Unless otherwise specified in the Option Notice, upon
termination of an Optionee's employment with the Company (or if the Optionee is
a director only, upon termination of the Optionee's term of office, or if the
Optionee is both an employee and a director, upon termination of both) for any
reason other than "Cause," as defined in Section 5(g)(v), or for retirement or
permanent disability as set forth in Section 5(g)(iv) with respect to non-
qualified stock options, Options exercisable by such Optionee on the date of
termination of employment shall be exercisable by the Optionee (or in the case
of the Optionee's death subsequent to termination of employment, by the
Optionee's executor(s) or administrator(s)) for a period of three (3) months
from the date of such Optionee's termination of employment.

               (iv)  Solely with respect to non-qualified stock options, unless
otherwise specified in the Option Notice, upon termination of an Optionee's
employment with the Company (or if the Optionee is a director only, upon
termination of the Optionee's term of office, or if the Optionee is an employee
and a director, upon termination of both) for reasons of retirement or permanent
disability, non-qualified stock options exercisable by the Optionee on the date
of termination of employment shall be exercisable by such Optionee (or in the
case of the Optionee's death subsequent to termination of employment, by the
Optionee's executor(s) or administrator(s)) for a period of one (1) year from
the date of such Optionee's termination of employment; provided, however, that
if such

                                      -6-

<PAGE>
 
Optionee shall commence any employment during this one (1) year period with a
competitor of the Company (including, but not limited to, full or part-time
employment or independent consulting work), as determined solely in the judgment
of the Board of Directors, all Options held by such Optionee which have not yet
been exercised shall terminate immediately upon commencement thereof.
 
               (v)  Unless otherwise specified in the Option Notice, upon the
termination of an Optionee's employment (or if the Optionee is a director only,
upon termination of the Optionee's term of office, or if the Optionee is both an
employee and a director, upon termination of both) for "Cause," as defined in
this Section 5(g)(v), all Options held by such Optionee shall terminate
concurrently with receipt by the Optionee of oral or written notice that his or
her employment has been terminated. For the purposes of this Plan, termination
for "Cause" shall include termination by reason of being convicted of any felony
or committing willful and gross negligence or willful and gross misconduct in
carrying out duties properly assigned to such Optionee by the Company.

               (vi)  The Option Notice may provide that the Options issued
thereunder may be exercised for one year following the "disability" of the
Optionee as such term is defined in Section 22(c)(3) of the Code.

               (vii)  In the case of a leave of absence taken by an Optionee,
the Company shall have the unilateral right to (1) determine whether such leave
of absence shall be treated as a termination of employment, and (2) suspend or
otherwise delay the time or times at which the Shares subject to the Option
would otherwise vest.

               (viii)  Options granted to employees and directors of the Company
and its Affiliates may be terminated at any time by agreement between the
Company and the Optionee.

          (h)  Termination of Options Granted to Non-Employees.

               (i)  With respect to Options granted to persons who are not
employees or directors of the Company or its Affiliates, the Option Notice shall
state the conditions, if any, under which the Options shall terminate.

               (ii)  Options granted to persons who are not employees or
directors of the Company or its Affiliates may be terminated at any time by
agreement between the Company and the Optionee.

                                      -7-


<PAGE>
 
          (i)  Recapitalization.

               (i)  Subject to any required action by the stockholders, if any,
the number of Shares as to which Options may be granted under this Plan and the
number of Shares subject to outstanding Options and the Option prices thereto
will be adjusted proportionately for any increase or decrease in the number of
outstanding shares of Common Stock of the Company resulting from stock splits
and reverse stock splits, but not for stock dividends. The number of Shares will
be adjusted to the nearest whole share. Any stock dividend resulting in an
increase of five percent (5%) or more in the outstanding Common Stock shall be
deemed a stock split.

               (ii)  If the Company is a party to any merger in which the
Company is not the surviving entity, any consolidation or dissolution (other
than the merger or consolidation of the Company with one or more of its wholly-
owned subsidiaries), the Company, in the discretion of the Option Committee and
to the extent permitted by law, (1) will cause any successor corporation to
assume the Options outstanding hereunder or substitute similar options to those
outstanding hereunder, or (2) will continue such Options in full force and
effect. In the event that any successor to the Company in a merger,
consolidation or dissolution will not assume the Options or substitute similar
Options then, with respect to Options held by Optionees then performing services
for the Company, the time for exercising such Options will be accelerated and
the Options will be terminated if not exercised prior to the merger,
consolidation or dissolution.

               (iii)  Except as expressly provided in this Section 5(i), the
Optionee will have no rights by reason of (1) any subdivision or consolidation
of shares of stock of any class of the Company; (2) payment of any stock
dividend by the Company; (3) any other increase or decrease in the number of
shares of stock of any class of the Company; or (4) by reason of any
dissolution, liquidation, merger, consolidation or spin-off of assets or stock
of another corporation.

               (iv)  The grant or existence of any Option shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations, or changes of its capital or business
structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all
or any part of its stock or assets.

          (j) Rights as a Stockholder.  The Optionee will have no rights as a
stockholder of the Company with respect to any Shares subject to an Option until
such Option has been exercised and a certificate with respect to the Shares
purchased upon exercise has been issued to him or

                                      -8-

<PAGE>
 
her. No adjustment will be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property), distributions or other rights
for which the record date is prior to the date the Shares so purchased have been
issued. Throughout the term of any Option issued hereunder, the Company shall
make available to each Optionee, not less than 120 days after the close of each
fiscal year of the Company, upon request by the Optionee, any financial or other
information contained in the annual report to the shareholders of the Company as
provided in the Company's by-laws.

          (k) Modification, Extension and Renewal of Option. Subject to the
terms and conditions of the Plan, the Option Committee may modify, extend or
renew an Option, or accept the surrender of an Option (to the extent not
theretofore exercised), provided that no incentive stock option may be modified,
extended or renewed if such action would cause it to cease to be an "incentive
stock option" under the Code. Notwithstanding the foregoing, no modification of
an Option which adversely affects the Optionee shall be made without the consent
of the Optionee.

          (l) Purchase for Investment.  The issuance of Shares on exercise of
the Option will be conditioned on obtaining appropriate representations and
warranties of the Optionee that the purchase of Shares thereunder will be for
investment, and not with a view to the public resale or distribution thereof,
unless the Shares subject to the Option are registered under the Securities Act
of 1933, as amended (the "Act"), and comply with any other law, regulation or
rule applicable thereto. Unless the Shares are registered under the Act, the
Optionee shall acknowledge that the Shares purchased on exercise of the Option
are not registered under the Act and may not be sold or otherwise transferred
unless the Shares have been registered under the Act in connection with the sale
or other transfer, or that counsel satisfactory to the Company is of the opinion
that the sale or other transfer is exempt from registration under the Act, and
unless said sale or transfer is in compliance with any other applicable law,
including all applicable state securities laws.

          (m) No Rights to Employment.  Officers or employees granted Options
under this Plan shall not have any right to continue in the employment of the
Company or its Affiliates by reason of the existence of such Options and
consultants granted Options under this Plan shall not have any right to continue
as consultants to the Company or its Affiliates by reason of the existence of
such options. Persons who directly or indirectly provide goods or services to
the Company or its Affiliates shall not have any right to continue providing
such goods and services by reason of the existence of such Options. An Optionee
who is not an employee of the Company or its Affiliates shall have no right to
become an employee, or to obtain any benefit of employment, by reason of having
been granted

                                      -9-

<PAGE>
 
Options under this Plan. An Optionee whose employment is terminated shall have
no rights against the Company by reason of the termination of such Option
whether the termination of the employment be with or without "Cause," as defined
in Section 5(g)(iv).

          (n) Other Provisions.  The Option Notice may contain such other
provisions as the Option Committee in its discretion deems advisable and which
are not inconsistent with the provisions of this Plan, including, without
limitation, restrictions upon the exercise of the Option.

     Section 6.  Amendment of the Plan.

     Insofar as permitted by law and the Plan, the Option Committee may from
time to time suspend or discontinue the Plan or revise or amend it in any
respect whatsoever with respect to any Shares at the time not subject to an
Option; provided, however, that without approval of the stockholders, no such
revision or amendment may change the aggregate number of Shares for which
Options may be granted hereunder, change the designation of the class of
employees eligible to receive Options or decrease the price at which Options may
be granted.

     Any other provision of this Section 6 notwithstanding, the Option Committee
or the Board of Directors specifically is authorized to adopt any amendment to
this Plan deemed by the Board of Directors to be necessary or advisable to
assure that the incentive stock options or the non-qualified stock options
available under the Plan continue to be treated as such, respectively, under the
law.

     Section 7.  Application of Funds.

     The proceeds received by the Company from the sale of Shares pursuant to
the exercise of Options will be used for general corporate purposes.

     Section 8.  No Obligation to Exercise Option.

     The granting of an Option will impose no obligation upon the Optionee to
exercise such Option.

     Section 9.  Restrictions on Sale of Shares.  Optionee may not dispose of
any Shares received under the Plan within one hundred and eighty (180) days of
the date on which the Company's initial S-1 Registration Statement for
registration of the Company's common stock under the Securities Act of 1933, as
amended, is declared effective.

                                     -10-

<PAGE>
 
     Section 10.  Indemnification.  In addition to such other rights of
indemnification as they may have as members of the Board of Directors or
officers or employees of the Company or one of its Affiliates, members of the
Board of Directors and any officers or employees of the Company or any one of
its Affiliates to whom authority to act for the Board of Directors is delegated
shall be indemnified by the Company against all reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such person is liable for gross
negligence, bad faith or intentional misconduct in duties; provided, however,
that within sixty (60) days after the institution of such action, suit or
proceeding, such person shall offer to the Company, in writing, the opportunity
at its own expense to handle and defend the same.

     Section 11.  Approval of Stockholders.

     This Plan shall become effective on the date that it is adopted by the
Board of Directors; provided, however, that it shall become null and void if it
is not approved by a majority of the holders of the Company's Common Stock
within one year (365 days) of its adoption by the Board of Directors. The Option
Committee may grant Options hereunder prior to approval of the Plan or any
material amendments thereto by the holders of a majority of the Company's Common
Stock; provided, however, that no Option so granted shall be exercisable within
365 days of the date of the adoption or material amendment of the Plan, and all
Options so granted shall terminate and become null and void if the Plan is not
approved by a majority of the holders of the Company's Common Stock within 365
days of its adoption or material amendment.

                                     -11-

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                            1992 EMPLOYEE INCENTIVE
                            STOCK OPTION AGREEMENT


     AASTROM BIOSCIENCES, INC., a Michigan corporation (the "Company"), hereby
grants to __________________ ("Optionee"), an option to purchase a total of
_________________ shares (the "Shares") of common stock of the Company, at the
price determined as provided herein, and in all respects subject to the terms,
definitions and provisions of the Company's 1992 Incentive and Non-Qualified
Stock Option Plan (the "Plan") incorporated herein by reference. Terms which are
defined in the Plan shall have the same meanings when used herein.

     1.   Nature of the Option. This Option is an incentive stock option within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.

     2.   Exercise Price. The option price shall be __________________ for each
Share (the "Exercise Price"), which is not less than the fair market value of
each Share on the date hereof. The Option Price shall be adjusted
proportionately for increases or decreases in the number of outstanding Shares
resulting from stock splits.

     3.   Exercise of Option. Subject to Section 6 hereof, this Option shall be
exercisable during its term as follows:

          (a)  Right to Exercise. This Option shall be exercisable with respect
to ________________ Shares on ___________ and shall be exercisable with respect
to an additional _______________ Shares on the first day of every third month
thereafter, as long as Optionee remains an employee or director of the Company.

          (b)  Method of Exercise. This Option shall be exercisable by written
notice in the form of Exhibit A attached hereto. Such written notice shall be
signed by Optionee and shall be delivered in person, by certified mail, or by
such other means as the Company may permit to the Secretary of the Company. The
written notice shall be accompanied by payment of the aggregate Exercise Price.

     No Shares will be issued pursuant to the exercise of this Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares may then be
listed.

<PAGE>
 
          (c)  Number of Shares Exercisable. Each exercise of this Option in
part shall reduce, pro tanto, the total number of Shares that may thereafter be
purchased under such Option.

     4.   Optionee's Representations. If the shares which may be purchased
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
Option is exercised, Optionee shall, concurrently with the exercise of all or
any portion of this Option, deliver to the Company his Investment Representation
Statement in the form attached hereto as Exhibit B.

     5.   Method of Payment. Payment of the Exercise Price, may be in any of the
following forms, or a combination thereof, in the discretion of the Company:

          (a)  cash or check in the full amount of the aggregate Exercise Price;
or

          (b)  surrender to the Company of other shares of Common Stock of the
Company having a fair market value on the date of surrender equal to the
aggregate Exercise Price of the Shares as to which this Option is being
exercised. If the Company's Common Stock is then quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") or
listed on a recognized securities exchange, the fair market value of the shares
shall be the representative closing price of the stock as obtained from Nasdaq
or such recognized securities exchange on the date of the exercise of the
Option, or if there is no such quotation on the date of the exercise, on the
last trading day prior to the date of exercise. If the Company's Common Stock is
not quoted on Nasdaq or listed on a recognized securities exchange, the fair
market value of such shares shall be as determined by the Board of Directors in
its sole discretion; or

          (c)  promissory note, bearing a reasonable rate of interest, requiring
at least annual payments of accrued interest, maturing in not more than four (4)
years, secured by the shares purchased, and being a full recourse obligation of
the Optionee. Such recourse promissory note shall be in a form satisfactory to
the Company, and the Company may require the Optionee to deposit any shares
securing the promissory note with an agent designated by the Company under the
terms and conditions of escrow and security agreements approved by the Company.
It shall be at the sole and absolute discretion of the Company's Board of
Directors as to whether or not the Optionee is allowed to exercise this Option
by a

                                      -2-

<PAGE>
 
promissory note payment, and the Optionee shall have no right to do so unless
the Board of Directors expressly exercises its discretion to allow the use of a
promissory note. Any such approval by the Board of Directors shall not
constitute a precedent for any subsequent exercise of this Option by the
Optionee.

          (d)  through "Cashless Exercise." A "Cashless Exercise" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the Shares of Common Stock acquired upon the
exercise of the Option pursuant to a program or procedure approved by the
Company (including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.

     6.   Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require the Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.

     7.   Termination of Options.

          (a)  Except as provided herein, this Option shall terminate at such
time as Optionee ceases to be employed by the Company or ceases to be a director
of the Company.

          (b)  Upon the death of Optionee while in the employ of the Company or
while a director of the Company, Options held by Optionee which are exercisable
on the date of his or her death shall be exercisable by his or her executor(s)
or administrator(s) for a period of eighteen (18) months following the date of
Optionee's death.

          (c)  Upon termination of Optionee's employment with the Company (or if
Optionee is a director only, upon termination of the Optionee's term of office,
or if the Optionee is both an employee and a director, upon termination of both)
for any reason other than death,

                                      -3-

<PAGE>
 
disability or "Cause," as defined in Section 7(d), Options exercisable by
Optionee on the date of termination of employment shall be exercisable by
Optionee (or in the case of the Optionee's death subsequent to termination of
employment, by the Optionee's executor(s) or administrator(s)) for a period of
three (3) months from the date of Optionee's termination of employment.

          (d)  Upon the termination of Optionee's employment (or if Optionee is
a director only, upon termination of Optionee's term of office, or if Optionee
is both an employee and a director, upon termination of both) for "Cause," as
defined in this Section 7(d), all Options held by Optionee shall terminate
concurrently with receipt by the Optionee of oral or written notice that his or
her employment has been terminated. Termination for "Cause" shall include
termination by reason of being convicted of any felony or committing willful and
gross negligence or willful and gross misconduct in carrying out duties properly
assigned to Optionee by the Company.

          (e)  Upon termination of Optionee's employment due to the "disability"
of Optionee as such term is defined in Section 22(c)(3) of the Code an Option
exercisable by Optionee on the date of termination shall be exercisable by
Optionee (or Optionee's legal guardian or representative) for a period of one
(1) year from the date of Optionee's termination of employment.

          (f)  Notwithstanding the provisions of subsections (b), (c) and (e)
above, if a sale within the applicable time periods set forth in subsections
(b), (c) and (e) of this Section 7 of shares acquired upon the exercise of the
Option would subject the Optionee to suit under Section 16(b) of the Exchange
Act, the Option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of employment or service,
or (iii) the Option term date determined pursuant to Section 8. The Company
makes no representation as to the tax consequences of any such delayed exercise.
The Optionee should consult with the Optionee's own tax advisor as to the tax
consequences to the Optionee of any such delayed exercise.

     8.   Non-Transferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner during the
lifetime of Optionee other than by will or the laws of descent and distribution,
and may be exercised during the lifetime of the Optionee

                                      -4-

<PAGE>
 
only by him or her. The terms of this Option shall be binding upon the
executors, administrators, heirs and successors of the Optionee.

     9.   Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
term only in accordance with the terms of the Plan and this Option.

     10.  Early Disposition of Stock. Optionee hereby agrees that if he disposes
of any Shares received under this Option within one (1) year after such Shares
were transferred to him, or within two (2) years of the grant of this Option, he
will notify the Company in writing within 30 days after the date of any such
disposition.

     11.  Acknowledgment. The Optionee acknowledges receipt of a copy of the
Plan, which is annexed hereto as Exhibit C. The Optionee represents that he has
read the terms and provisions of the Plan and accepts this Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Committee
upon any questions arising under the Plan.

     12.  Entire Agreement. This Agreement, together with the exhibits attached
hereto, represents the entire agreement between the parties.

     13.  Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Michigan.

     14.  Amendment. This Agreement may only be amended by a writing signed by
each of the parties hereto.

DATE OF GRANT:  ________________________

                                   AASTROM BIOSCIENCES, INC.


                                   By:___________________________
                                   R. Douglas Armstrong, Ph.D.
                                   Its: President and CEO

                                      -5-

<PAGE>
 
Agreed to this ___ day of


___________________, 19__



__________________________
     Optionee

                                      -6-

<PAGE>
 
                                   EXHIBIT A
                                   ---------

                               NOTICE OF EXERCISE



                                           -------------------
                                           [Date]

AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
P.O. Box 376
Ann Arbor, MI  48106
Attn.: Corporate Secretary


Dear Madam or Sir:

          I hereby notify AASTROM Biosciences, Inc. of my intent to exercise
___________ Options granted to me pursuant to a Stock Option Agreement dated
_______________ at an exercise price of $______ per share. I have enclosed a
check for $________.

          I hereby agree that if I dispose of any Shares received upon exercise
of the Option within one (1) year after this date of exercise, or within two (2)
years after the Date of Grant of this Option, I will notify the Company in
writing within 30 days after the date of any such disposition.



                                           ____________________________________
                                           [Signature of Optionee]


 
                                           ____________________________________
                                           [Print Name of Optionee]




<PAGE>
 
                                   EXHIBIT B

                      INVESTMENT REPRESENTATION STATEMENT
 
 
PURCHASER:   [                          ]
 
COMPANY:     Aastrom Biosciences, Inc.
 
SECURITY:    COMMON STOCK
 
AMOUNT:      [             ]  SHARES
 
DATE:        [                          ]

In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company, the following:

          (a) I am aware of the Company's business affairs and financial
condition, and have acquired all such information about the Company as I deem
necessary and appropriate to enable me to reach an informed and knowledgeable
decision to acquire the Securities. I am purchasing these Securities for my own
account for investment and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes for the Securities Act of 1933, as
amended ("Securities Act").

          (b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.

          (c) I further understand that the Securities may not be sold publicly
and must be held indefinitely unless they are subsequently registered under the
Securities Act or unless an exemption from registration is available. I am able,
without impairing my financial condition, to hold the Securities for an
indefinite period of time and to suffer a complete loss of my investment. I
understand that the Company is under no obligation to register the Securities.
In addition, I understand that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel for the Company.

          (d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, including, among other things: (1)
the availability of certain public information about the Company; (2) the resale
occurring not less than two years after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and (3)
in the case of an affiliate, or of a non-affiliate who has held the securities
less than three years, the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.

          (e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Securities under Rule 144 even
if the two-year minimum holding period had been satisfied. I understand that the
Company is not currently required to file reports pursuant to the Securities
Exchange Act of 1934, as amended, and is under no obligation to make Rule 144
available.

          (f) I further understand that, in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the Securities and Exchange Commission has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.


                                      Signature of Purchaser:


                                      _________________________
                                      Name:

                                      Date:  ____________________



 

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                          1992 EMPLOYEE NON-QUALIFIED
                            STOCK OPTION AGREEMENT


     AASTROM BIOSCIENCES, INC., a Michigan corporation (the "Company"),
hereby grants to _______________________ ("Optionee"), an option to purchase a
total of ____________ shares (the "Shares") of common stock of the Company, at
the price determined as provided herein, and in all respects subject to the
terms, definitions and provisions of the Company's 1992 Incentive and Non-
Qualified Stock Option Plan (the "Plan") incorporated herein by reference.
Terms which are defined in the Plan shall have the same meanings when used
herein.

