<PAGE>
 
   
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996     
                                                   
                                                REGISTRATION NO. 333-15415     
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   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.                      1633 BROADWAY
     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. [_]
       
  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 18, 1996     
 
                                3,250,000 Shares
 
                       [LOGO of 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. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ASTM."     
   
  Cobe Laboratories, Inc. has agreed to purchase $5,000,000 of shares of Common
Stock in this offering at the Price to the Public set forth below. See "Certain
Transactions."     
 
                                --------------
 
 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 leading provider of 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 has been 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 stem cell collection methods. Compared with current methods,
the Aastrom CPS is expected to involve two patient care episodes rather than
approximately eight to 21 care episodes, less than three hours of patient
procedure time rather than approximately 16 to 39 hours of patient procedure
time and approximately four to ten needle sticks rather than 22 or more needle
sticks over the course of collection and infusion. 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. Cobe Laboratories Inc., an affiliate of Cobe BCT, has agreed to purchase
$5,000,000 of Common Stock in this offering at the initial public offering
price per share.     
 
  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(1)
Common Stock to be out-    
 standing after this of-
 fering................... 13,235,734 shares(2)
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   
 Market symbol............ ASTM
</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(3)............... $      (.32) $      (.49) $      (.82) $      (.66) $      (.98) $      (.13)  $      (.32)
                         ===========  ===========  ===========  ===========  ===========  ===========   ===========
Pro forma weighted
 average number of
 shares outstanding(3)..   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(4)
                                                                                          -----------  --------------
<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 shareholders' equity.........................................................        7,618,000    33,920,500
</TABLE>
    
- -------
   
(1) Includes 555,556 shares which Cobe Laboratories, Inc. has agreed to
    purchase, assuming an initial public offering price of $9.00 per share.
           
(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 an initial public offering price of $9.00 per
    share. See "Management--Stock Option and Employee Benefit Plans" and Notes
    4 and 9 of Notes to Financial Statements.     
   
(3) 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.     
   
(4) 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 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; --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, it is possible 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 of acceptable quality, or 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 will achieve
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 months' 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, if at all. 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 23.1% 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 option, 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
"--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, 9,947,757 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 shareholders
have rights to include shares of Common Stock owned by them in future
registrations 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, all 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. The Company also 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. The shares issuable upon exercise of such warrants and the shares
issuable upon exercise of such option will be subject to lock-up agreements.
In addition, Cobe has agreed to purchase $5,000,000 of Common Stock in this
offering at the initial public offering price per share, all of which shares
will be 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 44% of the Common Stock (approximately 42% 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.
 
 
                                      13

<PAGE>
 
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 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."
 
                                      14

<PAGE>
 

                                  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.
 
                                      15

<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
Shareholders' 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 shareholder notes receivable..............     198,000    64,218,500
Deficit accumulated during the development stage..... (30,298,000)  (30,298,000)
                                                      -----------  ------------
Total shareholders' 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 an initial public offering price of $9.00 per
    share. See "Management--Stock Option and Employee Benefit Plans" and Notes
    4 and 9 of Notes to Financial Statements.     
 
                                      16

<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 shareholders 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 shareholders 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 shareholders...  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 an initial public offering 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.     
 
                                      17

<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 shareholders' 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.
 
                                      18

<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.
 
                                      19

<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
 
                                      20

<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
 
                                      21

<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.
 
                                      22

<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 leading provider of 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
 
                                      23

<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 has been
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 multicycle therapy, the stem and
progenitor cells on which these growth     
 
                                      24

<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 90 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 often 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 believes that current charges for bone
marrow harvest, processing and infusion are approximately $10,000 to $15,000
per procedure, with considerable variability between institutions. The Company
believes that current charges for PBPC collection, including mobilization and
infusion, are approximately $12,000 to $20,000 for a two to three cycle
procedure, with considerable variability between institutions depending on the
mobilization regimen and the total volume, time and number of aphereses
required.     
   
  Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, 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.     
 
                                      25

<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 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
 
                                      26

<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 licenses 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 is the exclusive licensee of a U.S.
Patent, and has additional applications pending, 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 blood-bag container with the cell product. The control and documentation
features of the Aastrom CPS have been designed to meet GMP requirements for
the therapeutic production of cells.     
 