     1. Nature of the Option. This Option is a non-qualified stock option and is
not intended to qualify for any special tax benefits to the Optionee.

     2. Exercise Price. The option price shall be $_______________ for each
Share (the "Exercise Price"), which is not less than the fair market value of
each Share on the date hereof. The Option Price shall be adjusted
proportionately for increases or decreases in the number of outstanding Shares
resulting from stock splits.

     3. Exercise of Option. Subject to Section 6 hereof, this Option shall be
exercisable during its term as follows:

          (a) Right to Exercise. This Option shall be exercisable with respect
to ______________ Shares on ______________ and shall be exercisable with respect
to an additional __________________ Shares on the first day of every third month
thereafter, as long as Optionee remains an employee, director or consultant of
the Company.

          (b) Method of Exercise. This Option shall be exercisable by written
notice in the form of Exhibit A attached hereto. Such written notice shall be
signed by Optionee and shall be delivered in person, by certified mail, or by
such other means as the Company may permit to the Secretary of the Company. The
written notice shall be accompanied by payment of the aggregate Exercise Price.

     No Shares will be issued pursuant to the exercise of this Option unless
such issuance and such exercise shall comply with all relevant
 

<PAGE>
 
provisions of law and the requirements of any stock exchange upon which the
Shares may then be listed.

          (c) Number of Shares Exercisable. Each exercise of this Option in part
shall reduce, pro tanto, the total number of Shares that may thereafter be
purchased under such Option.

     4. Optionee's Representations. If the Shares which may be purchased
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), at the time this
Option is exercised, Optionee shall, concurrently with the exercise of all or
any portion of this Option, deliver to the Company his Investment Representation
Statement in the form attached hereto as Exhibit B.

     5. Method of Payment. Payment of the Exercise Price, may be in any of the
following forms, or a combination thereof, in the discretion of the Company:

          (a) cash or check in the full amount of the aggregate Exercise Price;
or

          (b) surrender to the Company of other shares of Common Stock of the
Company having a fair market value on the date of surrender equal to the
aggregate Exercise Price of the Shares as to which this Option is being
exercised. If the Company's Common Stock is then quoted on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") or
listed on a recognized securities exchange, the fair market value of the shares
shall be the representative closing price of the stock as obtained from the
Nasdaq or such recognized securities exchange on the date of the exercise of the
Option, or if there is no such quotation on the date of the exercise, on the
last trading day prior to the date of exercise. If the Company's Common Stock is
not quoted on Nasdaq or listed on a recognized securities exchange, the fair
market value of such shares shall be as determined by the Board of Directors in
its sole discretion; or

          (c) promissory note, bearing a reasonable rate of interest, requiring
at least annual payments of accrued interest, maturing in not more than four (4)
years, secured by the shares purchased, and being a full recourse obligation of
the Optionee. Such recourse promissory note shall be in a form satisfactory to
the Company, and the Company may require the Optionee to deposit any shares
securing the promissory note


                                      -2-

<PAGE>
 
with an agent designated by the Company under the terms and conditions of escrow
and security agreements approved by the Company. It shall be at the sole and
absolute discretion of the Company's Board of Directors as to whether or not the
Optionee is allowed to exercise this Option by a promissory note payment, and
the Optionee shall have no right to do so unless the Board of Directors
expressly exercises its discretion to allow the use of a promissory note. Any
such approval by the Board of Directors shall not constitute a precedent for any
subsequent exercise of this Option by the Optionee.

          (d) through "Cashless Exercise". A "Cashless Exercise" means the
assignment in a form acceptable to the Company of the proceeds of a sale or loan
with respect to some or all of the Shares of Common Stock acquired upon the
exercise of the Option pursuant to a program or procedure approved by the
Company (including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System). The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.

     6. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such Shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require the Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.

     7. Termination of Options.

          (a) Except as provided herein, this Option shall terminate at such
time as Optionee ceases to be employed by the Company or ceases to be a director
of or consultant to the Company.

          (b) Upon the death of Optionee while in the employ of the Company or
while a director of or consultant to the Company, Options held by Optionee which
are exercisable on the date of his or her death shall be exercisable by his or
her executor(s) or administrator(s) for a period of eighteen (18) months
following the date of Optionee's death.

                                      -3-

<PAGE>
 
          (c) Upon termination of Optionee's employment with or service as a
consultant to the Company (or if Optionee is a director only, upon termination
of the Optionee's term of office, or if the Optionee is both an employee and a
director, upon termination of both) for any reason other than death, disability
or "Cause," as defined in Section 7(d), Options exercisable by Optionee on the
date of termination of employment or service shall be exercisable by Optionee
(or in the case of the Optionee's death subsequent to termination of employment,
by the Optionee's executor(s) or administrator(s)) for a period of three (3)
months from the date of Optionee's termination of employment or service.

          (d) Upon the termination of Optionee's employment or service as a
consultant (or if Optionee is a director only, upon termination of Optionee's
term of office, or if Optionee is both an employee and a director, upon
termination of both) for "Cause," as defined in this Section 7(d), all Options
held by Optionee shall terminate concurrently with receipt by the Optionee of
oral or written notice that his or her employment or service has been
terminated. Termination for "Cause" shall include termination by reason of being
convicted of any felony or committing willful and gross negligence or willful
and gross misconduct in carrying out duties properly assigned to Optionee by the
Company.

          (e) Upon termination of Optionee's employment or service as a
consultant due to the "disability" of Optionee as such term is defined in
Section 22(c)(3) of the Code an Option exercisable by Optionee on the date of
termination shall be exercisable by Optionee (or Optionee's legal guardian or
representative) for a period of one (1) year from the date of Optionee's
termination of employment or service.

          (f) Notwithstanding the provisions of subsections (b), (c) and (e)
above, if a sale within the applicable time periods set forth in subsections
(b), (c) and (e) of this Section 7 of shares acquired upon the exercise of the
Option would subject the Optionee to suit under Section 16(b) of the Exchange
Act, the Option shall remain exercisable until the earliest to occur of (i) the
tenth (10th) day following the date on which a sale of such shares by the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of employment or service,
or (iii) the Option term date determined pursuant to Section 8. The Company
makes no representation as to the tax consequences of any such delayed exercise.
The Optionee should consult with the Optionee's own tax advisor as to the tax
consequences to the Optionee of any such delayed exercise.

                                      -4-

<PAGE>
 
     8. Non-Transferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner during the
lifetime of Optionee other than by will or the laws of descent and distribution,
and may be exercised during the lifetime of the Optionee only by him or her. The
terms of this Option shall be binding upon the executors, administrators, heirs
and successors of the Optionee.

     9. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
term only in accordance with the terms of the Plan and this Option.

     10. Early Disposition of Stock. Optionee hereby agrees that if he disposes
of any Shares received under this Option within one (1) year after such Shares
were transferred to him, he will notify the Company in writing within 30 days
after the date of any such disposition.

     11. Acknowledgment. The Optionee acknowledges receipt of a copy of the
Plan, which is annexed hereto as Exhibit C. The Optionee represents that he has
read the terms and provisions of the Plan and accepts this Option subject to all
of the terms and provisions thereof. The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Committee
upon any questions arising under the Plan.

     12. Entire Agreement. This Agreement, together with the exhibits attached
hereto, represents the entire agreement between the parties.

     13. Governing Law. This Agreement shall be construed in accordance with the
laws of the State of Michigan.

     14. Amendment. This Agreement may only be amended by a writing signed by
each of the parties hereto.


DATE OF GRANT: ___________________

                                           AASTROM BIOSCIENCES, INC.


                                           By: _________________________________


                                      -5-

<PAGE>
 
                                                    R. Douglas Armstrong, Ph.D.
                                              Its:  President and CEO


Agreed to this ___ day of

___________________, 19__.


__________________________
        Optionee


                                      -6-

<PAGE>
 
 
                                   EXHIBIT A
                                   ---------

                               NOTICE OF EXERCISE



                                           ----------------
                                           [Date]


AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
P.O. Box 376
Ann Arbor, MI  48106
Attn.: Corporate Secretary


Dear Madam or Sir:

          I hereby notify AASTROM Biosciences, Inc. of my intent to exercise
___________ Options granted to me pursuant to a Stock Option Agreement dated
_______________ at an exercise price of $______ per share. I have enclosed a
check for $________.



                                           ___________________________________
                                           [Signature of Optionee]



 
                                           ___________________________________
                                           [Print Name of Optionee]



<PAGE>
 
                                   EXHIBIT B

                      INVESTMENT REPRESENTATION STATEMENT
 
 
PURCHASER:   [                          ]
 
COMPANY:     Aastrom Biosciences, Inc.
 
SECURITY:    COMMON STOCK
 
AMOUNT:      [             ]  SHARES
 
DATE:        [                          ]

In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company, the following:

          (a) I am aware of the Company's business affairs and financial
condition, and have acquired all such information about the Company as I deem
necessary and appropriate to enable me to reach an informed and knowledgeable
decision to acquire the Securities. I am purchasing these Securities for my own
account for investment and not with a view to, or for the resale in connection
with, any "distribution" thereof for purposes for the Securities Act of 1933, as
amended ("Securities Act").

          (b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.

          (c) I further understand that the Securities may not be sold publicly
and must be held indefinitely unless they are subsequently registered under the
Securities Act or unless an exemption from registration is available. I am able,
without impairing my financial condition, to hold the Securities for an
indefinite period of time and to suffer a complete loss of my investment. I
understand that the Company is under no obligation to register the Securities.
In addition, I understand that the certificate evidencing the Securities will be
imprinted with a legend which prohibits the transfer of the Securities unless
they are registered or such registration is not required in the opinion of
counsel for the Company.

          (d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or
 

<PAGE>
 
from an affiliate of such issuer), in a non-public offering subject to the
satisfaction of certain conditions, including, among other things: (1) the
availability of certain public information about the Company; (2) the resale
occurring not less than two years after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and (3)
in the case of an affiliate, or of a non-affiliate who has held the securities
less than three years, the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.

          (e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that, in
such event, I would be precluded from selling the Securities under Rule 144 even
if the two-year minimum holding period had been satisfied. I understand that the
Company is not currently required to file reports pursuant to the Securities
Exchange Act of 1934, as amended, and is under no obligation to make Rule 144
available.

          (f) I further understand that, in the event all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the Securities and Exchange Commission has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.


                                      Signature of Purchaser:


                                      _________________________
                                      Name:

                                      Date:  ____________________






<PAGE>
 
                                                                    EXHIBIT 10.6


                           AASTROM BIOSCIENCES, INC.

                    1996 OUTSIDE DIRECTORS STOCK OPTION PLAN


      1.  ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
          --------------------------------------- 

          1.1  ESTABLISHMENT. The Aastrom Biosciences, Inc. 1996 Outside
Directors Stock Option Plan (the "Plan") is hereby established effective as of
the effective date of the initial registration by the Company of its Stock under
Section 12 of the Exchange Act (the "Effective Date").

          1.2  PURPOSE.  The purpose of the Plan is to advance the interests of
the Participating Company Group and its stockholders by providing an incentive
to attract and retain highly qualified persons to serve as Outside Directors of
the Company and by creating additional incentive for Outside Directors to
promote the growth and profitability of the Participating Company Group.

          1.3  TERM OF PLAN.  The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed.

      2.  DEFINITIONS AND CONSTRUCTION.
          ---------------------------- 

          2.1  DEFINITIONS.  Whenever used herein, the following terms shall
have
 their respective meanings set forth below:

               (a)  "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).

               (b)  "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.

               (c)  "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted herein, including, without
limitation, the power to amend or terminate the Plan at any time, subject to the
terms of the Plan and any applicable limitations imposed by law.

               (d)  "COMPANY" means Aastrom Biosciences, Inc., a Michigan
corporation, or any successor corporation thereto.

                                       1

<PAGE>
 
               (e)  "CONSULTANT" means any person, including an advisor, engaged
by a Participating Company to render services other than as an Employee or a
Director.

               (f)  "DIRECTOR" means a member of the Board or the board of
directors of any other Participating Company.

               (g)  "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes of the Plan .

               (h)  "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

               (i)  "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of the Stock (or the mean of
the closing bid and asked prices of the Stock if the Stock is so reported
instead) as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.

               (j)  "OPTION" means a right to purchase Stock (subject to
adjustment as provided in Section 4.2) pursuant to the terms and conditions of
the Plan.

               (k)  "OPTIONEE" means a person who has been granted one or more
Options.

               (l)  "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee.

               (m)  "OUTSIDE DIRECTOR" means a Director of the Company who is
not an Employee.

                                       2

<PAGE>
 
               (n)  "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.

               (o)  "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.

               (p)  "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.

               (q)  "RULE 16b-3" means Rule 16b-3 as promulgated under the
Exchange Act, as amended from time to time, or any successor rule or regulation.

               (r)  "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.

               (s)  "STOCK" means the common stock, no par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.

               (t)  "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.

          2.2  CONSTRUCTION.  Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.

     3.   ADMINISTRATION.
          -------------- 

          3.1  ADMINISTRATION BY THE BOARD.  The Plan shall be administered by
the Board, including any duly appointed Committee of the Board. All questions of
interpretation of the Plan or of any Option shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan or such Option. Any officer of a Participating Company
shall have the authority to act on behalf of the Company with respect to any
matter, right, obligation, determination or election which is the responsibility
of or which is

                                       3

<PAGE>
 
allocated to the Company herein, provided the officer has apparent authority
with respect to such matter, right, obligation, determination or election.

          3.2  LIMITATIONS ON AUTHORITY OF THE BOARD.  Notwithstanding any
other provision herein to the contrary, the Board shall have no authority,
discretion, or power to select the Outside Directors who will receive Options,
to set the exercise price of the Options, to determine the number of shares of
Stock to be subject to an Option or the time at which an Option shall be
granted, to establish the duration of an Option, or to alter any other terms or
conditions specified in the Plan, except in the sense of administering the Plan
subject to the provisions of the Plan.

     4.   SHARES SUBJECT TO PLAN.
          ---------------------- 

          4.1  MAXIMUM NUMBER OF SHARES ISSUABLE.  Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be one hundred fifty thousand (150,000) (on a
post-split basis following the two-for-three reverse stock split of the Stock 
approved by the Board on April 30, 1996) and shall consist of authorized but
unissued shares or reacquired shares of Stock or any combination thereof. If an
outstanding Option for any reason expires or is terminated or canceled or shares
of Stock acquired, subject to repurchase, upon the exercise of an Option are
repurchased by the Company, the shares of Stock allocable to the unexercised
portion of such Option, or such repurchased shares of Stock, shall again be
available for issuance under the Plan.

          4.2  ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan, to the "Initial Option" and "Annual Option" (as defined in
Section 6.1), and to any outstanding Options, and in the exercise price of any
outstanding Options. If a majority of the shares which are of the same class as
the shares that are subject to outstanding Options are exchanged for, converted
into, or otherwise become (whether or not pursuant to an "Ownership Change
Event" as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price of, the
outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
exercise price of any Option be decreased to an amount less than the par value,
if any, of the stock subject to the Option.

                                       4

<PAGE>
 
     5.   Eligibility and Type of Options.
          ------------------------------- 

          5.1  PERSONS ELIGIBLE FOR OPTIONS.  An Option shall be granted only to
a person who, at the time of grant, is an Outside Director.

          5.2  OPTIONS AUTHORIZED.  Options shall be nonstatutory stock options;
that is, options which are not treated as incentive stock options within the
meaning of Section 422(b) of the Code.

     6.  Terms and Conditions of Options.  Options shall be evidenced by Option
         -------------------------------                                       
Agreements specifying the number of shares of Stock covered thereby, in such
form as the Board shall from time to time establish.  Option Agreements may
incorporate all or any of the terms of the Plan by reference and shall comply
with and be subject to the following terms and conditions:

          6.1   AUTOMATIC GRANT OF OPTIONS.  Subject to execution by an Outside
Director of the appropriate Option Agreement, Options shall be granted
automatically and without further action of the Board, as follows:

               (a)  INITIAL OPTION.  Each person who (i) is an Outside Director
on the Effective Date, or (ii) first becomes an Outside Director after the
Effective Date shall be granted an Option to purchase five thousand (5,000)
shares of Stock on the Effective Date or the date he or she first becomes an
Outside Director, respectively (an "Initial Option").

               (b)  ANNUAL OPTION.  Each Outside Director (including any
Director of the Company who previously did not qualify as an Outside Director
but who subsequently becomes an Outside Director) shall be granted, on the date
immediately following the date of each annual meeting of the stockholders of the
Company (an "Annual Meeting") following which such person remains an Outside
Director, an Option to purchase five thousand (5,000) shares of Stock (an
"Annual Option"). Notwithstanding the foregoing, an Outside Director who has not
served continuously as a Director of the Company for at least six (6) months as
of the date immediately following such Annual Meeting shall not receive an
Annual Option on such date.

               (c)  RIGHT TO DECLINE OPTION.  Notwithstanding the foregoing, any
person may elect not to receive an Option by delivering written notice of such
election to the Board no later than the day prior to the date such Option would
otherwise be granted.  A person so declining an Option shall receive no payment
or other consideration in lieu of such declined Option.  A person who has
declined an Option may revoke such election by delivering written notice of such
revocation to the Board no later than the day prior to the date such Option
would be granted pursuant to Section 6.1(a) or (b), as the case may be.

                                       5

<PAGE>
 
          6.2  DISCRETION TO VARY OPTION SIZE.  Notwithstanding any provision of
the Plan to the contrary, the Board may, in its sole discretion, increase or
decrease the number of shares of Stock that would otherwise be subject to one or
more Initial Options or Annual Options to be granted pursuant to Section 6.1 if,
at the time of such exercise of discretion, the exercise of such discretion
would not otherwise preclude any transaction in an equity security of the
Company by an officer or Director of a Participating Company from being exempt
from Section 16(b) of the Exchange Act pursuant to Rule 16b-3.

          6.3  EXERCISE PRICE.  The exercise price per share of Stock subject
to an Option shall be the Fair Market Value of a share of Stock on the date the
Option is granted.

          6.4  EXERCISE PERIOD.  Each Option shall terminate and cease to be
exercisable on the date ten (10) years after the date of grant of the Option
unless earlier terminated pursuant to the terms of the Plan or the Option
Agreement.

          6.5  RIGHT TO EXERCISE OPTIONS.

               Except as otherwise provided in the Plan or in the Option 
Agreement, an Option shall (a) first become exercisable on the date which is one
(1) month after the date on which the Option was granted (the "Initial Vesting
Date"); and (b) be exercisable on and after the Initial Vesting Date and prior
to the termination thereof in an amount equal to the number of shares of Stock
initially subject to the Option multiplied by the Vested Ratio as set forth
below, less the number of shares previously acquired upon exercise thereof. The
Vested Ratio described in the preceding sentence shall be determined as follows:


<TABLE>
<CAPTION>
                                                         Vested Ratio
                                                         ------------
               <S>                                       <C>
 
               Prior to Initial Option Vesting Date                 0
 
               On Initial Vesting Date, provided                 1/12
               the Optionee's Service is continuous 
               from the date of grant of the Option 
               until the Initial Vesting Date
 
               Plus
               ----
 
               For each full month of                            1/12
               of the Optionee's continuous
</TABLE>


                                       6

<PAGE>
 
               Service from the Initial 
               Vesting Date until the Vested
               Ratio equals 1/1, an additional


          6.6  PAYMENT OF EXERCISE PRICE.

               (a)  FORMS OF CONSIDERATION AUTHORIZED.  Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of shares of Stock owned by the
Optionee having a Fair Market Value not less than the exercise price, (iii) by
the assignment of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), or (iv) by any combination thereof.

                                       7

<PAGE>
 
               (b)  TENDER OF STOCK.  Notwithstanding the foregoing, an Option
may not be exercised by tender to the Company of shares of Stock to the extent
such tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.
Unless otherwise provided by the Board, an Option may not be exercised by tender
to the Company of shares of Stock unless such shares either have been owned by
the Optionee for more than six (6) months or were not acquired, directly or
indirectly, from the Company.

               (c)  CASHLESS EXERCISE.  The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.

          6.7  TAX WITHHOLDING.  The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value equal to all or any part of the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Participating Company Group with respect to such Option or the shares acquired
upon exercise thereof.  Alternatively or in addition, in its sole discretion,
the Company shall have the right to require the Optionee to make adequate
provision for any such tax withholding obligations of the Participating Company
Group arising in connection with the Option or the shares acquired upon exercise
thereof.  The Company shall have no obligation to deliver shares of Stock until
the Participating Company Group's tax withholding obligations have been
satisfied.

     7.   STANDARD FORM OF OPTION AGREEMENT.
          --------------------------------- 

          7.1  INITIAL OPTION.  Unless otherwise provided for by the Board at
the time an Initial Option is granted, each Initial Option shall comply with and
be subject to the terms and conditions set forth in the form of Nonstatutory
Stock Option Agreement for Outside Directors (Initial Option) adopted by the
Board concurrently with its adoption of the Plan and as amended from time to
time.

          7.2  ANNUAL OPTION.  Unless otherwise provided for by the Board at the
time an Annual Option is granted, each Annual Option shall comply with and be
subject to the terms and conditions set forth in the form of Nonstatutory Stock
Option Agreement for Outside Directors (Annual Option) adopted by the Board
concurrently with its adoption of the Plan and as amended from time to time.

          7.3  AUTHORITY TO VARY TERMS.  Subject to the limitations set forth in
Section 3.2, the Board shall have the authority from time to time to vary the
terms of any of the standard forms of Option Agreement described in this Section
7 either in connection with the grant or amendment of an individual Option or in
connection with the authorization of a new standard form or forms; provided,

                                       8

<PAGE>
 
however, that the terms and conditions of any such new, revised or amended
standard form or forms of Option Agreement are not inconsistent with the terms
of the Plan.  Such authority shall include, but not by way of limitation, the
authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of Stock acquired by the
Optionee upon the exercise of an Option in the event such Optionee's Service is
terminated for any reason.  

     8.   TRANSFER OF CONTROL.
          ------------------- 

          8.1  DEFINITIONS.

          (a)  AN "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company:

               (i)  the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;

               (ii) a merger or consolidation in which the Company is a
party;

               (iii)  the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or

               (iv)  a liquidation or dissolution of the Company.

          (b)  A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be.  For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations.  The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company

                                       9

<PAGE>
 
or multiple Ownership Change Events are related, and its determination shall be
final, binding and conclusive.

          8.2  EFFECT OF TRANSFER OF CONTROL ON OPTIONS.  In the event of a
Transfer of Control, any unexercisable or unvested portion of the outstanding
Options shall be immediately exercisable and vested in full as of the date ten
(10) days prior to the date of the Transfer of Control.  The exercise or vesting
of any Option that was permissible solely by reason of this Section 8.2 shall be
conditioned upon the consummation of the Transfer of Control.  In addition, the
surviving, continuing, successor, or purchasing corporation or parent
corporation thereof, as the case may be (the "ACQUIRING CORPORATION"), may
either assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock.  Any Options which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Transfer of Control and any consideration received pursuant to the
Transfer of Control with respect to such shares shall continue to be subject to
all applicable provisions of the Option Agreement evidencing such Option except
as otherwise provided in such Option Agreement.  Furthermore, notwithstanding
the foregoing, if the corporation the stock of which is subject to the
outstanding Options immediately prior to an Ownership Change Event described in
Section 8.1(a)(i) constituting a Transfer of Control is the surviving or
continuing corporation and immediately after such Ownership Change Event less
than fifty percent (50%) of the total combined voting power of its voting stock
is held by another corporation or by other corporations that are members of an
affiliated group within the meaning of Section 1504(a) of the Code without
regard to the provisions of Section 1504(b) of the Code, the outstanding Options
shall not terminate.

     9.   NONTRANSFERABILITY OF OPTIONS.  During the lifetime of the Optionee,
          -----------------------------                                       
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative.  No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.

     10.  INDEMNIFICATION.  In addition to such other rights of indemnification
          ---------------                                                      
as they may have as members of the Board or officers or employees of the
Participating Company Group, members of the Board and any officers or employees
of the Participating Company Group to whom authority to act for the Board is
delegated shall be indemnified by the Company against all reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan, or any right
granted hereunder, and against all amounts paid by them in settlement thereof
(provided such

                                       10

<PAGE>
 
settlement is approved by independent legal counsel selected by the Company) or
paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such person is liable for gross negligence,
bad faith or intentional misconduct in duties; provided, however, that within
sixty (60) days after the institution of such action, suit or proceeding, such
person shall offer to the Company, in writing, the opportunity at its own
expense to handle and defend the same.

     11.  TERMINATION OR AMENDMENT OF PLAN.  The Board may terminate or amend
          --------------------------------                                   
the Plan at any time.  However, subject to changes in the law or other legal
requirements that would permit otherwise, without the approval of the Company's
stockholders, there shall be (a) no increase in the total number of shares of
Stock that may be issued under the Plan (except by operation of the provisions
of Section 4.2), and (b) no other amendment of the Plan that would require 
approval of the Company's stockholders under any applicable law, regulation or
rule. In any event, no termination or amendment of the Plan may adversely affect
any then outstanding Option, or any unexercised portion thereof, without the
consent of the Optionee, unless such termination or amendment is necessary to
comply with any applicable law or government regulation.

     IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing AASTROM Biosciences, Inc. 1996 Outside Directors Stock Option Plan
was duly adopted by the Board on April 30, 1996.




                                    /s/ Todd E. Simpson
                                    ___________________________________
                                    Todd E. Simpson, Secretary

                                       11

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.

                      NONSTATUTORY STOCK OPTION AGREEMENT

                             FOR OUTSIDE DIRECTORS

                                (INITIAL OPTION)


     THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (INITIAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of
              , 199 , by and between Aastrom Biosciences, Inc. and
- --------------     -

- -----------------------------------------------------------------------------
(the "OPTIONEE").

     The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").

     1.   DEFINITIONS AND CONSTRUCTION.
          ---------------------------- 

          1.1    DEFINITIONS.  Whenever used herein, the
following terms shall have their respective meanings set forth below:

          (a) "DATE OF OPTION GRANT" means            , 199 .
                                           -----------     -
           
          (b) "NUMBER OF OPTION SHARES" means five thousand (5,000)
shares of Stock, as adjusted from time to time pursuant to Section 9.

          (c) "EXERCISE PRICE" means $           per
                                      -----------
share of Stock, as adjusted from time to time pursuant to Section 9.

          (d) "INITIAL EXERCISE DATE" means the Initial
Vesting Date.

          (e) "INITIAL VESTING DATE" means the date
occurring one (1) month after the Date of Option Grant.

                                       12

<PAGE>
 
          (f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:

<TABLE>
<CAPTION>
                                      Vested Ratio
                                      ------------
<S>                                   <C>
Prior to Initial Vesting Date                    0
 
On Initial Vesting Date,                      1/12
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Vesting Date
 
PLUS
- ----
 
For each full month of the                    1/12
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>


          (g) "OPTION EXPIRATION DATE" means the date ten (10) years
after the Date of Option Grant.

          (h) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" shall also mean such Committee(s).

          (i) "CODE" means the Internal Revenue Code of 1986,
as amended, and any applicable regulations promulgated thereunder.

          (j) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted in the Plan,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
          (k) "COMPANY" means Biosciences, Inc., a Michigan corporation, or any
successor corporation thereto.

          (l) "CONSULTANT" means Aastrom any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.

                                      13


<PAGE>
 
          (m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.

          (n) "DISABILITY" means the permanent and total disability of
the Optionee within the meaning of Section 22(e)(3) of the Code.

          (o) "EMPLOYEE" means any person treated as an employee
(including an officer or a Director who is also treated as an employee) in the
records of a Participating Company; provided, however, that neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
employment for purposes  of the Plan.

          (p) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

          (q) "FAIR MARKET VALUE" means, as of any date, if there is
then a public market for the Stock, the closing price of the Stock (or the mean
of the closing bid and asked prices of the Stock if the Stock is so reported
instead) as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date. If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
 
          (r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.

          (s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.

          (t) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating  Companies.

          (u) "PLAN" means the Aastrom Biosciences, Inc. 1996 Outside Directors
Stock Option Plan.

                                       14

<PAGE>
 
          (v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.

          (w) "SERVICE" means the Optionee's service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. The Optionee's Service shall be deemed
to have terminated either upon an actual termination of Service or upon the
corporation for which the Optionee performs Service ceasing to be a
Participating Company.

          (x) "STOCK" means the common stock, no par value of the
Company, as adjusted from time to time in accordance with Section 9.

          (y) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
 Code.

          1.2  CONSTRUCTION.  Captions and titles contained herein are
for convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement. Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.

     2.   TAX STATUS OF THE OPTION.  This Option is intended to be a
          ------------------------                                  
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.

     3.   ADMINISTRATION.  All questions of interpretation concerning this
          --------------                                                  
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board.  All determinations by the Board shall be final and
binding upon all persons having an interest in the Option.  Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.

     4.   EXERCISE OF THE OPTION.
          ---------------------- 

          4.1  RIGHT TO EXERCISE. Except as otherwise provided herein, the
           Option shall be exercisable on and after the Initial Exercise Date
           and prior to the termination of the Option (as provided in Section 6)
           in an amount not to exceed the Number of Option

                                       15

<PAGE>
 
Shares multiplied by the Vested Ratio less the number of shares previously
acquired upon exercise of the Option.  In no event shall the Option be
exercisable for more shares than the Number of Option Shares.

          4.2  METHOD OF EXERCISE.  Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement.  The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased.  The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.

          4.3  PAYMENT OF EXERCISE PRICE.

          (a) FORMS OF CONSIDERATION AUTHORIZED.  Except as otherwise provided
below, payment of the aggregate Exercise Price for the number of shares of Stock
for which the Option is being exercised shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by
the Optionee having a Fair Market Value not less than the aggregate Exercise
Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or
(iv) by any combination of the foregoing.

          (b) TENDER OF STOCK.  Notwithstanding the foregoing, the Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.  The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.

          (c) CASHLESS EXERCISE.  A "Cashless Exercise" means the assignment in
a form acceptable to the Company of the proceeds of a sale or loan with respect
to some or all of the shares of Stock acquired upon the exercise of

                                       16

<PAGE>
 
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System).  The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
 
          4.4  TAX WITHHOLDING.  At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.

          4.5  CERTIFICATE REGISTRATION.  Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, the heirs of the Optionee.

          4.6  RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.  The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities.  The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed.  In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act.  THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED.  The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained.  As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications

                                       17

<PAGE>
 
that may be necessary or appropriate, to evidence compliance with any applicable
law or regulation and to make any representation or warranty with respect
thereto as may be requested by the Company.

          4.7  FRACTIONAL SHARES.  The Company shall not be required to issue
fractional shares upon the exercise of the Option.

     5.   NONTRANSFERABILITY OF THE OPTION.  The Option may be exercised during
          --------------------------------                                     
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution.  Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.

     6.   TERMINATION OF THE OPTION.  The Option shall terminate and may no
          -------------------------                                        
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.

     7.   EFFECT OF TERMINATION OF SERVICE.
          -------------------------------- 

          7.1  OPTION EXERCISABILITY.

          (a) DISABILITY.  If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.

          (b) DEATH.  If the Optionee's Service with the Participating Company
Group is terminated because of the death of the Optionee, the Option, to the
extent unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee (or the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of twelve
(12) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date.  The Optionee's Service
shall be deemed to have terminated on account of death if the Optionee dies
within three (3) months after the Optionee's termination of Service.

                                       18

<PAGE>
 
          (c) OTHER TERMINATION OF SERVICE.  If the Optionee's Service with the
Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.

          7.2  EXTENSION IF EXERCISE PREVENTED BY LAW.  Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.

          7.3  EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).  Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.

     8.   OWNERSHIP CHANGE AND TRANSFER OF CONTROL.
          ---------------------------------------- 

          8.1  DEFINITIONS.

               (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the followin g occurs with respect to the Company:

                   (i) the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;

                   (ii) a merger or consolidation in which the Company is a
party;

                   (iii)  the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or

                   (iv) a liquidation or dissolution of the Company.

               (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event
or a series of related Ownership Change Events (collectively, the "Transaction")
wherein the stockholders of the Company immediately before the Transaction do
not retain imme diately after the Transaction, in substantially the

                                       19

<PAGE>
 
same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "Transferee
Corporation(s)"), as the case may be.  For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations.  The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.

          8.2  EFFECT OF TRANSFER OF CONTROL ON OPTION.  In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Transfer of Control.  Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Transfer of Control.  In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock.  The Option shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control.  Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein.  Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate.

     9.   ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.  In the event of any
          --------------------------------------------                      
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option.  If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,

                                       20

<PAGE>
 
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares.  In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion.  Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.

     10.  RIGHTS AS A STOCKHOLDER.  The Optionee shall have no rights as a
          ------------------------                                        
stockholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company).  No adjustment shall be
made for dividends, distributions or other rights for which the record date is
prior to the date such certificate is issued, except as provided in Section 9.
 
     11.  LEGENDS.  The Company may at any time place legends referencing any
          -------                                                            
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement.  The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.

     12.  BINDING EFFECT.  Subject to the restrictions on transfer set forth
          --------------                                                    
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.

     13.  TERMINATION OR AMENDMENT.  The Board may terminate or amend the Plan
          ------------------------                                            
or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law, regulation or rule.  No
amendment or addition to this Option Agreement shall be effective unless in
writing.

     14.  INTEGRATED AGREEMENT.  This Option Agreement constitutes the entire
          --------------------                                               
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other

                                       21

<PAGE>
 
than those as set forth or provided for herein.  To the extent contemplated
herein, the provisions of this Option Agreement shall survive any exercise of
the Option and shall remain in full force and effect.

     15.  APPLICABLE LAW.  This Option Agreement shall be governed by the laws
          --------------                                                      
of the State of Michigan as such laws are applied to agreements between Michigan
residents entered into and to be performed entirely within the State of
Michigan.


                                    AASTROM BIOSCIENCES, INC.



                                    By:________________________________

                                    Title:_______________________________


     The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof.  The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.


                                    OPTIONEE



Date:_______________________________  ____________________________________

                                       22

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.

                      NONSTATUTORY STOCK OPTION AGREEMENT

                             FOR OUTSIDE DIRECTORS

                                (ANNUAL OPTION)


     THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (ANNUAL
OPTION) (the "OPTION AGREEMENT") is made and entered into as of
         ,199   by and between Aastrom Biosciences, Inc. and
- --------     -                                       ------------------------
(the "OPTIONEE").

     The Company has granted to the Optionee an option to purchase certain
shares of Stock, upon the terms and conditions set forth in this Option
Agreement (the "OPTION").

     1.   DEFINITIONS AND CONSTRUCTION.
          ---------------------------- 

          1.1    DEFINITIONS.  Whenever used herein, the
following terms shall have their respective meanings set forth below:

                 (a) "DATE OF OPTION GRANT" means           ,199 .
                                                 -----------    -

                 (b) "NUMBER OF OPTION SHARES" means five thousand (5,000)
shares of Stock, as adjusted from time to time pursuant to Section 9.

                 (c) "EXERCISE PRICE" means $ ____________ per
share of Stock, as adjusted from time to time pursuant to Section 9.

                 (d) "INITIAL EXERCISE DATE" means the Initial
Vesting Date.

                 (e) "INITIAL VESTING DATE" means the date
occurring one (1) month after the Date of Option Grant.

                                       23
 

<PAGE>
 
                 (f) "VESTED RATIO" means, on any relevant date, the ratio
determined as follows:

<TABLE>
<CAPTION>

                                      Vested Ratio
                                      ------------
<S>                                   <C>
Prior to Initial Vesting Date                    0
 
On Initial Vesting Date,                      1/12
provided the Optionee's Service
is continuous from the Date of
Option Grant until the Initial
Vesting Date
 
Plus
- ----
 
For each full month of the                    1/12
Optionee's continuous Service
from the Initial Vesting Date
until the Vested Ratio equals
1/1, an additional
</TABLE>

          (g) "OPTION EXPIRATION DATE" means the date ten (10) years after
the Date of Option Grant.

          (h) "BOARD" means the Board of Directors of the Company.  If one or
more Committees have been appointed by the Board to administer the Plan, "Board"
shall also mean such Committee(s).

          (i) "CODE" means the Internal Revenue Code of 1986, as amended, and
any applicable regulations promulgated thereunder.

          (j) "COMMITTEE" means a committee of the Board duly appointed to
administer the Plan and having such powers as shall be specified by the Board.
Unless the powers of the Committee have been specifically limited, the Committee
shall have all of the powers of the Board granted in the Plan, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.

          (k) "COMPANY" means Aastrom Biosciences, Inc., a Michigan corporation,
or any successor corporation thereto.

          (l) "CONSULTANT" means Aastrom any person, including an advisor,
engaged by a Participating Company to render services other than as an Employee
or a Director.

                                       24
 

<PAGE>
 
          (m) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.

          (n) "DISABILITY" means the permanent and total disability of the
Optionee within the meaning of Section 22(e)(3) of the Code.
 
          (o) "EMPLOYEE" means any person treated as an employee (including an
officer or a Director who is also treated as an employee) in the records of a
Participating Company; provided, however, that neither service as a Director nor
payment of a director's fee shall be sufficient to constitute employment for
purposes of the Plan.

          (p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

          (q) "FAIR MARKET VALUE" means, as of any date, if there is then a
public market for the Stock, the closing price of the Stock (or the mean of the
closing bid and asked prices of the Stock if the Stock is so reported instead)
as reported on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") System, the NASDAQ National Market System or such other
national or regional securities exchange or market system constituting the
primary market for the Stock.  If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date.  If there is then no public market for
the Stock, the Fair Market Value on any relevant date shall be as determined by
the Board without regard to any restriction other than a restriction which, by
its terms, will never lapse.
 
          (r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.

          (s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.

          (t) "PARTICIPATING COMPANY GROUP" means, at any point in time, all
corporations collectively which are then Participating Companies.

          (u) "PLAN" means the Aastrom Biosciences, Inc. 1996 Outside Directors
Stock Option Plan.
         
                                      25

<PAGE>
 
          (v) "SECURITIES ACT" means the Securities Act of 1933, as
amended.

          (w) "SERVICE" means the Optionee's service with the Participating
Company Group, whether in the capacity of an Employee, a Director or a
Consultant.  The Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service.  The Optionee's Service shall be
deemed to have terminated either upon an actual termination of Service or upon
the corporation for which the Optionee performs Service ceasing to be a
Participating Company.

          (x) "STOCK" means the common stock, no par value, of the Company, as
adjusted from time to time in accordance with Section 9.

          (y) "SUBSIDIARY CORPORATION" means any present or future "subsidiary
corporation" of the Company, as defined in Section 424(f) of the Code.

          1.2  CONSTRUCTION.  Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of this Option Agreement.  Except when otherwise indicated by the
context, the singular shall include the plural, the plural shall include the
singular, and the term "or" shall include the conjunctive as well as the
disjunctive.

     2.   TAX STATUS OF THE OPTION.  This Option is intended to be a
          ------------------------                                  
nonstatutory stock option and shall not be treated as an incentive stock option
within the meaning of Section 422(b) of the Code.

     3.   ADMINISTRATION.  All questions of interpretation concerning this
          --------------                                                  
Option Agreement shall be determined by the Board, including any duly appointed
Committee of the Board.  All determinations by the Board shall be final and
binding upon all persons having an interest in the Option.  Any officer of a
Participating Company shall have the authority to act on behalf of the Company
with respect to any matter, right, obligation, or election which is the
responsibility of or which is allocated to the Company herein, provided the
officer has apparent authority with respect to such matter, right, obligation,
or election.

     4.   EXERCISE OF THE OPTION.
          ---------------------- 

          4.1  RIGHT TO EXERCISE. Except as otherwise provided herein, the
Option shall be exercisable on and after the Initial Exercise Date and prior to
the termination of the Option (as provided in Section 6) in an amount not to
exceed the Number of Option

                                       26

<PAGE>
 
Shares multiplied by the Vested Ratio less the number of shares previously
acquired upon exercise of the Option.  In no event shall the Option be
exercisable for more shares than the Number of Option Shares.

          4.2  METHOD OF EXERCISE.  Exercise of the Option shall be by written
notice to the Company which must state the election to exercise the Option, the
number of whole shares of Stock for which the Option is being exercised and such
other representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement.  The written notice must be signed by the Optionee and must be
delivered in person, by certified or registered mail, return receipt requested,
by confirmed facsimile transmission, or by such other means as the Company may
permit, to the Chief Financial Officer of the Company, or other authorized
representative of the Participating Company Group, prior to the termination of
the Option as set forth in Section 6, accompanied by full payment of the
aggregate Exercise Price for the number of shares of Stock being purchased.  The
Option shall be deemed to be exercised upon receipt by the Company of such
written notice and the aggregate Exercise Price.

          4.3  PAYMENT OF EXERCISE PRICE.

          (a) FORMS OF CONSIDERATION AUTHORIZED.  Except as otherwise provided
below, payment of the aggregate Exercise Price for the number of shares of Stock
for which the Option is being exercised shall be made (i) in cash, by check, or
cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by
the Optionee having a Fair Market Value not less than the aggregate Exercise
Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or
(iv) by any combination of the foregoing.

          (b) TENDER OF STOCK.  Notwithstanding the foregoing, the Option may
not be exercised by tender to the Company of shares of Stock to the extent such
tender of Stock would constitute a violation of the provisions of any law,
regulation or agreement restricting the redemption of the Company's stock.  The
Option may not be exercised by tender to the Company of shares of Stock unless
such shares either have been owned by the Optionee for more than six (6) months
or were not acquired, directly or indirectly, from the Company.