                                      27

<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 typically 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 and infusion processes. The
following table, which sets forth the Company's estimates based on a 1996
survey of 11 U.S. transplant institutions, illustrates some potential
advantages of the Aastrom CPS compared to estimated patient care episodes,
procedure time and needle sticks in connection with currently established cell
collection and infusion techniques:     
 

<TABLE>   
<CAPTION>
                                       CARE     PROCEDURE TIME
  CELL SOURCE                       EPISODES(1)   (HOURS)(1)   NEEDLE STICKS(2)
  -----------                       ----------- -------------- ----------------
  <S>                               <C>         <C>            <C>
  Bone Marrow Harvest(3)...........       8           16              103
  PBPC Mobilization and Collec-
   tion(4).........................      21           39               22
  Aastrom CPS(5)...................       2          1-3             4-10
</TABLE>
    
 --------
 (1) Includes all outpatient, inpatient, and home care episodes.
    
 (2) Includes bone marrow aspirates, blood samples, catheter placements and
     other venous access, and subcutaneous injections.     
    
 (3) Includes operating room procedure and all preparatory and recovery
     procedures.     
    
 (4) Based on an average of three rounds of apheresis following cell
     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 and infusion
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 are expected to include fewer needle sticks than with current
cell collection and infusion 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 multicycle, 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.
 
                                      28

<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 bone marrow harvest or
PBPC transplants may 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.
 
                                      29

<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 leading provider 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."     
 
 
                                      30

<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
assurance 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 initiated to demonstrate CTL effectiveness. 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 Company believes that 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.     
 
                                      31

<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. The
Company believes that for ex vivo 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 designed to produce cells for therapy and the
Company believes that the Aastrom CPS may be useful in many potential ex vivo
gene therapy applications. Further, the Company     
 
                                      32

<PAGE>
 
   
anticipates that its proprietary stem cell production process technology
implemented by the Aastrom CPS will provide the conditions for clinical scale
stem cell division, and enable or enhance 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 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 than
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.     
 
                                      33

<PAGE>
 
   
  In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and other
rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe has elected to purchase $5,000,000 of Common Stock in
this offering at the initial public offering price per share. See "Description
of Capital Stock--Rights of Cobe" and "Certain Transactions."     
 
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 present
claims to (i) certain methods for ex vivo stem cell division as well as ex
vivo human hematopoietic stem cell stable genetic     
 
                                      34

<PAGE>
 
   
transformation and expanding and harvesting a human hematopoietic stem cell
pool; (ii) certain apparatus for cell culturing, including a bioreactor
suitable for culturing human stem cells or human hematopoietic cells; and
(iii) certain methods of infecting or transfecting target cells with 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 operations. 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
 
                                      35

<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 (the "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 the 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 the 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
 
                                      36

<PAGE>
 
   
Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the 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.
 
                                      37

<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 several IDEs for the Aastrom CPS,
and is currently conducting a pre-pivotal clinical study under one of 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
 
                                      38

<PAGE>
 
   
likely to cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits a company from 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,
 
                                      39

<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 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.     
 
  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
 
                                      40

<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.
 
                                      41

<PAGE>
 

                                  MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
   
  The following table provides information concerning directors and executive
officers of the Company as of October 31, 1996:     
 

<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..................      40     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...      43     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 shareholders 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.
 
                                      42

<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 Geneic 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
 
                                      43

<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, and is a leading provider of 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.
 
                                      44

<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,     
 Ph.D...................  1996  $156,962   $55,000         --             $8,885(1)
 President and Chief 
 Executive Officer

James Maluta............  1996  $118,942   $10,000         --                 --
 Vice President, Product
 Development

Thomas E. Muller, Ph.D..  1996  $118,560        --         --                 --
 Vice President,
 Regulatory Affairs

Walter C. Ogier.........  1996  $106,250   $ 7,500         --                 --
 Vice President,
 Marketing
</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>

- --------
(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.
 
                                      45

<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, respectively, 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.     
 
 
                                      46

<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.
 
                                      47

<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 options 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 date of this Prospectus, 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 shareholders 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.
 
                                      48

<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 or any other form of non-cash compensation
were 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.
 
                                      49

<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
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.
 
                                      50

<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 as of the date of this Prospectus, 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.
   
  Pursuant to its letter dated November 11, 1996, Cobe has elected to purchase
$5,000,000 of the Company's Common Stock in this offering at the initial
public offering price per share in satisfaction of its preemptive rights under
the Cobe Stock Agreement. In addition, the Company has elected not to exercise
its put option rights under the Cobe Stock Agreement with respect to this
offering. See "Description of Capital Stock--Rights of Cobe."     
   
  The Company has entered into employment agreements with certain of its
executive officers. See "Management--Employment Agreements." The Company has
also entered into an Indemnification Agreement with certain of its directors,
officers and other key personnel. See "Management--Limitation of Liability and
Indemnification Matters."     