          (c) CASHLESS EXERCISE.  A "CASHLESS EXERCISE" means the assignment in
a form acceptable to the Company of the proceeds of a sale or loan with respect
to some or all of the shares of Stock acquired upon the exercise of

                                       27

<PAGE>
 
the Option pursuant to a program or procedure approved by the Company
(including, without limitation, through an exercise complying with the
provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System).  The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to decline to
approve or terminate any such program or procedure.
 
          4.4  TAX WITHHOLDING.  At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
agrees to make adequate provision for any sums required to satisfy the federal,
state, local and foreign tax withholding obligations of the Participating
Company Group, if any, which arise in connection with the Option, including,
without limitation, obligations arising upon (i) the exercise, in whole or in
part, of the Option, (ii) the transfer, in whole or in part, of any shares
acquired upon exercise of the Option, or (iii) the lapsing of any restriction
with respect to any shares acquired upon exercise of the Option.

          4.5  CERTIFICATE REGISTRATION.  Except in the event the Exercise Price
is paid by means of a Cashless Exercise, the certificate for the shares as to
which the Option is exercised shall be registered in the name of the Optionee,
or, if applicable, the heirs of the Optionee.

          4.6  RESTRICTIONS ON GRANT OF THE OPTION AND ISSUANCE OF SHARES.  The
grant of the Option and the issuance of shares of Stock upon exercise of the
Option shall be subject to compliance with all applicable requirements of
federal, state or foreign law with respect to such securities.  The Option may
not be exercised if the issuance of shares of Stock upon exercise would
constitute a violation of any applicable federal, state or foreign securities
laws or other law or regulations or the requirements of any stock exchange or
market system upon which the Stock may then be listed.  In addition, the Option
may not be exercised unless (i) a registration statement under the Securities
Act shall at the time of exercise of the Option be in effect with respect to the
shares issuable upon exercise of the Option or (ii) in the opinion of legal
counsel to the Company, the shares issuable upon exercise of the Option may be
issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act.  THE OPTIONEE IS CAUTIONED THAT
THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED.
ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED
EVEN THOUGH THE OPTION IS VESTED.  The inability of the Company to obtain from
any regulatory body having jurisdiction the authority, if any, deemed by the
Company's legal counsel to be necessary to the lawful issuance and sale of any
shares subject to the Option shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained.  As a condition to the exercise of the
Option, the Company may require the Optionee to satisfy any qualifications

                                       28

<PAGE>
 
that may be necessary or appropriate, to evidence compliance with any applicable
law or regulation and to make any representation or warranty with respect
thereto as may be requested by the Company.

          4.7  FRACTIONAL SHARES.  The Company shall not be required to issue
fractional shares upon the exercise of the Option.

     5.   NONTRANSFERABILITY OF THE OPTION.  The Option may be exercised during
          --------------------------------                                     
the lifetime of the Optionee only by the Optionee or the Optionee's guardian or
legal representative and may not be assigned or transferred in any manner except
by will or by the laws of descent and distribution.  Following the death of the
Optionee, the Option, to the extent provided in Section 7, may be exercised by
the Optionee's legal representative or by any person empowered to do so under
the deceased Optionee's will or under the then applicable laws of descent and
distribution.

     6.   TERMINATION OF THE OPTION.  The Option shall terminate and may no
          -------------------------                                        
longer be exercised on the first to occur of (a) the Option Expiration Date, (b)
the last date for exercising the Option following termination of the Optionee's
Service as described in Section 7, or (c) a Transfer of Control to the extent
provided in Section 8.

     7.   EFFECT OF TERMINATION OF SERVICE.
          -------------------------------- 

          7.1  OPTION EXERCISABILITY.

          (a) DISABILITY.  If the Optionee's Service with the Participating
Company Group is terminated because of the Disability of the Optionee, the
Option, to the extent unexercised and exercisable on the date on which the
Optionee's Service terminated, may be exercised by the Optionee (or the
Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months after the date on which the Optionee's Service terminated,
but in any event no later than the Option Expiration Date.

          (b) DEATH.  If the Optionee's Service with the Participating Company
Group is terminated because of the death of the Optionee, the Option, to the
extent unexercised and exercisable on the date on which the Optionee's Service
terminated, may be exercised by the Optionee (or the Optionee's legal
representative or other person who acquired the right to exercise the Option by
reason of the Optionee's death) at any time prior to the expiration of twelve
(12) months after the date on which the Optionee's Service terminated, but in
any event no later than the Option Expiration Date.  The Optionee's Service
shall be deemed to have terminated on account of death if the Optionee dies
within three (3) months after the Optionee's termination of Service.

                                       29

<PAGE>
 
          (c) OTHER TERMINATION OF SERVICE.  If the Optionee's Service with the
Participating Company Group terminates for any reason, except Disability or
death, the Option, to the extent unexercised and exercisable by the Optionee on
the date on which the Optionee's Service terminated, may be exercised by the
Optionee within three (3) months after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date.

          7.2  EXTENSION IF EXERCISE PREVENTED BY LAW.  Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option
shall remain exercisable until three (3) months after the date the Optionee is
notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.

          7.3  EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).  Notwithstanding
the foregoing, if a sale, within the applicable time periods set forth in
Section 7.1, of shares acquired upon the exercise of the Option would subject
the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall
remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.

     8.   OWNERSHIP CHANGE AND TRANSFER OF CONTROL.
          ---------------------------------------- 

          8.1  DEFINITIONS.

          (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred if
any of the following occurs with respect to the Company:

              (i)    the direct or indirect sale or exchange in a single or
series of related transactions by the stockholders of the Company of more than
fifty percent (50%) of the voting stock of the Company;

              (ii)   a merger or consolidation in which the Company is a party;

              (iii)  the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or

              (iv) a liquidation or dissolution of the Company.

          (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change Event or a
series of related Ownership Change Events (collectively, the "TRANSACTION")
wherein the stockholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the

                                       30

<PAGE>
 
same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be.  For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations.  The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.

          8.2  EFFECT OF TRANSFER OF CONTROL ON OPTION.  In the event of a
Transfer of Control, any unexercised portion of the Option shall be immediately
exercisable and vested in full as of the date ten (10) days prior to the date of
the Transfer of Control.  Any exercise of the Option that was permissible solely
by reason of this Section 8.2 shall be conditioned upon the consummation of the
Transfer of Control.  In addition, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may either assume the Company's rights and obligations
under the Option or substitute for the Option a substantially equivalent option
for the Acquiring Corporation's stock.  The Option shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control to the extent
that the Option is neither assumed or substituted for by the Acquiring
Corporation in connection with the Transfer of Control nor exercised as of the
date of the Transfer of Control.  Notwithstanding the foregoing, shares acquired
upon exercise of the Option prior to the Transfer of Control and any
consideration received pursuant to the Transfer of Control with respect to such
shares shall continue to be subject to all applicable provisions of this Option
Agreement except as otherwise provided herein.  Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the Option
immediately prior to an Ownership Change Event described in Section 8.1(a)(i)
constituting a Transfer of Control is the surviving or continuing corporation
and immediately after such Ownership Change Event less than fifty percent (50%)
of the total combined voting power of its voting stock is held by another
corporation or by other corporations that are members of an affiliated group
within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the Option shall not terminate.

     9.   ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.  In the event of any
          --------------------------------------------                      
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification, or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number, Exercise Price and class of
shares of stock subject to the Option.  If a majority of the shares which are of
the same class as the shares that are subject to the Option are exchanged for,

                                       31

<PAGE>
 
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the Option to provide that the Option is exercisable for New
Shares.  In the event of any such amendment, the Number of Option Shares and the
Exercise Price shall be adjusted in a fair and equitable manner, as determined
by the Board, in its sole discretion.  Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 9 shall
be rounded down to the nearest whole number, and in no event may the Exercise
Price be decreased to an amount less than the par value, if any, of the stock
subject to the Option.

     10.  RIGHTS AS A STOCKHOLDER.  The Optionee shall have no rights as a
          ------------------------                                        
stockholder with respect to any shares covered by the Option until the date of
the issuance of a certificate for the shares for which the Option has been
exercised (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company).  No adjustment shall be
made for dividends, distributions or other rights for which the record date is
prior to the date such certificate is issued, except as provided in Section 9.
 
     11.  LEGENDS.  The Company may at any time place legends referencing any
          -------                                                            
applicable federal, state or foreign securities law restrictions on all
certificates representing shares of stock subject to the provisions of this
Option Agreement.  The Optionee shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to the Option in the possession of the Optionee in order to carry out
the provisions of this Section.

     12.  BINDING EFFECT.  Subject to the restrictions on transfer set forth
          --------------                                                    
herein, this Option Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.

     13.  TERMINATION OR AMENDMENT.  The Board may terminate or amend the Plan
          ------------------------                                            
or the Option at any time; provided, however, that no such termination or
amendment may adversely affect the Option or any unexercised portion hereof
without the consent of the Optionee unless such termination or amendment is
necessary to comply with any applicable law or government regulation.  No
amendment or addition to this Option Agreement shall be effective unless in
writing.

     14.  INTEGRATED AGREEMENT.  This Option Agreement constitutes the entire
          --------------------                                               
understanding and agreement of the Optionee and the Participating Company Group
with respect to the subject matter contained herein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Participating Company Group with respect to such subject
matter other

                                       32

<PAGE>
 
than those as set forth or provided for herein.  To the extent contemplated
herein, the provisions of this Option Agreement shall survive any exercise of
the Option and shall remain in full force and effect.

     15.  APPLICABLE LAW.  This Option Agreement shall be governed by the laws
          --------------                                                      
of the State of Michigan as such laws are applied to agreements between Michigan
residents entered into and to be performed entirely within the State of
Michigan.


                                    AASTROM BIOSCIENCES, INC.



                                    By:________________________________

                                    Title:_______________________________


     The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof.  The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.


                                    OPTIONEE



Date:_______________________________  ____________________________________

                                       33

<PAGE>
 
than those as set forth or provided for herein.  To the extent contemplated
herein, the provisions of this Option Agreement shall survive any exercise of
the Option and shall remain in full force and effect.

     15.  APPLICABLE LAW.  This Option Agreement shall be governed by the laws
          --------------                                                      
of the State of Michigan as such laws are applied to agreements between Michigan
residents entered into and to be performed entirely within the State of
Michigan.


                                    AASTROM BIOSCIENCES, INC.



                                    By:________________________________

                                    Title:_______________________________


     The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and hereby accepts the Option subject to all
of the terms and provisions thereof.  The Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board upon
any questions arising under this Option Agreement.


                                    OPTIONEE



Date:_______________________________  ____________________________________

                                       34



<PAGE>
 
                                                                    EXHIBIT 10.7


                           AASTROM BIOSCIENCES, INC.

                       1996 EMPLOYEE STOCK PURCHASE PLAN


     1.   ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
          --------------------------------------- 

          1.1    ESTABLISHMENT. The Biosciences, Inc. 1996 Employee Stock
Purchase Plan (the "Plan") is hereby established effective as of the effective
date of the initial registration by the Company of its Stock under Section 12 of
the Exchange Act (the "Effective Date").

          1.2    PURPOSE.  The purpose of the Plan to provide Eligible Employees
of the Participating Company Group with an opportunity to acquire a proprietary
interest in the Company through the purchase of Stock. The Company intends that
the Plan shall qualify as an "employee stock purchase plan" under Section 423 of
the Code (including any amendments or replacements of such section), and the
Plan shall be so construed.

          1.3    TERM OF PLAN.  The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.

     2.   DEFINITIONS AND CONSTRUCTION.
          ---------------------------- 

          2.1    DEFINITIONS.  Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have
 their respective
meanings set forth below:

                 (a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"Board" also means such Committee(s).

                 (b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.

                 (c) "COMMITTEE" means a committee of the Board duly appointed
to administer the Plan and having such powers as shall be specified by the
Board. Unless the powers of the Committee have been specifically limited, the
Committee shall have all of the powers of the Board granted herein, including,
without limitation, the power to amend or terminate the Plan at any time,
subject to the terms of the Plan and any applicable limitations imposed by law.

                                       1

<PAGE>
 
                 (d) "COMPANY" means Biosciences, Inc., a Michigan corporation,
or any successor corporation thereto.

                 (e) "COMPENSATION" means, with respect to an Offering Period
under the Plan, all amounts paid in cash in the forms of base salary,
commissions, overtime, bonuses, annual awards, other incentive payments, shift
premiums, and all other compensation paid in cash during such Offering Period
before deduction for any contributions to any plan maintained by a Participating
Company and described in Section 401(k) or Section 125 of the Code. Compensation
shall not include reimbursements of expenses, allowances, long-term disability,
workers' compensation or any amount deemed received without the actual transfer
of cash or any amounts directly or indirectly paid pursuant to the Plan or any
other stock purchase or stock option plan.

                 (f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.

                 (g) "EMPLOYEE" means any person treated as an employee
(including an officer or a director who is also treated as an employee) in the
records of a Participating Company and for purposes of Section 423 of the Code;
provided, however, that neither service as a director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan.

                 (h) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.

                 (i) "FAIR MARKET VALUE" means, as of any date, if there is then
a public market for the Stock, the closing price of a share of Stock (or the
mean of the closing bid and asked prices of a share of Stock if the Stock is so
reported instead) as reported on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") System, the NASDAQ National Market System or such
other national or regional securities exchange or market system constituting the
primary market for the Stock. If the relevant date does not fall on a day on
which the Stock is trading on NASDAQ, the NASDAQ National Market System or other
national or regional securities exchange or market system, the date on which the
Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date, or such other appropriate day as shall
be determined by the Board, in its sole discretion. If there is then no public
market for the Stock, the Fair Market Value on any relevant date shall be as
determined by the Board without regard to any restriction other than a
restriction which, by its terms, will never lapse. Notwithstanding the
foregoing, the Fair Market Value per share of Stock on the Effective Date shall
be deemed to be the public offering price set forth in the final prospectus
filed with the Securities and Exchange Commission in connection with the initial
public offering of the Stock.

                                       2

<PAGE>
 
                 (j) "OFFERING" means an offering of Stock as provided in
Section 6.

                 (k) "OFFERING DATE" means, for any Offering Period, the first
day of such Offering Period.

                 (l) "OFFERING PERIOD" means a period determined in accordance
with Section 6.1.

                 (m) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.

                 (n) "PARTICIPANT" means an Eligible Employee participating in
the Plan.

                 (o) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation which the Board determines should be
included in the Plan. The Board shall have the sole and absolute discretion to
determine from time to time what Parent Corporations or Subsidiary Corporations
shall be Participating Companies.

                 (p) "PARTICIPATING COMPANY GROUP" means, at any point in time,
the Company and all other corporations collectively which are then Participating
Companies.

                 (q) "PURCHASE DATE" means, for any Purchase Period, the last
day of such Purchase Period.

                 (r) "PURCHASE PERIOD" means a period determined in accordance
with Section 6.2.

                 (s) "PURCHASE PRICE" means the price at which a share of Stock
may be purchased pursuant to the Plan, as determined in accordance with Section
9.

                 (t) "PURCHASE RIGHT" means an option pursuant to the Plan to
purchase such shares of Stock as provided in Section 8 which may or may not be
exercised at the end of an Offering Period. Such option arises from the right of
a Participant to withdraw such Participant's accumulated payroll deductions (if
any) and terminate participation in the Plan or any Offering therein at any time
during a Purchase Period.

                 (u) "STOCK" means the common stock, no par value, of the
Company, as adjusted from time to time in accordance with Section 4.2.

                                       3

<PAGE>
 
                 (v) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.

         2.2  CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural, the plural shall include the singular, and
use of the term "or" shall include the conjunctive as well as the disjunctive.

     3.  ADMINISTRATION.  The Plan shall be administered by the Board, including
         --------------                                                         
any duly appointed Committee of the Board.  All questions of interpretation of
the Plan or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or such
Purchase Right.  Subject to the provisions of the Plan, the Board shall
determine all of the relevant terms and conditions of Purchase Rights granted
pursuant to the Plan; provided, however, that all Participants granted Purchase
Rights pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code.  All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.

     4.  SHARES SUBJECT TO PLAN.
         ---------------------- 

         4.1  MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand (250,000) (on a
post-split basis following the two-for-three reverse stock split of the Stock
approved by the Board on April 30, 1996) and shall consist of authorized but
unissued or reacquired shares of the Stock, or any combination thereof. If an
outstanding Purchase Right for any reason expires or is terminated or canceled,
the shares of Stock allocable to the unexercised portion of such Purchase Right
shall again be available for issuance under the Plan.

         4.2  ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company, or
in the event of any merger (including a merger effected for the purpose of
changing the Company's domicile), sale of assets or other reorganization in
which the Company is a party, appropriate adjustments shall be made in the
number and class of shares subject to the Plan, to the Per Offering Share Limit
set forth in Section 8.1 and to each Purchase Right and in the Purchase Price.

     5.  ELIGIBILITY.
         ----------- 

         5.1  EMPLOYEES ELIGIBLE TO PARTICIPATE. Any Employee of a Participating
Company is eligible to participate in the Plan except the following:

                 (a) Employees who are customarily employed by the Participating
Company Group for twenty (20) hours or less per week;

                                       4

<PAGE>
 
                 (b) Employees who are customarily employed by the Participating
Company Group for not more than five (5) months in any calendar year; and

                 (c) Employees who own or hold options to purchase or who, as a
result of participation in the Plan, would own or hold options to purchase,
stock of the Company or of any Parent Corporation or Subsidiary Corporation
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of such corporation within the meaning of Section
423(b)(3) of the Code.

         5.2  LEASED EMPLOYEES EXCLUDED. Notwithstanding anything herein to the
contrary, any individual performing services for a Participating Company solely
through a leasing agency or employment agency shall not be deemed an "Employee"
of such Participating Company.

     6.   OFFERINGS.
          --------- 

          6.1 OFFERING PERIODS. Except as otherwise set forth below, the Plan
shall be implemented by sequential Offerings of approximately twenty-four (24)
months duration (an "OFFERING PERIOD"); provided, however that the first
Offering Period shall commence on the Effective Date and end on August 31, 1998
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first days of March and September of each year and end on the last days of the
second February and August, respectively, occurring thereafter. Notwithstanding
the foregoing, the Board may establish a different term for one or more
Offerings or different commencing or ending dates for such Offerings; provided,
however, that no Offering may exceed a term of twenty-seven (27) months. An
Employee who becomes an Eligible Employee after an Offering Period has commenced
shall not be eligible to participate in such Offering but may participate in any
subsequent Offering provided such Employee is still an Eligible Employee as of
the commencement of any such subsequent Offering. Eligible Employees may not
participate in more than one Offering at a time. In the event the first or last
day of an Offering Period is not a business day, the Company shall specify the
business day that will be deemed the first or last day, as the case may be, of
the Offering Period.

          6.2 PURCHASE PERIODS. Each Offering Period shall consist of four (4)
consecutive purchase periods of approximately six (6) months duration
(individually, a "PURCHASE PERIOD"). The Purchase Period commencing on the
Offering Date of the Initial Offering Period shall end on February 28, 1997. A
Purchase Period commencing on the first day of March shall end on the last day
of the next following August. A Purchase Period commencing on the first day of
September shall end on the last day of the next following February.
Notwithstanding the foregoing, the Board may establish a different term for one
or more Purchase Periods or different commencing or ending dates for such
Purchase

                                       5

<PAGE>
 
Periods.  In the event the first or last day of a Purchase Period is not a
business day, the Company shall specify the business day that will be deemed the
first or last day, as the case may be, of the Purchase Period.

          6.3  GOVERNMENTAL APPROVAL; STOCKHOLDER APPROVAL. Notwithstanding any
other provision of the Plan to the contrary, any Purchase Right granted pursuant
to the Plan shall be subject to (a) obtaining all necessary governmental
approvals or qualifications of the sale or issuance of the Purchase Rights or
the shares of Stock and (b) obtaining stockholder approval of the Plan.
Notwithstanding the foregoing, stockholder approval shall not be necessary in
order to grant any Purchase Right granted in the Plan's Initial Offering Period;
provided, however, that the exercise of any such Purchase Right shall be subject
to obtaining stockholder approval of the Plan.

     7.   PARTICIPATION IN THE PLAN.
          ------------------------- 

          7.1 INITIAL PARTICIPATION. An Eligible Employee shall become a
Participant on the first Offering Date after satisfying the eligibility
requirements of Section 5 and delivering to the Company's payroll office or
other office designated by the Company not later than the close of business for
such office on the last business day before such Offering Date (the
"SUBSCRIPTION DATE") a subscription agreement indicating the Employee's election
to participate in the Plan and authorizing payroll deductions. An Eligible
Employee who does not deliver a subscription agreement to the Company's payroll
or other designated office on or before the Subscription Date shall not
participate in the Plan for that Offering Period or for any subsequent Offering
Period unless such Employee subsequently enrolls in the Plan by filing a
subscription agreement with the Company by the Subscription Date for such
subsequent Offering Period. The Company may, from time to time, change the
Subscription Date as deemed advisable by the Company in its sole discretion for
proper administration of the Plan.