                                      51

<PAGE>
 
                             
                          PRINCIPAL SHAREHOLDERS     
 
  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>
                                   SHARES BENEFICIALLY     SHARES BENEFICIALLY
                                      OWNED BEFORE             OWNED AFTER
                                     THE OFFERING(1)         THE OFFERING(1)
                                   ----------------------- -----------------------
BENEFICIAL OWNER                     NUMBER     PERCENT      NUMBER     PERCENT
- ----------------                   ------------ ---------- ------------ ----------
<S>                                <C>          <C>        <C>          <C>
H&Q Life Science(2)..............     1,061,334     10.6%     1,061,334      8.0%
 Technology Fund I
 One Bush Street, 18th Floor
 San Francisco, CA 94104
H&Q London Ventures..............       816,666      8.2%       816,666      6.2%
 One Bush Street, 18th Floor
 San Francisco, CA 94104
State Treasurer of the State of       1,338,724     13.4%     1,338,724     10.1%
 Michigan,(3)....................
 Custodian of certain retirement
 systems
 c/o Venture Capital Division
 430 West Allegan
 Lansing, MI 48992
SBIC Partners, L.P...............       627,451      6.3%       627,451      4.7%
 201 Main Street, Suite 2302
 Fort Worth, TX 76102
Brentwood Associates V, L.P.(4)..       745,831      7.5%       745,831      5.6%
 11150 Santa Monica Blvd., Suite
 1200
 Los Angeles, CA 90025
Wind Point Partners II, L.P......       559,500      5.6%       559,500      4.2%
 676 N. Michigan Ave., Suite 3300
 Chicago, IL 60611
Cobe Laboratories, Inc.(5).......     2,499,999     25.0%     3,055,555     23.1%
 1185 Oak Street
 Lakewood, CO 80215
R. Douglas Armstrong, Ph.D.(6)...       501,555      5.0%       501,555      3.8%
Albert B. Deisseroth, M.D.,              25,000        *         25,000        *
 Ph.D. ..........................
Stephen G. Emerson, M.D., Ph.D. .       256,789      2.6%       256,789      1.9%
G. Bradford Jones(7).............       745,831      7.5%       745,831      5.6%
Robert J. Kunze(8)...............     1,061,334     10.6%     1,061,334      8.0%
James Maluta(9)..................        83,333        *         83,333        *
Thomas E. Muller, Ph.D.(10)......        15,000        *         15,000        *
Walter C. Ogier(11)..............        20,833        *         20,833        *
Horst R. Witzel, Dr.-Ing.(12)....         8,237        *          8,237        *
Edward C. Wood, Jr.(13)..........     2,499,999     25.0%     3,055,555     23.1%
All officers and directors as a       5,237,911     52.1%     5,793,467     43.5%
 group (12 persons)(14)..........
</TABLE>
    
- --------
*  Represents less than 1% of outstanding Common Stock or voting power.
 
                                      52

<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 of this
    Offering. 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) The shares attributed to Cobe in the "Shares Beneficially Owned After the
    Offering" column include 555,556 shares of Common Stock which Cobe has
    agreed to purchase in this offering, assuming the closing of this offering
    at an initial public offering price of $9.00 per share. In addition,
    pursuant to the Cobe Stock Agreement, 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) The shares attributed to Mr. Wood in the "Shares Beneficially Owned
     Before the Offering" column consist of 2,499,999 shares held by Cobe and
     the shares attributed to Mr. Wood in the "Shares Beneficially Owned After
     the Offering" column consist of such shares and an additional 555,556
     shares which Cobe has agreed to purchase in this offering, assuming the
     closing of this offering at an initial public offering price of $9.00 per
     share. 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 as of the date of this Prospectus.     
 
                                      53

<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 this 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
 
                                      54

<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 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     
 
                                      55

<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 the closing of this 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. Pursuant to
such preemptive rights, Cobe has elected to purchase $5,000,000 of Common
Stock in this offering at the initial public offering price per share. 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 $5,000,000. If the Company exercises the 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. The Company has elected not to exercise the
Put Option with respect to this offering.     
 
  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.
 