          7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
until such time as such Participant (a) ceases to be an Eligible Employee, (b)
withdraws from the Plan pursuant to Section 14.2 or (c) terminates employment as
provided in Section 15. If a Participant automatically may participate in a
subsequent Offering Period pursuant to this Section 7.2, then the Participant is
not required to file any additional subscription agreement for such subsequent
Offering Period in order to continue participation in the Plan. However, a
Participant may file a subscription agreement with respect to a subsequent
Offering Period if the Participant desires to change any of the Participant's
elections contained in the Participant's then effective subscription agreement.

                                       6

<PAGE>
 
     8.   RIGHT TO PURCHASE SHARES.
          ------------------------ 

          8.1 PURCHASE RIGHT. Except as set forth below, during an Offering
Period each Participant in such Offering Period shall have a Purchase Right
consisting of the right to purchase that number of whole shares of Stock arrived
at by dividing Fifty Thousand Dollars ($50,000) by the Fair Market Value of a
share of Stock on the Offering Date of such Offering Period; provided, however,
that such number shall not exceed five thousand (5,000) shares (the "Per
Offering Share Limit"). Shares of Stock may only be purchased through a
Participant's payroll deductions pursuant to Section 10.

          8.2 PRO RATA ADJUSTMENT OF PURCHASE RIGHT. Notwithstanding the
foregoing, if the Board shall establish an Offering Period of less than twenty-
three and one-half (23 1/2) months or more than twenty-four and one-half (24
1/2) months in duration, (a) the dollar amount in Section 8.1 shall be
determined by multiplying $2,083.33 by the number of months in the Offering
Period and rounding to the nearest whole dollar, and (b) the Per Offering Share
Limit shall be determined by multiplying 208.33 shares by the number of months
in the Offering Period and rounding to the nearest whole share. For purposes of
the preceding sentence, fractional months shall be rounded to the nearest whole
month.

     9.  PURCHASE PRICE.  The Purchase Price at which each share of Stock may be
         --------------                                                         
acquired in a given Offering Period pursuant to the exercise of all or any
portion of a Purchase Right granted under the Plan shall be set by the Board;
provided, however, that the Purchase Price shall not be less than eighty-five
percent (85%) of the lesser of (a) the Fair Market Value of a share of Stock on
the Offering Date of the Offering Period, or (b) the Fair Market Value of a
share of Stock on the Purchase Date of the Offering Period.  Unless otherwise
provided by the Board prior to the commencement of an Offering Period, the
Purchase Price for that Offering Period shall be eighty-five percent (85%) of
the lesser of (a) the Fair Market Value of a share of Stock on the Offering Date
of the Offering Period, or (b) the Fair Market Value of a share of Stock on the
Purchase Date of the Offering Period.

     10.  ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.  Shares of
          --------------------------------------------------------            
Stock which are acquired pursuant to the exercise of all or any portion of a
Purchase Right for an Offering Period may be paid for only by means of payroll
deductions from the Participant's Compensation accumulated during the Offering
Period.  Except as set forth below, the amount of Compensation to be deducted
from a Participant's Compensation during each pay period shall be determined by
the Participant's subscription agreement.

          10.1 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions shall
commence on the first payday following the Offering Date and shall continue to
the end of the Offering Period unless sooner altered or terminated as provided
in the Plan.

                                       7

<PAGE>
 
          10.2 LIMITATIONS ON PAYROLL DEDUCTIONS. The amount of payroll
deductions with respect to the Plan for any Participant during any pay period
shall be in one percent (1%) increments not to exceed ten percent (10%) of the
Participant's Compensation for such pay period. Notwithstanding the foregoing,
the Board may change the limits on payroll deductions effective as of a future
Offering Date, as determined by the Board. Amounts deducted from Compensation
shall be reduced by any amounts contributed by the Participant and applied to
the purchase of Company stock pursuant to any other employee stock purchase plan
qualifying under Section 423 of the Code.

          10.3 ELECTION TO DECREASE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to decrease the amount deducted or stop
deductions from his or her Compensation by filing an amended subscription
agreement with the Company on or before the "Change Notice Date." The "CHANGE
NOTICE DATE" shall initially be the seventh (7th) day prior to the end of the
first pay period for which such election is to be effective; however, the
Company may change such Change Notice Date from time to time. A Participant may
not elect to increase the amount deducted from the Participant's Compensation
during an Offering Period.

          10.4 PARTICIPANT ACCOUNTS. Individual Plan accounts shall be
maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such account and shall be deposited with the
general funds of the Company. All payroll deductions received or held by the
Company may be used by the Company for any corporate purpose.

          10.5 NO INTEREST PAID. Interest shall not be paid on sums deducted
from a Participant's Compensation pursuant to the Plan.

          10.6 COMPANY ESTABLISHED PROCEDURES. The Company may, from time to
time, establish or change (a) a minimum required payroll deduction amount for
participation in an Offering, (b) limitations on the frequency or number of
changes in the rate of payroll deduction during an Offering, (c) an exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars, (d)
payroll deduction in excess of or less than the amount designated by a
Participant in order to adjust for delays or mistakes in the Company's
processing of subscription agreements, (e) the date(s) and manner by which the
Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan, or (f) such other limitations or procedures as
deemed advisable by the Company in the Company's sole discretion which are
consistent with the Plan and in accordance with the requirements of Section 423
of the Code.

     11. PURCHASE OF SHARES.
         ------------------ 

          11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date of an Offering
Period, each Participant who has not withdrawn from the Offering or

                                       8

<PAGE>
 
whose participation in the Offering has not terminated on or before such
Purchase Date shall automatically acquire pursuant to the exercise of the
Participant's Purchase Right the number of whole shares of Stock arrived at by
dividing the total amount of the Participant's accumulated payroll deductions
for the Purchase Period by the Purchase Price; provided, however, in no event
shall the number of shares purchased by the Participant during an Offering
Period exceed the number of shares subject to the Participant's Purchase Right.
No shares of Stock shall be purchased on a Purchase Date on behalf of a
Participant whose participation in the Offering or the Plan has terminated on or
before such Purchase Date.

          11.2 RETURN OF CASH BALANCE. Any cash balance remaining in the
Participant's Plan account shall be refunded to the Participant as soon as
practicable after the Purchase Date. In the event the cash to be returned to a
Participant pursuant to the preceding sentence is an amount less than the amount
necessary to purchase a whole share of Stock, the Company may establish
procedures whereby such cash is maintained in the Participant's Plan account and
applied toward the purchase of shares of Stock in the subsequent Purchase Period
or Offering Period.

          11.3 TAX WITHHOLDING. At the time a Participant's Purchase Right is
exercised, in whole or in part, or at the time a Participant disposes of some or
all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.

          11.4 EXPIRATION OF PURCHASE RIGHT. Any portion of a Participant's
Purchase Right remaining unexercised after the end of the Offering Period to
which such Purchase Right relates shall expire immediately upon the end of such
Offering Period.

     12.  MARKET STAND-OFF PERIOD.  No Participant shall, for a period of 180
          -----------------------                                            
days following the Purchase Date upon which a share of Stock is acquired,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant any option to purchase or otherwise transfer
or dispose (other than to donees who agree to be similarly bound) of such share
of Stock.  The restriction on transfer of this Section 12 shall terminate
immediately upon a Transfer of Control, as defined in Section 16.

     13.  LIMITATIONS ON PURCHASE OF SHARES; RIGHTS AS A STOCKHOLDER.
          ---------------------------------------------------------- 

          13.1 FAIR MARKET VALUE LIMITATION. Notwithstanding any other provision
of the Plan, no Participant shall be entitled to purchase shares of Stock

                                       9

<PAGE>
 
under the Plan (or any other employee stock purchase plan which is intended to
meet the requirements of Section 423 of the Code sponsored by the Company or a
Parent Corporation or Subsidiary Corporation at a rate which exceeds $25,000 in
Fair Market Value, which Fair Market Value is determined for shares purchased
during a given Offering Period as of the Offering Date for such Offering Period
(or such other limit as may be imposed by the Code), for each calendar year in
which the Participant participates in the Plan (or any other employee stock
purchase plan described in this sentence).

          13.2 PRO RATA ALLOCATION. In the event the number of shares of Stock
which might be purchased by all Participants in the Plan exceeds the number of
shares of Stock available in the Plan, the Company shall make a pro rata
allocation of the remaining shares in as uniform a manner as shall be
practicable and as the Company shall determine to be equitable.

          13.3 RIGHTS AS A STOCKHOLDER AND EMPLOYEE. A Participant shall have no
rights as a stockholder by virtue of the Participant's participation in the Plan
until the date of the issuance of a stock certificate for the shares of Stock
being purchased pursuant to the exercise of the Participant's Purchase Right. No
adjustment shall be made for cash dividends or distributions or other rights for
which the record date is prior to the date such stock certificate is issued.
Nothing herein shall confer upon a Participant any right to continue in the
employ of the Participating Company Group or interfere in any way with any right
of the Participating Company Group to terminate the Participant's employment at
any time.

     14.  WITHDRAWAL.
          ---------- 

          14.1 WITHDRAWAL FROM AN OFFERING. A Participant may withdraw from an
Offering by signing and delivering to the Company's payroll or other designated
office a written notice of withdrawal on a form provided by the Company for such
purpose. Such withdrawal may be elected at any time prior to the end of an
Offering Period; provided, however, if a Participant withdraws after the
Purchase Date for a Purchase Period of an Offering, the withdrawal shall not
affect shares of Stock acquired by the Participant in such Purchase Period.
Unless otherwise indicated, withdrawal from an Offering shall not result in a
withdrawal from the Plan or any succeeding Offering therein. By withdrawing from
an Offering effective as of the close of a given Purchase Date, a Participant
may have shares of Stock purchased on such Purchase Date and immediately
commence participation in the new Offering commencing immediately after such
Purchase Date. A Participant is prohibited from again participating in an
Offering at any time following withdrawal from such Offering. The Company may
impose, from time to time, a requirement that the notice of withdrawal be on
file with the Company's payroll office or other designated office for a
reasonable period prior to the effectiveness of the Participant's withdrawal
from an Offering.

                                       10

<PAGE>
 
          14.2 WITHDRAWAL FROM THE PLAN. A Participant may withdraw from the
Plan by signing and delivering to the Company's payroll office or other
designated office a written notice of withdrawal on a form provided by the
Company for such purpose. Withdrawals made after a Purchase Date shall not
affect shares of Stock acquired by the Participant on such Purchase Date. In the
event a Participant voluntarily elects to withdraw from the Plan, the
Participant may not resume participation in the Plan during the same Offering
Period, but may participate in any subsequent Offering under the Plan by again
satisfying the requirements of Sections 5 and 7.1. The Company may impose, from
time to time, a requirement that the notice of withdrawal be on file with the
Company's payroll office or other designated office for a reasonable period
prior to the effectiveness of the Participant's withdrawal from the Plan.

          14.3 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's withdrawal
from an Offering or the Plan pursuant to Sections 14.1 or 14.2, respectively,
the Participant's accumulated payroll deductions which have not been applied
toward the purchase of shares of Stock shall be returned as soon as practicable
after the withdrawal, without the payment of any interest, to the Participant,
and the Participant's interest in the Offering or the Plan, as applicable, shall
terminate. Such accumulated payroll deductions may not be applied to any other
Offering under the Plan.

          14.4 AUTOMATIC WITHDRAWAL FROM AN OFFERING. If the Fair Market Value
of a share of Stock on a Purchase Date of an Offering (other than the final
Purchase Date of such Offering) is less than the Fair Market Value of a share of
Stock on the Offering Date for such Offering, then every Participant shall
automatically (a) be withdrawn from such Offering at the close of such Purchase
Date and after the acquisition of shares of Stock for such Purchase Period and
(b) be enrolled in the Offering commencing on the first business day subsequent
to such Purchase Period. A Participant may elect not to be automatically
withdrawn from an Offering Period pursuant to this Section 14.4 by delivering to
the Company not later than the close of business on the last day before the
Purchase Date a written notice indicating such election.


                                       11

<PAGE>
 
     15.  TERMINATION OF EMPLOYMENT OR ELIGIBILITY.  Termination of a
          ----------------------------------------                   
Participant's employment with a Participating Company for any reason, including
retirement, disability or death or the failure of a Participant to remain an
Eligible Employee, shall terminate the Participant's participation in the Plan
immediately.  In such event, the payroll deductions credited to the
Participant's Plan account since the last Purchase Date shall, as soon as
practicable, be returned to the Participant or, in the case of the Participant's
death, to the Participant's legal representative, and all of the Participant's
rights under the Plan shall terminate.  Interest shall not be paid on sums
returned to a Participant pursuant to this Section 15.  A Participant whose
participation has been so terminated may again become eligible to participate in
the Plan by again satisfying the requirements of Sections 5 and 7.1.

     16.   TRANSFER OF CONTROL.
           ------------------- 

          16.1   DEFINITIONS.

                 (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company a party; (iii) the sale, exchange, or transfer of all or substantially
all of the assets of the Company; or (iv) a liquidation or dissolution of the
Company.
                 (b) A "TRANSFER OF CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.

          16.2 EFFECT OF TRANSFER OF CONTROL ON PURCHASE RIGHTS. In the event of
a Transfer of Control, the surviving, continuing, successor, or purchasing
corporation or parent corporation thereof, as the case may be (the "ACQUIRING

                                       12

<PAGE>
 
CORPORATION"), may assume the Company's rights and obligations under the Plan or
substitute substantially equivalent Purchase Rights for stock of the Acquiring
Corporation.  If the Acquiring Corporation elects not to assume or substitute
for the outstanding Purchase Rights, the Board may, in its sole discretion and
notwithstanding any other provision herein to the contrary, adjust the Purchase
Date of the then current Purchase Period to a date on or before the date of the
Transfer of Control, but shall not adjust the number of shares of Stock subject
to any Purchase Right.  All Purchase Rights which are neither assumed or
substituted for by the Acquiring Corporation in connection with the Transfer of
Control nor exercised as of the date of the Transfer of Control shall terminate
and cease to be outstanding effective as of the date of the Transfer of Control.
Notwithstanding the foregoing, if the corporation the stock of which is subject
to the outstanding Purchase Rights immediately prior to an Ownership Change
Event described in Section 16.1(a)(i) constituting a Transfer of Control is the
surviving or continuing corporation and immediately after such Ownership Change
Event less than fifty percent (50%) of the total combined voting power of its
voting stock is held by another corporation or by other corporations that are
members of an affiliated group within the meaning of section 1504(a) of the Code
without regard to the provisions of section 1504(b) of the Code, the outstanding
Purchase Rights shall not terminate unless the Board otherwise provides in its
sole discretion.

     17.  NONTRANSFERABILITY OF PURCHASE RIGHTS.  A Purchase Right may not be
          -------------------------------------                              
transferred in any manner otherwise than by will or the laws of descent and
distribution and shall be exercisable during the lifetime of the Participant
only by the Participant.  The Company, in its absolute discretion, may impose
such restrictions on the transferability of the shares purchasable upon the
exercise of a Purchase Right as it deems appropriate and any such restriction
shall be set forth in the respective subscription agreement and may be referred
to on the certificates evidencing such shares.

     18.  REPORTS.  Each Participant who exercised all or part of his or her
          -------                                                           
Purchase Right for a Purchase Period shall receive, as soon as practicable after
the Purchase Date of such Purchase Period, a report of such Participant's Plan
account setting forth the total payroll deductions accumulated, the number of
shares of Stock purchased, the Purchase Price for such shares, the date of
purchase and the remaining cash balance to be refunded or retained in the
Participant's Plan account pursuant to Section 11.2, if any.  Each Participant
shall be provided information concerning the Company equivalent to that
information generally made available to the Company's common stockholders.

     19.  RESTRICTION ON ISSUANCE OF SHARES.  The issuance of shares under the
          ---------------------------------                                   
Plan shall be subject to compliance with all applicable requirements of foreign,
federal or state law with respect to such securities.  A Purchase Right may not
be exercised if the issuance of shares upon such exercise would constitute a
violation of any applicable foreign, federal or state securities laws or other
law or regulations.  In addition, no Purchase Right may be exercised unless (a)
a

                                       13

<PAGE>
 
registration statement under the Securities Act of 1933, as amended, shall at
the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act.  The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained.  As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.

     20.  LEGENDS.  The Company may at any time place legends or other
          -------                                                     
identifying symbols referencing any applicable foreign, federal or state
securities law restrictions or any provision convenient in the administration of
the Plan on some or all of the certificates representing shares of Stock issued
under the Plan.  The Participant shall, at the request of the Company, promptly
present to the Company any and all certificates representing shares acquired
pursuant to a Purchase Right in the possession of the Participant in order to
carry out the provisions of this Section.  Unless otherwise specified by the
Company, legends placed on such certificates may include but shall not be
limited to the following:

          "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED.  THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY
SHALL NOTIFY THE CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE
REGISTERED HOLDER HEREOF MADE ON OR BEFORE ______________, 19__.  THE REGISTERED
HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN THE REGISTERED HOLDER'S
NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE."

          "THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE
CORPORATION TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN
EMPLOYEE STOCK PURCHASE PLAN, PURSUANT TO WHICH THE SHARES MAY NOT BE SOLD,
TRANSFERRED, OR DISPOSED OF (OTHER THAN TO DONEES WHO AGREE TO BE SIMILARLY
BOUND) UNTIL ___________, 19__."

     21.  NOTIFICATION OF SALE OF SHARES.  The Company may require the
          ------------------------------                              
Participant to give the Company prompt notice of any disposition of shares

                                       14

<PAGE>
 
acquired by exercise of a Purchase Right within two years from the date of
granting such Purchase Right or one year from the date of exercise of such
Purchase Right.  The Company may require that until such time as a Participant
disposes of shares acquired upon exercise of a Purchase Right, the Participant
shall hold all such shares in the Participant's name (and not in the name of any
nominee) until the lapse of the time periods with respect to such Purchase Right
referred to in the preceding sentence.  The Company may direct that the
certificates evidencing shares acquired by exercise of a Purchase Right refer to
such requirement to give prompt notice of disposition.

     22.  AMENDMENT OR TERMINATION OF THE PLAN.  The Board may at any time amend
          ------------------------------------                                  
or terminate the Plan, except that (a) such termination shall not affect
Purchase Rights previously granted under the Plan, except as permitted under the
Plan, and (b) no amendment may adversely affect a Purchase Right previously
granted under the Plan (except to the extent permitted by the Plan or as may be
necessary to qualify the Plan as an employee stock purchase plan pursuant to
Section 423 of the Code or to obtain qualification or registration of the shares
of Stock under applicable foreign, federal or state securities laws).  In
addition, an amendment to the Plan must be approved by the stockholders of the
Company within twelve (12) months of the adoption of such amendment if such
amendment would authorize the sale of more shares than are authorized for
issuance under the Plan or would change the definition of the corporations that
may be designated by the Board as Participating Companies.

     IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing AASTROM Biosciences, Inc. 1996 Employee Stock Purchase Plan was
duly adopted by the Board of Directors of the Company on April 30, 1996.


                                    /s/ Todd E. Simpson
                                    -------------------------- 
                                    Todd E. Simpson, Secretary

                                       15

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                       1996 EMPLOYEE STOCK PURCHASE PLAN
                             SUBSCRIPTION AGREEMENT



[_]  Original Application


[_]  Change in Percentage of Payroll Deductions

     I hereby elect to participate in the 1996 Employee Stock Purchase Plan (the
"Plan") of AASTROM Biosciences, Inc. (the "COMPANY") and subscribe to purchase
shares of the Company's common stock as determined in accordance with the terms
of the Plan.

     I hereby authorize payroll deductions in the amount of ______________
percent (in 1% increments not to exceed 10%) of my "COMPENSATION" (as defined in
the Plan) from each paycheck throughout the "OFFERING PERIOD" (as defined in the
Plan) in accordance with the terms of the Plan.  I understand that these payroll
deductions will be accumulated for the purchase of shares of common stock of the
Company at the applicable purchase price determined in accordance with the Plan.
I further understand that, except as otherwise set forth in the Plan, shares
will be purchased for me automatically on the last day of each Purchase Period
unless I withdraw from the Plan or from the Offering by giving written notice to
the Company or unless I terminate employment.

     I further understand that I will automatically participate in each
subsequent Offering which commences immediately after the last day of an
Offering in which I am participating under the Plan until such time as I file
with the Company a notice of withdrawal from the Plan on such form as may be
established from time to time by the Company or I terminate employment.

     Shares purchased for me under the Plan should be issued in the name set
forth below.  (I understand that shares may be issued either in my name alone or
together with my spouse as community property or in joint tenancy.)

          NAME:
                   -------------------------------------------------------------
          ADDRESS:
                   -------------------------------------------------------------

          MY SOCIAL SECURITY NUMBER:
                                     -------------------------------------------

     I hereby authorize withholding from my compensation in order to satisfy the
foreign, federal, state and local tax withholding obligations, if any, which may
arise upon my purchase of shares under the Plan and/or upon my disposition of
shares I acquired under the Plan.  I hereby agree that until I dispose of the
shares, unless otherwise permitted by the Company, I will hold all shares I
acquire under the Plan in the name entered above (and not in the name of any
nominee) for at least two (2) years from the first day of the Offering Period in
which, and at least one (1) year from the Purchase Date on which, I acquired
such shares.  I further agree that I will promptly notify the Chief Financial
Officer of the Company in writing of any transfer of such shares prior to the
end of the periods referred to in the preceding sentence.

     I am familiar with the provisions of the Plan and hereby agree to
participate in the Plan subject to all of the provisions thereof.  I understand
that any shares purchased under the Plan are subject to a 180-day "market stand-
off" period, as provided in the Plan.  I understand that the Board of Directors
of the Company reserves the right to amend the Plan and my right to purchase
stock under the Plan as may be necessary to qualify the Plan as an employee
stock purchase plan as defined in section 423 of the Internal Revenue Code of
1986, as amended, or to obtain qualification or registration of the Company's
common stock to be issued out of the Plan under applicable foreign, federal and
state securities laws.  I understand that the effectiveness of this subscription
agreement is dependent upon my eligibility to participate in the Plan.


Date: ________________________     Signature: _______________________________

                                   Name Printed: ____________________________

                                       16

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                       1996 EMPLOYEE STOCK PURCHASE PLAN
                              NOTICE OF WITHDRAWAL

     I hereby elect to withdraw from the current offering (the "CURRENT
OFFERING") of the common stock of AASTROM Biosciences, Inc. (the "COMPANY")
under the Company's 1996 Employee Stock Purchase Plan (the "PLAN").

     MAKE ONE ELECTION UNDER SECTION A AND ONE ELECTION UNDER SECTION B:

A.   Current Offering.  As to my participation in the current purchase period
     ----------------
     (the "Current Purchase Period") of the Current Offering under the Plan, I
     elect as follows (check one):

______  1.  I elect to terminate my participation in the Current Purchase Period
            immediately.

            I hereby request that all payroll deductions credited to my account
            under the Plan (if any) not previously used to purchase shares under
            the Plan shall not be used to purchase shares on the last day of the
                           ---
            Current Purchase Period. Instead, I request that all such amounts be
            paid to me as soon as practicable. I understand that this election
            immediately terminates my interest in the Current Offering.

______  2.  I elect to terminate my participation in the Current Offering
            following my purchase of shares on the last day of the Current
            Purchase Period.

            I hereby request that all payroll deductions credited to my account
            under the Plan (if any) not previously used to purchase shares under
            the Plan shall be used to purchase shares on the last day of the
            Current Purchase Period.  I understand that this election will
            terminate my interest in the Current Offering immediately following
            such purchase.  I request that any cash balance remaining in my
            account under the Plan after my purchase of shares be returned to me
            as soon as practicable.

     I understand that if no election is made as to participation in the Current
Offering under the Plan, I will be deemed to have elected to participate in the
Current Offering.

B.   Future Offerings.  As to my participation in future offerings of common
     ----------------                                                       
     stock under the Plan, I elect as follows (check one):

______  1.  I elect to participate in future offerings under the Plan.

            I understand that by making this election I will participate in the
            next offering under the Plan commencing subsequent to the Current
            Offering, and in each subsequent offering commencing immediately
            after the last day of an offering in which I participate, until such
            time as I elect to withdraw from the Plan or from any such
            subsequent offering.

______  2.  I elect not to participate in future offerings under the Plan.
                    ---
            I understand that by making this election I terminate my interest in
            the Plan and that no further payroll deductions will be made unless
            I elect in accordance with the Plan to become a participant in
            another offering under the Plan.


     I understand that if no election is made as to participation in future
offerings under the Plan, I will be deemed to have elected to participate in
such future offerings.


Date:                    Signature:
      ----------------              -------------------------------------------

                         Name Printed:
                                       ----------------------------------------

                                       17



<PAGE>
 
                             Employment Agreement


This Employment Agreement (the "Agreement") is entered into as of __________ 
1996, by and between AASTROM BIOSCIENCES, INC., a Michigan corporation 
("Employer") and [name] ("Employee").

     NOW, THEREFORE, the parties agree as follows:

     1.    EMPLOYMENT Employer hereby engages Employee, and Employee hereby 
accepts such engagement, upon the terms and conditions set forth herein.

     2.    DUTIES Employee is engaged as an [position]. Employee shall perform 
faithfully and diligently the duties customarily performed by persons in the 
position for which employee is engaged, together with such other reasonable and 
appropriate duties as Employer shall designate from time to time. Employee shall
devote Employee's full business time and efforts to the rendition of such 
services and to the performance of such duties. As a full-time employee of 
Employer, Employee shall not be entitled to provide consulting services or other
business or scientific services to any other party, without the prior written 
consent of Employer.

     3.    COMPENSATION

           3.1   BASE SALARY During the term of this Agreement, as compensation 
for the proper and satisfactory performance of all duties to be performed by 
Employee hereunder, Employer shall pay
 Employee at an annual salary rate of 
[salary written] Dollars ($[salary]), payable in arrears in equal bi-weekly 
installments, less required deductions for state and federal withholding tax, 
Social Security and all other employee taxes and payroll deductions. The base 
salary shall be subject to review and adjustment on an annual basis.

     4.    TERM

           4.1   COMMENCEMENT The employment relationship pursuant to this 
Agreement shall commence [start_date].

           4.2   TERMINATION AT WILL Although Employer and Employee anticipate a
long and mutually rewarding employment relationship, either party may terminate 
this Agreement, without cause, upon fourteen (14) days' prior written notice 
delivered to the other. It is expressly understood and agreed that the 
employment relationship is "at will", and with no agreement for employment for 
any specified term, and with no agreement for employment for so long as Employee
performs satisfactorily. Provided, however, before Employer exercises this right
of termination at will, Employer shall first either (i) discuss with Employee 
the needs of Employer and why Employee no longer meets those needs, or (ii) 
discuss with Employee any concerns or dissatisfactions which Employer has with 
Employee's performance, and give to Employee a reasonable 


<PAGE>
 

Employment Agreement
Page 2

opportunity to remedy those concerns or dissatisfactions, to the reasonable 
satisfaction of Employer.

           4.3   TERMINATION FOR CAUSE Either party may terminate this 
employment relationship immediately upon notice to the other party in the event 
of any good cause, such as a default, dishonesty, neglect of duties, failure to 
perform by the other party, or death or disability of Employee.

           4.4   PAYMENT OF COMPENSATION UPON TERMINATION Upon termination for 
cause, Employee shall be entitled to the compensation set forth as "base salary"
herein, prorated to the effective date of such termination as full compensation 
for any and all claims of Employee under this Agreement.

     5.    FRINGE BENEFITS

           5.1   CUSTOMARY FRINGE BENEFITS Employee shall be entitled to such 
fringe benefits as Employer customarily makes available to employees of Employer
engaged in the same or similar position as Employee ("Fringe Benefits"). Such 
Fringe Benefits may include vacation leave, sick leave, and health insurance 
coverage. Employer reserves the right to change the Fringe Benefits on a 
prospective basis, at any time, effective upon delivery of written notice to 
Employee.

           5.2   ACCUMULATION Employee shall not earn and accumulate unused 
vacation in excess of Fifteen (15) days. Employee shall not earn and accumulate 
sick leave or other Fringe Benefits in excess of an unused amount equal to twice
the amount earned for one year. Further, Employee shall not be entitled to 
receive payments in lieu of said Fringe Benefits, other than for unused vacation
leave earned and accumulated at the time the employment relationship terminates.

     6.    INVENTIONS, TRADE SECRETS AND CONFIDENTIALITY

           6.1   DEFINITIONS

                 6.1.1 Invention Defined. As used herein "Invention" means 
inventions, discoveries, concepts, and ideas, whether patentable or 
copyrightable or not, including but not limited to processes, methods, formulas,
techniques, materials, devices, designs, programs (including computer programs),
computer graphics, apparatus, products, as well as improvements thereof or 
know-how related thereto, relating to any present or anticipated business or 
activities of Employer.

                 6.1.2 Trade Secret Defined. As used herein "Trade Secret" 
means, without limitation, any document or information relating to Employer's 
products, processes or services, including documents and information relating to
Inventions, and to the research, development, engineering or manufacture of 
Inventions, and to Employer's purchasing, customer or supplier lists, which 
documents or information have been disclosed to Employee or known to 

<PAGE>
 
 
Employment Agreement
Page 3

Employee as a consequence of or through Employee's employment by Employer 
(including documents, information or Inventions conceived, originated, 
discovered or developed by Employee), which is not generally known in the 
relevant trade or industry.

           6.2   INVENTIONS

                 6.2.1 Disclosure. Employee shall disclose promptly to Employer 
each Invention, whether or not reduced to practice, which is conceived or 
learned by Employee (either alone or jointly with others) during the term of his
employment with Employer. Employee shall disclose in confidence to Employer all 
patent applications filed by or on behalf of Employee during the term of his 
employment and for a period of three (3) years thereafter. Any disclosure of an 
Invention, or any patent application, made within one (1) year after termination
of employment shall be presumed to relate to an Invention made during Employee's
term of Employment with Employer, unless Employee clearly proves otherwise.

                 6.2.2 Employer Property; Assignment. Employee acknowledges and 
agrees that all Inventions which are discovered, conceived, developed, made, 
produced or prepared by Employee (alone or in conjunction with others) during 
the duration of Employee's employment with Employer shall be the sole property 
of Employer. Said property rights of Employer include without limitation all 
domestic and foreign patent rights, rights of registration or other protection 
under the patent and copyright laws, and all other rights pertaining to the 
Inventions. Employee further agrees that all services, products and Inventions 
that directly or indirectly result from engagement with Company shall be deemed 
"works for hire" as that term is defined in Title 17 of the United States Codes,
and accordingly all rights associated therewith shall vest in the Company. 
Notwithstanding the foregoing, Employee hereby assigns to Employer all of 
Employee's right, title and interest in any such services, products and 
Inventions, in the event any such services, products and Inventions shall be 
determined not to constitute "works for hire."

                 6.2.3 Exclusion Notice. The Assignment by Employee of 
Inventions under this Agreement does not apply to any Inventions which are owned
or controlled by Employee prior to the commencement of employment of Employee by
Employer (all of which are set forth on Exhibit "A" hereto). Additionally,
Employee is not required to assign an idea or invention where the invention or
idea meets all of the following criteria; namely if the invention
           ---
or idea: (i) was created or conceived without the use of any of Employer's 
equipment, supplies, facilities, or trade secret information, and (ii) was 
developed entirely on Employee's own time, and (iii) does not relate to the 
business of Employer, and (iv) does not relate to Employer's actual or 
demonstrably anticipated research or development, and (v) does not result from 
any work performed by Employee for Employer.

                 6.2.4 Patents and Copyrights; Attorney-in Fact. Both before and
after termination of this Agreement (and with reasonable compensation paid by 
Employer to Employee after termination), Employee


<PAGE>
 
 
Employment Agreement
Page 4

agrees to assist the Employer to apply for, obtain and enforce patents on, and 
to apply for, obtain and enforce copyright protection and registration of, the 
Inventions described in Section 6.2.2 in any and all countries. To that end, 
Employee shall (at Employer's request) without limitation, testify in any 
proceeding, and execute any documents and assignments determined to be necessary
or convenient for use in applying for, obtaining, registering and enforcing
patent or copyright protection involving any of the Inventions. Employee hereby
irrevocably appoints Employer, and its duly authorized officers and agents, as
Employee's agent and attorney-in-fact, to act for and in behalf of Employee in
filing all patent applications, applications for copyright protection and
registration, amendments, renewals, and all other appropriate documents in any
way related to the Inventions described in Section 6.2.2.

           6.3   TRADE SECRETS

                 6.3.1 Acknowledgement of Proprietary Interest. Employee 
recognizes the proprietary interest of Employer in any Trade Secrets of 
Employer. Employee acknowledges and agrees that any and all Trade Secrets of 
Employer, whether developed by Employee alone or in conjunction with others or 
otherwise, shall be and are the property of Employer.

                 6.3.2 Covenant Not to Divulge Trade Secrets. Employee 
acknowledges and agrees that Employer is entitled to prevent the disclosure of 
Trade Secrets of Employer. As a portion of the consideration for the employment 
of Employee and for the compensation being paid to Employee by Employer, 
Employee agrees at all times during the term of the employment by Employer and 
thereafter to hold in strictest confidence, and not to use, disclose or allow to
be disclosed to any person, firm, or corporation, Trade Secrets of Employer, 
including Trade Secrets developed by Employee, other than disclosures to persons
engaged by Employer to further the business of Employer, and other than use in 
the pursuit of the business of Employer.

                 6.3.3 Confidential Information of Others. Employee represents 
and warrants that if Employee has any confidential information belonging to 
others, Employee will not use or disclose to Employer any such information or 
documents. Employee represents that his employment with Employer will not 
require him to violate any obligation to or confidence with any other party.

           6.4   NO ADVERSE USE Employee will not at any time use Employer's 
Trade Secrets or Inventions in any manner which may directly or indirectly have 
an adverse effect upon Employer's business, nor will Employee perform any acts 
which would tend to reduce Employer's proprietary value in Employer's Trade 
Secrets or Inventions.

           6.5   RETURN OF MATERIALS AT TERMINATION In the event of any 
termination of Employee's employment, Employee will promptly deliver to Employer
all materials, property, documents, data, and other information belonging to 
Employer or pertaining to Trade Secrets or Inventions. Employee


<PAGE>
 
 
Employment Agreement
Page 5

shall not take any materials, property, documents or other information, or any 
reproduction or excerpt thereof, belonging to Employer or containing or 
pertaining to any Trade Secrets or Inventions.

           6.6   REMEDIES UPON BREACH In the event of any breach by Employee of 
the provision in this Section 6, Employer shall be entitled, if it so elects, to
institute and prosecute proceedings in any court of competent jurisdiction, 
either in law or in equity, to enjoin Employee from violating any of the terms 
of this Section 6, to enforce the specific performance by Employee of any of the
terms of this Section 6, and to obtain damages for any of them, but nothing 
herein contained shall be construed to prevent such remedy or combination of 
remedies as Employer may elect to invoke. The failure of Employer to promptly 
institute legal action upon any breach of this Section 6 shall not constitute a 
waiver of that or any other breach hereof.

     7.    COVENANT NOT TO COMPETE Employee agrees that, during Employee's 
employment, Employee will not directly or indirectly compete with Employer in
any way, and that Employee will not act as an officer, director, employee,
consultant, shareholder, lender or agent of any other entity which is engaged in
any business of the same nature as, or in competition with, the business in
which Employer is now engaged, or in which Employer becomes engaged during the
term of Employee's employment, or which is involved in science or technology
which is similar to Employer's science or technology.

     8.    GENERAL PROVISIONS

           8.1   ATTORNEYS' FEES In the event of any dispute or breach arising 
with respect to this Agreement, the party prevailing in any negotiations or 
proceedings for the resolution or enforcement thereof shall be entitled to 
recover from the losing party reasonable expenses, attorneys' fees and costs 
incurred therein.

           8.2   AMENDMENTS No amendment or modification of the terms or 
conditions of this Agreement shall be valid unless in writing and signed by both
parties hereto. There shall be no implied-in-fact contracts modifying the terms 
of this Agreement.

           8.3   ENTIRE AGREEMENT This Agreement constitutes the entire 
agreement between the parties with respect to the employment of Employee. This 
Agreement supersedes all prior agreements, understandings, negotiations and 
representation with respect to the employment relationship.

           8.4   SUCCESSORS AND ASSIGNS The Rights and obligations of Employer 
under this Agreement shall inure to the benefit of and shall be binding upon 
the successors and assigns of Employer. Employee shall not be entitled to assign
any of Employee's rights or obligations under this Agreement.

           8.5   WAIVER Either party's failure to enforce any provision of this 
Agreement shall not in any way be construed as a waiver of any such


<PAGE>
 

Employment Agreement
Page 6

provision, or prevent that party thereafter from enforcing each and every other 
provision of this Agreement.

           8.6   SEVERABLE PROVISIONS The provisions of this Agreement are 
severable, and if any or more provisions may be determined to be judicially 
unenforceable, in whole or in part, the remaining provisions shall nevertheless 
be binding and enforceable.

       9.  EMPLOYEE'S REPRESENTATIONS Employee represents and warrants that 
Employee (i) is free to enter into this Agreement and to perform each of the 
terms and covenants contained herein, (ii) is not restricted or prohibited, 
contractually or otherwise, from entering into and performing this Agreement, 
and (iii) will not be in violation or breach of any other agreement by reason of
Employee's execution and performance of this Agreement.

       IN WITNESS WHEREOF, the parties have executed this Agreement as of the 
date set forth above.

EMPLOYER:

AASTROM BIOSCIENCES, INC.

By: _____________________________________
    R. Douglas Armstrong, Ph.D.
    President and Chief Executive Officer


EMPLOYEE:

_______________________________


Address:   __________________________________

           __________________________________


<PAGE>
 
 
                                   Exhibit A

                           List of Prior Inventions
                                (Section 6.2.3)


None, other than the following:

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

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

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

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

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

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

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

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

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




<PAGE>
 
                                                                    EXHIBIT 10.9
                                                                  
                                                                  EXECUTION COPY



                      ===================================




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


                            STOCK PURCHASE AGREEMENT


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


                                    Between


                            COBE LABORATORIES, INC.


                                      and


                           AASTROM BIOSCIENCES, INC.



                          Dated as of October 22, 1993



                      ===================================

<PAGE>
 
Section                               i                               Page
- -------                                                               ----
                               TABLE OF CONTENTS
                               ----------------- 
Section                                                               Page
- -------                                                               ----


                                   ARTICLE I
                                  DEFINITIONS

<TABLE> 
<CAPTION>
<C>    <S>                                                            <C>   
1.01   Definitions.................................................   1
</TABLE>
 

                                   ARTICLE II
                          PURCHASE AND SALE OF SHARES;
                                    CLOSING

<TABLE> 
<C>    <S>                                                            <C>   
2.01   Authorization, Purchase and Sale of Shares..................   12
2.02   Closing.....................................................   12
</TABLE>
 

                                  ARTICLE III
                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
 

<TABLE> 
<C>    <S>                                                            <C>   
3.01   Organization, Authority and Qualification of the Company;
       No Subsidiaries.............................................   13
3.02   Restated Articles of Incorporation and By-Laws .............   14
3.03   Capitalization..............................................   14
3.04   Authority...................................................   15
3.05   No Conflict.................................................   15
3.06   Common Stock; Preferred Stock...............................   15
3.07   Compliance with Laws........................................   16
3.08   Governmental Consents and Approvals.........................   16
3.09   Financial Information.......................................   16
3.10   Absence of Certain Changes, Events and Conditions;
       Conduct in the Ordinary Course..............................   17
3.11   Employee Benefit Plans......................................   18
3.12   Leased Real Property........................................   19
3.13   Intellectual Property.......................................   20
3.14   Environmental Matters.......................................   23
3.15   Litigation..................................................   23
3.16   Agreements..................................................   23
3.17   Certain Interests...........................................   24
3.18   Licenses and Permits........................................   24
</TABLE>
 

<PAGE>
 
Section                               ii                              Page
- -------                                                               ----

<TABLE> 
<C>    <S>                                                            <C>   
3.19   Private Offering............................................   25
3.20   Brokers.....................................................   25
3.21   General Solicitation........................................   25
</TABLE>
 
 
                                   ARTICLE IV

                       REPRESENTATIONS AND WARRANTIES OF
                                 THE PURCHASER

<TABLE>
<C>    <S>                                                            <C>
4.01   Organization of the Purchaser...............................   25
4.02   Authority...................................................   25
4.03   No Conflict.................................................   26
4.04   Securities Act..............................................   26
4.05   Governmental Consents and Approvals.........................   27
4.06   Brokers.....................................................   27
</TABLE>


                                   ARTICLE V
                             ADDITIONAL AGREEMENTS

<TABLE>
<C>    <S>                                                            <C>
5.01   Access to Information; Confidentiality......................   27
5.02   Registration Rights.........................................   28
5.03   Purchaser's Option..........................................   28
5.04   Purchaser's Preemptive Rights...............................   29
5.05   Company Put Option..........................................   31
5.06   Standstill Agreement........................................   33
5.07   Purchaser's Right of First Negotiation......................   33
5.08   Legend......................................................   34
5.09   Board Observer; Board Representation........................   35
5.10   Regulatory Approvals........................................   36
5.11   Reservation of Shares.......................................   36
5.12   Voting Rights; Rights Plan..................................   37
5.13   Survival of Representations and Warranties..................   38
5.14   Company's Right of First Negotiation........................   38
</TABLE>


                                   ARTICLE VI
                    TERM, TERMINATION, AMENDMENT AND WAIVER


<TABLE>
<C>    <S>                                                            <C>
6.01   Term........................................................   38
6.02   Amendment...................................................   38
6.03   Waiver......................................................   38
</TABLE>


<PAGE>
 
Section                              iii                              Page
- -------                                                               ----

                                  ARTICLE VII
                               GENERAL PROVISIONS

<TABLE>
<C>    <S>                                                            <C>
7.01   Notices.....................................................   39
7.02   Entire Agreement; Assignment................................   40
7.03   Parties in Interest.........................................   40
7.04   Governing Law...............................................   40
7.05   Headings....................................................   40
7.06   Severability................................................   40
7.07   Counterparts................................................   41
7.08   Specific Performance........................................   41
7.09   Waiver of Trial by Jury.....................................   42
</TABLE>


EXHIBIT 2.02(b)(ii)   Form of Opinion of Pepper, Hamilton & Scheetz
EXHIBIT 2.02(b)(iv)   Restated Articles of Incorporation
EXHIBIT 2.02(b)(vii)  Stockholders' Agreement
EXHIBIT 2.02(b)(viii) Form of Distribution Agreement
EXHIBIT 5.02          Registration Rights

DISCLOSURE SCHEDULE

<PAGE>
 
     STOCK PURCHASE AGREEMENT dated as of October __, 1993 between
AASTROM BIOSCIENCES, INC., a Michigan corporation (the "Company"), and COBE
                                                        -------            
LABORATORIES, INC., a Colorado corporation (the "Purchaser").
                                                 ---------   


                             W I T N E S S E T H:
                             - - - - - - - - - - 

     WHEREAS, the Company desires to authorize, issue, and sell to the
Purchaser, and the Purchaser desires to purchase from the Company, the Shares
(as hereinafter defined).

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:


                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

     SECTION 1.01.  Definitions.  As used in this Agreement, the following terms
                    -----------                                                 
shall have the following meanings:

     "Action" means any claim, action, suit, arbitration, inquiry, proceeding or
      ------                                                                    
investigation by or before any federal, state or local or any foreign
government, governmental, regulatory or administrative authority, agency or
commission or any court, tribunal or judicial or arbitral body.

     "Affiliate" means, with respect to any specified Person, any other Person
      ---------                                                               
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person.

     "Agreement" or "this Agreement" means this Stock Purchase Agreement dated
      ---------      --------------                                           
as of October  , 1993 between the Company and the Purchaser (including the
             --
Exhibits hereto and the Disclosure Schedule) and all amendments made in
accordance with the provisions of Section 6.02.

     "Applicable Percentage" has the meaning specified in Section 5.04(d).
      ---------------------                                               

     "Applicable Preemptive Price" means (a) if the Issuance is or was a Public
      ---------------------------                                              
Offering, the quotient of (i) the aggregate price to the public of the New
Voting Securities sold by the Company in such Public Offering, less underwriting
discounts and commissions , divided by (ii) the number of New Voting Securities
sold by the Company in such Public Offering; (b) if the Issuance is or was a
Private Placement, the Private Placement Price paid to the Company by Persons
other than the Purchaser in such Private Placement; (c) if the Issuance is or
was a Non-Cash Transaction and the New Voting Securities to be issued are
publicly traded prior to such Issuance, the Market Price on the date of the 
Post-Determination Subscription Notice; (d) if the Issuance is or was a Non-Cash
Transaction not described in (c) above in which

<PAGE>
 
a monetary value of the New Voting Securities is established, such value; and
(e) otherwise, the greater of (i) the Compounded Private Placement Price or 
(ii) $8 per share of Common Stock.  For purposes of calculating the Applicable
Preemptive Price, the price of shares of Non-Coupon Preferred Stock shall be
calculated based upon the number of shares of Common Stock into which such
shares of Non-Coupon Preferred Stock are convertible at the time of such
calculation.

     "Articles" means the Restated Articles of Incorporation attached as Exhibit
      --------                                                                  
2.02(b)(iv) hereto establishing and designating the Preferred Stock.

     "Board" means the Board of Directors of the Company.
      -----                                              

     "Business Combination" has the meaning specified in Section 5.07.
      --------------------                                            

     "Business Combination Notice" has the meaning specified in Section 5.07.
      ---------------------------                                            

     "Business Day" means any day that is not a Saturday, a Sunday or other day
      ------------                                                             
on which banks are required or authorized by law to be closed in Denver,
Colorado or Ann Arbor, Michigan.

     "By-Laws" means the Restated By-Laws of the Company, as amended through the
      -------                                                                   
date hereof.

     "Chapter 7B" means Chapter 7B (known as the "Stacey, Bennett and Randall
      ----------                                  ------- -------------------
Shareholder Equity Act") of the MBCA.
- ----------------------               

     "Closing" means the completion of the transactions specified herein
      -------                                                           
relating to the purchase and sale of the Shares as contemplated by Section 2.02
hereof.

     "Code" means the Internal Revenue Code of 1986, as amended, together with
      ----                                                                    
the rules and regulations promulgated thereunder.

     "Common Stock" means the common shares of the Company, no par value.
      ------------                                                       

     "Company" has the meaning specified in the recitals to this Agreement.
      -------                                                              

     "Company Benefit Plans" has the meaning specified in Section 3.11(a).
      ---------------------                                               

     "Company Option" has the meaning specified in Section 5.05(a).
      --------------                                               

     "Company's Accountants" means Coopers & Lybrand, independent accountants of
      ---------------------                                                     
the Company.

     "Compounded Private Placement Price" means the Private Placement Price for
      ----------------------------------                                       
the last Private Placement preceding the date on which the Compounded Private
Placement Price is calculated, plus interest on such Private Placement Price
compounded annually at a rate of 15

<PAGE>
 
percent from the date of the closing of such preceding Private Placement to the
date of calculation.

     "Confidential Information" means all confidential or secret data, reports,
      ------------------------                                                 
interpretations, forecasts, records, marketing, sales and other commercial data
or reports, trade secrets information, know-how, methods, procedures, designs,
technology, inventions, ideas, specifications, plans, patent applications and
related correspondence, or other information that the parties hereto provide to
each other in connection with the transactions contemplated by this Agreement,
together with analyses, compilations, studies or other documents, whether
prepared by their respective agents or attorneys, which contain or otherwise
reflect such information; provided, however, that the following will not
                          --------  -------                             
constitute Confidential Information for purposes of this Agreement:

     (a)  information which was in one of such parties' possession prior to its
          receipt from the other of such parties;

     (b)  information which is obtained by one of such parties from a third
          person who, insofar as is known to such party, is not prohibited from
          transmitting the information to such party by a contractual, legal or
          fiduciary obligation to the other of such parties; and

     (c)  information which is or becomes publicly available through no fault of
          either of such parties.

          "Control" (including the terms "controlled by" and "under common
           -------                        -------------       ------------
control with"), with respect to the relationship between or among two or more
- ------------                                                                 
Persons, means the possession, directly or indirectly or as trustee or executor,
of the power to direct or cause the direction of the affairs or management of a
Person, whether through the ownership of voting securities, as trustee or
executor, by contract or otherwise, including, without limitation, the
ownership, directly or indirectly, of securities having the power to elect a
majority of the board of directors or similar body governing the affairs of such
Person.

          "Conversion Determination Date" has the meaning specified in Section
           -----------------------------                                      
5.04(a).

          "Disclosure Schedule" means the Disclosure Schedule attached hereto,
           -------------------                                                
dated as of the date hereof, delivered and forming a part of this Agreement.

          "Distribution Agreement" means the Distribution Agreement, dated as of
           ----------------------                                               
the date hereof, between the Company and an Affiliate of the Purchaser,
substantially in the form of Exhibit 2.02(b)(viii) hereto, as it may be amended
from time to time in accordance with its terms.

          "Encumbrance" means any security interest, pledge, mortgage, lien,
           -----------                                                      
charge, encumbrance, adverse claim, preferential arrangement or restriction of
any kind, including, without limitation, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of ownership.

<PAGE>
 
          "Environmental Laws" means any federal, state, local or foreign law,
           ------------------                                                 
regulation, agency interpretation, policy, order, decree, judgment, or judicial
opinion relating to (A) the manufacture, transport, use, treatment, storage,
recycling, disposal, release or threatened release of Hazardous Substances or
(B) relating to the preservation, restoration, or protection of natural
resources or health.

          "Environmental Permits" means any permit, license, approval,
           ---------------------                                      
identification number or other authorization involving Hazardous Substances or
required under any Environmental Law.

          "Equity Securities" means shares of Common Stock and any other
           -----------------                                            
securities convertible into, or exchangeable for, shares of Common Stock or
giving the holder the right to acquire shares of Common Stock.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
           -----                                                               
amended, together with the rules and regulations promulgated thereunder.

          "ERISA Affiliate" means any trade or business (whether or not
           ---------------                                             
incorporated) that is part of the same controlled group as, or under common
control with, the Company within the meaning of Section 414(b)(c)(m) or (o) of
the Code.

          "Exchange Act" means the Securities and Exchange Act of 1934, as
           ------------                                                   
amended, together with the rules and regulations promulgated thereunder.

          "Exclusivity Period" has the meaning specified in Section 5.07.
           ------------------                                            

          "Financial Statements" has the meaning specified in Section 3.09.
           --------------------                                            

          "Fully Diluted Outstanding Common Stock" means all of the outstanding
           --------------------------------------                              
Common Stock, all shares of Common Stock that can be acquired by any Person upon
conversion of the Shares and all shares of Common Stock that can be acquired
upon conversion or exchange of any other convertible or exchangeable securities
of the Company or pursuant to outstanding options, warrants or other securities
or arrangements having a conversion, exchange or exercise price that is less
than or equal to the Option Price and excluding the shares of Common Stock
subject to the Option and any shares of Common Stock held in the treasury of the
Company.

          "GAAP" means U.S. generally accepted accounting principles and
           ----                                                         
practices in effect from time to time applied consistently throughout the
periods involved.

          "Hazardous Substances" means any matter containing substances which
           --------------------                                              
are:  (A) listed, classified or regulated pursuant to any Environmental Law,
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, 42 U.S.C. (S) 9601 et seq.; the
                                                            -------     
Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq.; the Federal
                                                           -------             
Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.; the Toxic Substances
                                                -------                      
Control Act, 15 U.S.C. (S) 2601 et seq.; and the Clean Air Act, 42 U.S.C. 
                                ------ 
(S) 7401 et seq.; each as
         ------         

<PAGE>
 
amended; (B) any petroleum products or by-products, asbestos-containing
material, polychlorinated biphenyls, radioactive materials or radon gas; or 
(C) any other matter to which exposure is prohibited, limited or regulated by
any government authority or Environmental Law.

          "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
           -------                                                           
1976, as amended, and the rules and regulations promulgated thereunder.

          "Initial Public Offering" means the initial offering to the public by
           -----------------------                                             
the Company of shares of Common Stock registered under the Securities Act.

          "Intellectual Property" means (a) inventions, whether or not
           ---------------------                                      
patentable, whether or not reduced to practice, and whether or not yet made the
subject of a pending patent application or applications, (b) ideas and
conceptions of potentially patentable subject matter, including, without
limitation, any patent disclosures, whether or not reduced to practice and
whether or not yet made the subject of a pending patent application or
applications, (c) national (including the United States) and multinational
statutory invention registrations, patents, patent registrations and patent
applications (including all reissues, divisions, continuations, continuations-
in-part, extensions and reexaminations) and all rights therein provided by
international treaties or conventions and all improvements to the inventions
disclosed in each such registration, patent or application, (d) trademarks,
service marks, trade dress, logos, trade names and corporate names, whether or
not registered, including all common law rights, and registrations and
applications for registration thereof, including, but not limited to, all marks
registered in the United States Patent and Trademark Office, the Trademark
Offices of the States and Territories of the United States of America, and the
Trademark Offices of other nations throughout the world, and all rights therein
provided by international treaties or conventions, (e) copyrights (registered or
otherwise) and registrations and applications for registration thereof, and all
rights therein provided by international treaties or conventions, (f) computer
software, including, without limitation, source code, operating systems and
specifications, data, data bases, files, documentation and other materials
related thereto, data and documentation, (g) trade secrets and confidential,
technical and business information (including ideas, formulas, compositions,
inventions, and conceptions of inventions whether patentable or unpatentable and
whether or not reduced to practice), (h) whether or not confidential, technology
(including know-how and show-how), manufacturing and production processes and
techniques, research and development information, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial,
marketing and business data, pricing and cost information, business and
marketing plans and customer and supplier lists and information, (i) copies and
tangible embodiments of all the foregoing, in whatever form or medium, (j) all
rights to obtain and rights to apply for patents, and to register trademarks and
copyrights, and (k) all rights to sue or recover and retain damages and costs
and attorneys' fees for present and past infringement of any of the foregoing.

          "Interim Financial Statements" has the meaning specified in Section
           ----------------------------                                      
3.09.

          "IRS" means the United States Internal Revenue Service.
           ---                                                   

<PAGE>
 
          "Issuance" means a Post-Conversion Issuance or a Pre-Conversion
           --------                                                      
Issuance.

          "Leased Real Property" means the real property leased by the Company,
           --------------------                                                
together with, to the extent leased by the Company, all buildings and other
structures, facilities or improvements presently or hereafter located thereon,
all fixtures, systems, equipment and items of personal property of the Company
attached or appurtenant thereto and all easements, licenses, rights and
appurtenances relating to the foregoing.

          "Liabilities" means any and all debts, liabilities and obligations,
           -----------                                                       
whether accrued or fixed, absolute or contingent, mature or unmatured or
determined or determinable, including, without limitation, those arising under
any law, rule, regulation, or order by a governmental authority and those
arising under any contract, agreement, commitment or undertaking.

          "Licensed Intellectual Property" means all Intellectual Property
           ------------------------------                                 
licensed or sublicensed to the Company from a third party.

          "Market Price" of a security means the average of the daily closing
           ------------                                                      
prices of such security for the 30 consecutive trading days immediately
preceding the day as of which "Market Price" is being determined. The closing
price for each day shall be the last sale price regular way or, in case no such
sale takes place on such day, the average of the closing bid and asked prices
regular way, in either case on the New York Stock Exchange, or, if such
securities are not listed or admitted to trading on the New York Stock Exchange,
on the principal national securities exchange on which such securities are
listed or admitted to trading, or if such securities are not so listed or
admitted to trading but are listed in NASDAQ'S National Market System, the
closing price of such security regular way as reported by the National Market
System, or if the securities are not so listed or admitted to trading, the last
reported bid price as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or through a similar organization if NASDAQ is no
longer reporting such information.

          "Material Adverse Effect" means any circumstance, change, event,
           -----------------------                                        
transaction, loss, failure, effect on the business of the Company or other
occurrence that is, or could be, materially adverse to the business, operations,
properties (including intangible properties), condition (financial or
otherwise), assets, Liabilities, results of operations or prospects of the
Company.

          "MBCA" means the Michigan Business Corporation Act, effective 
           ----                                                                
January 1, 1973, as amended.

          "New Voting Securities" means any shares of Common Stock (or other
           ---------------------                                            
securities representing the common equity of the Company), any securities that
are convertible into or exchangeable for or otherwise give the holder the right
to acquire shares of Common Stock (or such other securities) or other Voting
Securities that are issued by the Company after the date hereof, other than
shares of Common Stock issued upon conversion of the Shares and Permitted
Employee Stock.

          "Non-Cash Transaction" means any Issuance other than a Public Offering
           --------------------                                                 
or a

<PAGE>
 
Private Placement.

          "Non-Coupon Preferred Stock" means the Shares and any other preferred
           --------------------------                                          
stock of the Company that carries no fixed dividend and is convertible by the
holder into shares of Common Stock.

          "Observation Period" has the meaning specified in Section 5.09(a).
           ------------------                                               

          "Option" has the meaning specified in Section 5.03(a).
           ------                                               

          "Option Closing" has the meaning specified in Section 5.03(c).
           --------------                                               

          "Option Closing Date" has the meaning specified in Section 5.03(c).
           -------------------                                               

          "Option Notice Date" has the meaning specified in Section 5.03(c).
           ------------------                                               

          "Option Period" has the meaning specified in Section 5.03(b).
           -------------                                               

          "Option Price" means a price per Option Share equal to 120% of the
           ------------                                                     
Market Price on the Option Notice Date.

          "Option Shares" means the number of newly issued shares of Common
           -------------                                                   
Stock which, immediately following the issuance thereof, will be equal to 30
percent of the Fully Diluted Outstanding Common Stock, and "Option Share" means
                                                            ------------       
one of the Option Shares.

          "Out of the Money Price" means a conversion, exchange or exercise
           ----------------------                                          
price that is equal to or greater than the Option Price.

          "Out of the Money Option Stock" means any Common Stock issued or to be
           -----------------------------                                        
issued by the Company upon conversion or exchange of any convertible or
exchangeable securities of the Company or pursuant to the exercise of any
outstanding options, warrants or other securities having an Out of the Money
Option Price.

          "Owned Intellectual Property" means all Intellectual Property, other
           ---------------------------                                        
than the Licensed Intellectual Property, in and to which the Company holds, or
has a right to hold, any right, title and interest.

          "Permitted Encumbrances" means such of the following as to which no
           ----------------------                                            
enforcement, collection, execution, levy or foreclosure proceeding shall have
been commenced: (a) liens for taxes, assessments and governmental charges or
levies not yet due and payable; (b) Encumbrances imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's liens and other
similar liens arising in the ordinary course of business; and (c) pledges or
deposits to secure obligations under workers' compensation laws or similar
legislation or to secure public or statutory obligations.

          "Permitted Employee Stock" means (a) shares of Common Stock or options
           ------------------------                                             
to

<PAGE>
 
purchase Common Stock issued to employees of the Company after the Initial
Public Offering, (b) all shares issuable to employees or consultants of the
Company pursuant to options issued by the Company prior to the date hereof, 
(c) all options and shares issuable pursuant to the Stock Option Plans, up to
the sum of (i) the aggregate number of shares authorized in the Stock Option
Plans as of the date hereof and (ii) up to an additional 300,000 shares of
Common Stock issuable pursuant to options granted after the date hereof, and (d)
an additional number of shares of Common Stock (or options therefor) equal to
not more than 25% of the additional shares (of Common Stock or of Non-Coupon
Preferred Stock) issued by the Company from and after the date hereof (including
the Shares) until one day prior to the date of the Initial Public Offering.

          "Person" means an individual, corporation, partnership, association,
           ------                                                             
trust, joint venture, unincorporated organization, other entity or group (as
defined in Section 13(d)(3) of the Exchange Act).

          "Post-Determination Issuance" has the meaning specified in Section
           ---------------------------                                      
5.04(a).

          "Post-Determination Issuance Notice" has the meaning specified in
           ----------------------------------                              
Section 5.04(a).

          "Post-Determination Preemptive Right" has the meaning specified in
           -----------------------------------                              
Section 5.04(b).

          "Post-Determination Subscription Notice" has the meaning specified in
           --------------------------------------                              
Section 5.04(a).

          "Post-Option Issuance" has the meaning specified in Section 5.03(g).
           --------------------                                               

          "Post-Option Issuance Notice" has the meaning specified in Section
           ---------------------------                                      
5.03(g).

          "Post-Option Purchase Right" has the meaning specified in Section
           --------------------------                                      
5.03(g).

          "Pre-Determination Issuance" has the meaning specified in Section
           --------------------------                                      
5.04(d).

          "Pre-Determination Preemptive Rights" has the meaning specified in
           -----------------------------------                              
Section 5.04(d).

          "Preferred Stock" means the shares of Series C convertible preferred
           ---------------                                                    
stock of the Company to be issued pursuant to this Agreement.

          "Private Placement" means an Issuance for cash other than a Public
           -----------------                                                
Offering.

          "Private Placement Price" means the quotient of (i) the aggregate
           -----------------------                                         
price paid to the Company in a Private Placement less the sales agency and
placement fees of such Private Placement borne by the Company, divided by 
(ii) the number of securities sold by the Company in such Private Placement. For
purposes of calculating the Private Placement Price, the price of shares of Non-
Coupon Preferred Stock shall be calculated based upon the number of shares

<PAGE>
 
of Common Stock into which such shares of Non-Coupon Preferred Stock are
convertible at the time of such calculation.

          "Public Offering" means a public offering of New Voting Securities
           ---------------                                                  
registered on a registration statement under the Securities Act.

          "Purchase Price" has the meaning specified in Section 2.01.
           --------------                                            

          "Purchaser" has the meaning specified in the recitals to this
           ---------                                                   
Agreement.

          "Purchaser Designees" has the meaning specified in Section 5.09(b).
           -------------------                                               

          "Purchaser Observer" has the meaning specified in Section 5.09(a).
           ------------------                                               

          "Put Notice" has the meaning specified in Section 5.05(b).
           ----------                                               

          "Qualifying IPO" has the meaning specified in Section 5.05(a).
           --------------                                               

          "Qualifying Private Placement" has the meaning specified in Section
           ----------------------------                                      
5.05(a).

          "Registration Rights" means the registration rights of the Purchaser
           -------------------                                                
as set forth in Exhibit 5.02 hereto.

          "Reserve Amount" has the meaning specified in Section 5.11.
           --------------                                            

          "Restated Articles of Incorporation" means the Restated Articles of
           ----------------------------------                                
Incorporation of the Company, as amended through the date hereof.

          "Securities Act" means the Securities Act of 1933, as amended,
           --------------                                               
together with the rules and regulations promulgated thereunder.

          "Series A Preferred Stock" means the Series A preferred stock of the
           ------------------------                                           
Company.

          "Series B Preferred Stock" means the Series B preferred stock of the
           ------------------------                                           
Company.

          "Shares" has the meaning specified in Section 2.01.
           ------                                            

          "Stock Option Plans" means the Company's 1992 Stock Option Plan, the
           ------------------                                                 
1989 Stock Option Plan and the Ancillary Stock Option Plan.

          "Subsidiaries" means any and all corporations, partnerships, joint
           ------------                                                     
ventures, associations and other entities controlled by the Company directly or
indirectly through one or more intermediaries.

          "Total Voting Power" means the combined voting power of all the Voting
           ------------------                                                   
Securities.

<PAGE>
 
          "Voting Securities" means any shares of any class of capital stock of
           -----------------                                                   
the Company entitled to vote generally in the election of directors.


                                  ARTICLE II

                     PURCHASE AND SALE OF SHARES; CLOSING
                     ------------------------------------

          SECTION 2.01.  Authorization, Purchase and Sale of Shares.  Upon the
                         ------------------------------------------           
terms set forth herein, at the Closing, the Company shall authorize, issue and
sell to the Purchaser, and the Purchaser shall purchase from the Company, 10,000
shares of Preferred Stock (the "Shares") for a purchase price of $10,000,000
                                ------                                      
(the "Purchase Price").  The Company hereby acknowledges receipt of $1,000,000
      --------------                                                          
received from the Purchaser by the Company prior to the date hereof, which
$1,000,000 shall be a credit against the Purchase Price.

          SECTION 2.02.  Closing.  (a)  The Closing of the purchase and sale
                         -------                                            
shall take place simultaneously with the execution of this Agreement at the
offices of the Company in Ann Arbor, Michigan.

          (b)  At the Closing, the Company shall deliver or cause to be
delivered to the Purchaser:  (i) stock certificates evidencing the Shares
registered in the name of the Purchaser; (ii) a legal opinion from Pepper,
Hamilton & Scheetz, Michigan, legal counsel to the Company substantially in the
form of Exhibit 2.02(b)(ii) hereto; (iii) a receipt for the Purchase Price; 
(iv) a copy of the Restated Articles of Incorporation certified by the
Corporations and Securities Bureau of the Department of Commerce of the State of
Michigan and a copy of the By-Laws certified by the Secretary of the Company;
(v) a certificate from the Corporations and Securities Bureau of the Department
of Commerce, certifying as to the good standing of the Company under the laws of
such state; (vi) evidence reasonably satisfactory to the Purchaser of the
adoption by the Board of the Company of actions duly approving this Agreement,
the Distribution Agreement and the transactions contemplated hereby and thereby;
(vii) agreements executed by H & Q Life Science Technology Fund I, H & Q London
Ventures, Brentwood Associates V, L.P., Wind Point II, L.P. and State Treasurer
of State of Michigan, as custodian for certain pension funds, which shareholders
of the Company hold in excess of 80% of the Voting Securities of the Company, in
the form of Exhibit 2.02(b)(vii) hereto agreeing (A) to vote shares held by such
shareholder against any proposal to amend the By-Laws or the Restated Articles
of Incorporation so as to make Chapter 7B of the MBCA applicable to acquisitions
of shares of Common Stock or Voting Securities and (B) to vote in favor of the
Purchaser Designees as directors; and (viii) a copy of the Distribution
Agreement, duly executed by the Company.

          (c)  At the Closing, the Purchaser shall deliver to the Company:  
(i) the Purchase Price, by wire transfer, to an account or accounts designated
by the Company at least five Business Days prior to the Closing Date; (ii) a
receipt for the Shares; and (iii) a copy of the Distribution Agreement duly
executed by the Purchaser.

<PAGE>
 
                                  ARTICLE III

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                 ---------------------------------------------

          The Company represents and warrants to the Purchaser that:

          SECTION 3.01.  Organization, Authority and Qualification of the
                         ------------------------------------------------
Company; No Subsidiaries.  The Company is a corporation duly organized, validly
- ------------------------                                                       
existing and in good standing under the laws of the State of Michigan and has
all necessary power and authority to own, operate or lease the properties and
assets now owned, operated or leased by it and to carry on the business of the
Company as it has been and is currently conducted. The Company is duly licensed
or qualified to do business and is in good standing in Michigan which is the
only jurisdiction in which the properties owned or leased by it or the operation
of its business makes such licensing or qualification necessary or desirable.
The Company has no Subsidiaries.

          SECTION 3.02.  Restated Articles of Incorporation and By-Laws.  The
                         ----------------------------------------------      
Company has heretofore furnished to the Purchaser a complete and correct copy of
the Restated Articles of Incorporation and the By-Laws, each as amended to date,
each of which is in full force and effect.  The Company is not in violation of
any of the provisions of the Restated Articles of Incorporation or By-Laws.

          SECTION 3.03.  Capitalization.  (a)  The authorized capital stock of
                         --------------                                       
the Company consists of (x) 5,540,000 shares of Preferred Stock, consisting of
2,500,000 issued and outstanding shares of Series A Preferred Stock, 3,030,000
issued and outstanding shares of Series B Preferred Stock and the Shares, none
of which is issued, outstanding or reserved for issuance, except pursuant to
this Agreement, and (y) 15,000,000 shares of Common Stock, of which 
(i) 1,736,219 shares of Common Stock are issued and outstanding, all of which
are validly issued, fully paid and nonassessable (except as noted in Section
3.03(a) of the Disclosure Schedule), (ii) 5,530,000 shares of Common Stock are
reserved for issuance upon conversion of the Series A and Series B Preferred
Stock, (iii) no shares of Common Stock are held in the treasury of the Company
and (iv) an aggregate of 1,573,940 shares of Common Stock are reserved for
issuance pursuant to the Company's Stock Option Plans. None of the issued and
outstanding shares of Common Stock was issued in violation of any preemptive
rights.

          (b)  Except as set forth in Section 3.03(b) of the Disclosure
Schedule, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character to which the Company or, to the
knowledge of the Company, any of its stockholders is a party or obligating the
Company or any of its stockholders to issue or to sell any shares of capital
stock of, or other equity interests in, the Company.  There are no outstanding
contractual obligations of the Company to repurchase, redeem or otherwise
acquire any of the capital stock of the Company or to provide funds to or make
any investment (in the form of a loan, capital contribution or otherwise) in any
other Person.

          (c)  Except as set forth in Section 3.03(c) of the Disclosure
Schedule, the Company is not party to any agreement granting registration rights
to any Person with respect to any equity or debt securities of the Company.

<PAGE>
 
          SECTION 3.04.  Authority.  The Company has all necessary corporate
                         ---------                                          
power and authority to execute and deliver this Agreement and the Distribution
Agreement and to perform its obligations and to consummate the transactions
contemplated hereunder and thereunder.  The execution, delivery and performance
of this Agreement and the Distribution Agreement by the Company have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or the Distribution Agreement or to consummate the transactions contemplated by
this Agreement or the Distribution Agreement.  This Agreement and the
Distribution Agreement have been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and delivery hereof by
the Purchaser and payment for the Shares as contemplated by this Agreement,
constitute the legal, valid and binding obligation of the Company enforceable
against the Company in accordance with their terms.

          SECTION 3.05.  No Conflict.  The execution and delivery of this
                         -----------                                     
Agreement and the Distribution Agreement by the Company do not, and the
performance of this Agreement and the Distribution Agreement by the Company will
not, (i) conflict with or violate the Restated Articles of Incorporation or By-
Laws, (ii) conflict with or violate any law, rule, regulation, order, judgment
or decree applicable to the Company or by which its properties are bound or
affected, or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of an Encumbrance on any of the
properties or assets of the Company pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, insurance policy or
other instrument or obligation to which the Company is a party, or by which the
Company or its properties are bound or affected.

          SECTION 3.06.  Common Stock; Preferred Stock.  All Shares and all
                         -----------------------------                     
shares of Common Stock subject to issuance as contemplated by this Agreement
(including, without limitation, the Common Stock issuable upon conversion of the
Shares and pursuant to Article V of this Agreement), upon such issuance against
payment therefor in accordance herewith or upon conversion of the Shares, as the
case may be, shall (i) be duly authorized, validly issued, fully paid and
nonassessable and (ii) be free and clear of all Encumbrances of any kind
whatsoever (including, without limitation, any preemptive rights of any other
stockholder of the Company). Upon issuance in accordance with the Articles and
herewith, all such shares of Common Stock shall have accorded to them full
voting rights. Upon issuance in accordance herewith, the Shares will have the
rights, including, without limitation, the voting rights, set forth in the
Articles.

          SECTION 3.07.  Compliance with Laws.  Except as set forth in Schedule
                         --------------------                                  
3.07 of the Disclosure Schedule and as would not have a Material Adverse Effect,
to the best knowledge of the Company, the Company is not in conflict with, or
violation of, any law, rule, regulation, order, judgment or decree applicable to
the Company or by which the Company or any of its properties are bound or
affected.

          SECTION 3.08.  Governmental Consents and Approvals.  The execution,
                         -----------------------------------                 
delivery and performance of this Agreement by the Company do not and will not
require any consent,

<PAGE>
 
approval, authorization or other order of, action by, filing with or
notification to any governmental or regulatory authority, domestic or foreign,
except (a) as described in Section 3.08 of the Disclosure Schedule and (b) to
the extent applicable, upon issuance of shares of Common Stock pursuant to
Article V of this Agreement and upon a conversion of the Shares as provided for
in the Articles, the notification requirements of the HSR Act.

          SECTION 3.09.  Financial Information.  True and complete copies of (i)
                         ---------------------                                  
the audited balance sheets of the Company for each of the fiscal years ended as
of June 30, 1992 and June 30, 1993, and the related audited statements of income
and cash flows of the Company, together with all related notes thereto,
accompanied by the reports thereon of the Company's Accountants (collectively,
the "Financial Statements") and (ii) the unaudited balance sheet of the Company
     --------------------                                                      
as of August 31, 1993, and the related unaudited statements of income and cash
flow, together with all related notes thereto (collectively referred to herein
as the "Interim Financial Statements"), are set forth in Section 3.09 of the
        ----------------------------                                        
Disclosure Schedule.  The Financial Statements and the Interim Financial
Statements (i) were prepared in accordance with the books of account and other
financial records of the Company, (ii) present fairly the financial condition,
results of operations and cash flows of the Company as of the dates thereof or
for the periods covered thereby, (iii) have been prepared in accordance with
U.S. GAAP applied on a basis consistent with the past practices of the Company
and (iv) include all adjustments (consisting only of normal recurring accruals)
that are necessary for a fair presentation of the financial condition of the
Company, the results of the operations and cash flows of the Company as of the
dates thereof or for the periods covered thereby; provided, however, that the
                                                  -----------------
Interim Financial Statements are subject to normal year-end adjustments, none of
which are expected to be material in amount, and to the inclusion of footnotes
with respect to the matters covered by the footnotes in the Financial
Statements.

          SECTION 3.10.  Absence of Certain Changes, Events and Conditions;
                         --------------------------------------------------
Conduct in the Ordinary Course.  (a)  Since June 30, 1993, except as disclosed
- ------------------------------                                                
in Schedule 3.10(a) of the Disclosure Schedule, there has not been any change
having a Material Adverse Effect.  Except as disclosed in Schedule 3.10(a) of
the Disclosure Schedule, there are no conditions known to the Company existing,
with respect to the research, markets, proposed development and marketing plans,
products, facilities, existing and prospective technologies, capabilities or
personnel of the Company that reasonably would be expected to have a Material
Adverse Effect.

          (b)  Since June 30, 1993, the Company has been operated only in the
ordinary course.  As amplification and not limitation of the foregoing, except
as disclosed in Schedule 3.10(b) of the Disclosure Schedule, the Company has
not, since June 30, 1993:

          (i)   permitted or allowed any of the assets or properties (whether
     tangible or intangible) of the Company to be subjected to any Encumbrance,
     other than Permitted Encumbrances;

          (ii)  made any loan to, guaranteed any indebtedness of or otherwise
     incurred any indebtedness on behalf of any Person;

          (iii) failed to pay any creditor any amount owed to such creditor when
     due;

<PAGE>
 
          (iv)  redeemed any of the capital stock or declared, made or paid any
     dividends or distributions (whether in cash, securities or other property)
     to the holders of capital stock of the Company;

          (v)   made any material changes in the customary methods of operations
     of the Company;

          (vi)  merged with, entered into a consolidation with or acquired an
     interest in, any Person or acquired a substantial portion of the assets or
     business of any Person or any division or line of business thereof, or
     otherwise acquired any material assets other than in the ordinary course of
     business consistent with past practice;

          (vii) made any capital expenditure or commitment for any capital
     expenditure in excess of $200,000 individually or $750,000 in the
     aggregate;

          (viii)issued or sold any capital stock, notes, bonds or other
     securities, or any option, warrant or other right to acquire the same, of,
     or any other interest in, the Company;

          (ix)  entered into any agreement, arrangement or transaction with any
     of its directors, officers, employees or shareholders (or with any
     relative, beneficiary, spouse or Affiliate of such Person);

          (x)   made any change in any method of accounting or accounting
     practice or policy used by the Company, other than such changes required by
     U.S. GAAP;

          (xi)  disclosed any secret or confidential Intellectual Property
     (except by way of issuance of a patent) or permitted to lapse or go
     abandoned any Intellectual Property (or any registration or grant thereof
     or any application relating thereto) to which, or under which, the Company
     has any right, title, interest or license; or

          (xii) agreed, whether in writing or otherwise, to take any of the
     actions specified in this Section 3.09 or granted any options to purchase,
     rights of first refusal, rights of first offer or any other similar rights
     or commitments with respect to any of the actions specified in this Section
     3.10, except as expressly contemplated by this Agreement.

          SECTION 3.11.  Employee Benefit Plans.  (a)  With respect to each
                         ----------------------                            
employee benefit plan, program, arrangement and contract (including, without
limitation, any "employee benefit plan", as defined in Section 3(3) of ERISA),
                 ---------------------                                        
maintained or contributed to by the Company or any of its ERISA Affiliates or
with respect to which the Company or any of its ERISA Affiliates could incur
liability under Section 4069, 4201 or 4212(c) of ERISA (the "Company Benefit
                                                            ---------------- 
Plans"), the Company has made available to the Purchaser a true and correct copy
- ------
of (i) the most recent annual report (Form 5500) filed with the IRS, (ii) such
Company Benefit Plan, (iii) each trust agreement relating to such Company
Benefit Plan, (iv) the most recent summary plan description for each Company
Benefit Plan for which a summary plan description is required and (v) the most
recent determination letter issued by the IRS with respect to any Company
Benefit Plan

<PAGE>
 
qualified under Section 401(a) of the Code.

          (b)  Except as set forth in Section 3.11(b) to the Disclosure
Schedule, none of the Company Benefit Plans promises or provides retiree medical
or life insurance benefits to any person.  Each Company Benefit Plan intended to
be qualified under Section 401(a) of the Code has received a favorable
determination letter from the IRS to the effect that it is so qualified and
nothing has occurred since the date of such letter to affect the qualified
status of such plan.  Except for the Stock Option Plans, none of the Company
Benefit Plans in effect on the date hereof would result, separately or in the
aggregate, in the payment of any material "excess parachute payment" within the
                                           ------------------------            
meaning of Section 280G of the Code.  Each Company Benefit Plan has been
operated in all material respects in accordance with its terms and the
requirements of applicable Law.  Except as set forth in Section 3.11(b) to the
Disclosure Schedule, none of the Company Benefit Plans is subject to Title IV of
ERISA, and neither the Company nor any of its ERISA Affiliates has incurred, or
reasonably expects to incur, any direct or indirect liability under or by
operation of Title IV or ERISA.

          (c)  With respect to the Company Benefit Plans, other than claims for
benefits, no event has occurred and, to the knowledge of the Company, there
exists no condition or set of circumstances, in connection with which the
Company or any of its ERISA Affiliates could be subject to any liability under
the terms of such Company Benefit Plans, ERISA, the Code or any other applicable
Law, which would, individually or in the aggregate, have a Material Adverse
Effect.

          SECTION 3.12.  Leased Real Property.  (a)  The Company owns no real
                         --------------------                                
property.

          (b)  Section 3.12(b) of the Disclosure Schedule contains a list of all
of the Leased Real Property. Except as described in such Section of the
Disclosure Schedule, (i) there is no material violation of any law, rule or
regulation by the Company or known to the Company relating to any of the Leased
Real Property, (ii) the Company is in peaceful and undisturbed possession of the
Leased Real Property, and so long as the lease remains in effect, there are no
contractual or legal restrictions that preclude or restrict the ability to use
the premises for the purposes for which they are currently being used and (iii)
the Company has not leased or subleased any parcel or any portion of any parcel
of Leased Real Property to any other Person, nor has the Company assigned its
interest under any lease or sublease listed in Section 3.12(b) of the Disclosure
Schedule to any third party.

          (c)  The Company has, or has caused to be, delivered to the Purchaser
true and complete copies of all leases and subleases listed in Section 3.12(b)
of the Disclosure Schedule.  Each of such leases and subleases is in full force
and effect and constitutes a legal, valid and binding obligation of the
respective parties thereto, and except as set forth on Schedule 3.12(c) of the
Disclosure Schedule, the Company is not in default or breach of (with or without
the giving of notice or the passage of time) any such leases or subleases.  To
the knowledge of the Company, no third party is in material breach of any of
such leases or subleases.

          SECTION 3.13.  Intellectual Property.  (a)  Except as set forth in
                         ---------------------                              
Schedule 3.13

<PAGE>
 
of the Disclosure Schedule:  (i) all the Owned Intellectual Property is owned by
the Company, free and clear of any Encumbrance and (ii) no Actions have been
made or asserted or are pending (nor, to the best knowledge of the Company after
due inquiry, has any such Action been threatened) against the Company either 
(A) based upon or challenging or seeking to deny or restrict the use by the
Company of any of the Owned Intellectual Property or (B) alleging that any
services provided, or products manufactured or sold by the Company are being
provided, manufactured or sold in violation of any patents or trademarks, or any
other rights of any Person. To the best knowledge of the Company after due
inquiry, no Person is using any patents, copyrights, trademarks, service marks,
trade names, trade secrets or similar property that are confusingly similar to
the Owned Intellectual Property or that infringe upon the Owned Intellectual
Property or upon the rights of the Company therein. Except as disclosed in
Section 3.12 of the Disclosure Schedule, the Company has not granted any license
or other right to any other Person with respect to the Owned Intellectual
Property. The consummation of the transactions contemplated by this Agreement
will not result in the termination or impairment of any of the Owned
Intellectual Property.

          (b)  Except as set forth on Section 3.13(b) of the Disclosure
Schedule, each license and sublicense with respect to the Licensed Intellectual
Property:

          (i)  is valid and binding and in full force and effect and represents
     the entire agreement between the respective licensor and licensee with
     respect to the subject matter of such license or sublicense;

          (ii)  except as otherwise set forth in Section 3.13(b)(ii) of the
     Disclosure Schedule, will not cease to be valid and binding and in full
     force and effect on terms identical to those currently in effect as a
     result of the consummation of any of the transactions contemplated by this
     Agreement, nor will the consummation of the transactions contemplated by
     this Agreement constitute a breach or default under such license or
     sublicense or otherwise give the licensor or sublicensor a right to
     terminate such license or sublicense;

          (iii) no Actions have been made or asserted or are pending (nor, to
     the best knowledge of the Company after due inquiry, has any such Action
     been threatened) against the Company either (A) based upon or challenging
     or seeking to deny or restrict the use by the Company of any of the
     Licensed Intellectual Property or (B) alleging that any Licensed
     Intellectual Property is being licensed, sublicensed or used in violation
     of any patents or trademarks, or any other rights of any Person; and

          (iv)  to the knowledge of the Company, no Person is using any patents,
     copyrights, trademarks, service marks, trade names, trade secrets or
     similar property that are confusingly similar to the Licensed Intellectual
     Property or that infringe upon the Licensed Intellectual Property or upon
     the rights of the Company therein.

          (c)   Except as otherwise disclosed in Section 3.13(c) of the
Disclosure Schedule, with respect to each such license or sublicense of Licensed
Intellectual Property:  (i) the Company has not received any notice of
termination or cancellation under such license or

<PAGE>
 
sublicense and no licensor or sublicensor has any right of termination or
cancellation under such license or sublicense except in connection with the
default of the Compa