                                      56

<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 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 this
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 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, 9,947,757 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 shareholders
have rights to include shares of Common Stock owned by them in future
registrations 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 plan. Of the 1,837,160 shares issuable under the
Company's stock option and stock purchase plans, 336,254 shares are subject to
outstanding options as of September 30, 1996, all 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. The Company also 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. The shares issuable upon exercise of such warrants and the shares
issuable upon exercise of such option will be subject to lock-up agreements.
In addition, Cobe has agreed to purchase $5,000,000 of Common Stock in this
offering at the initial public offering price per share, all of which shares
will be subject to a lock-up agreement.     
                                                                            
                                                                                
  In general, under Rule 144, a person (or persons whose shares are
aggregated), shareholders, 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 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 existings shareholders or by shareholders
purchasing in their offering could have a negative effect on the market price
of the Common Stock.     
 
                                      57

<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.
   
  As part of this offering, Cobe has agreed with the Company to purchase from
the Underwriters $5,000,000 of Common Stock at the initial public offering
price per share.     
 
  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
shareholders 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.
 
 
                                      58

<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 Continental Stock
Transfer & Trust Company. Its telephone number in New York, New York is (212)
509-4000.     
 

                                 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, shareholders' 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.     
   
  The statements in this Prospectus concerning the patents and patent
applications either owned or licensed by the Company under the captions "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights" and "Business--
Patents and Proprietary Rights" and the other references herein concerning the
patents and patent applications either owned or licensed by the Company have
been reviewed and approved by Oblon, Spivak, McClelland, Maier & Neustadt,
P.C., Arlington, Virginia, patent counsel to the Company, as experts on such
matters, and are included herein in reliance upon that review and approval.
    
                            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 shareholders quarterly reports containing unaudited
financial data for the first three quarters of each fiscal year.     
 
                                      59

<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 Shareholders' 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
                                                                   SHAREHOLDERS'
                                  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 SHAREHOLDER'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)
SHAREHOLDERS' 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)
Shareholder notes
 receivable..............     (198,000)    (167,000)     (167,000)     (167,000)
Stock purchase rights....           --    3,500,000            --            --
Unrealized losses on
 investments.............       (2,000)          --            --            --
                          ------------  -----------   -----------   -----------
  Total shareholders'
   equity................   11,186,000   10,850,000     7,618,000   $ 7,618,000
                          ------------  -----------   -----------   ===========
    Total liabilities and
     shareholders'
     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 SHAREHOLDERS' EQUITY     
 

<TABLE>   
<CAPTION>
                                                                   DEFICIT
                                                                 ACCUMULATED
                       PREFERRED STOCK         COMMON STOCK       DURING THE   SHAREHOLDER   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 Stock
  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
  shareholder
  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
                    SHAREHOLDERS'
                       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 Stock
  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
  shareholder
  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
  shareholder 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 shareholders' 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 or for any other period.     
 
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. SHAREHOLDERS' EQUITY:     
   
  Preferred Stock--The Company has the following outstanding 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>
 

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












       








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

<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...............................................................   15
Use of Proceeds...........................................................   15
Dividend Policy...........................................................   15
Capitalization............................................................   16
Dilution..................................................................   17
Selected Financial Data...................................................   18

Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   19
Business..................................................................   23
Management................................................................   42
Certain Transactions......................................................   50
Principal Shareholders....................................................   52
Description of Capital Stock..............................................   54
Shares Eligible for Future Sale...........................................   57
Underwriting..............................................................   58
Legal Matters.............................................................   59
Experts...................................................................   59
Additional Information....................................................   59
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 OF 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 3.3), 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.
       
  (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) and 15(b) 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(c) 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.     
     
  10.14**+  License and Supply Agreement dated April 1, 1996 between Immunex
            Corporation and the Company.     
 
                                     II-3

<PAGE>
 
     
  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     Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Enterprise Development Fund L.P., Enterprise
            Development Fund II, L.P. and Northwest Ohio Venture Fund Limited
            Partnership).     
     
  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.     
     
  10.32+    Governance Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.     
     
  10.33+    License Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.     
     
  10.34     Stock Purchase Agreement dated September 15, 1995 between the
            Company and Rhone-Poulenc Rorer Inc.     
     
  10.35     Letter Agreement dated November 11, 1996 between the Company and
            Cobe Laboratories, Inc.     
     
  10.36     Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Brentwood Associates V, L.P., Candice E.
            Appleton Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life
            Science Technology Fund, H&Q London Ventures, State Treasurer of
            the State of Michigan and Windpoint Partners II, L.P.).     
 
 
                                     II-4

<PAGE>
 
          
  10.37     Subscription Agreement dated December 11, 1995 between the
            Company and Northwest Ohio Venture Fund Limited Partnership.     
            
  10.38     Subscription Agreement dated May 30, 1995 between the Company and
            Cobe Laboratories, Inc.     
     
  10.39     Termination Agreement dated November 14, 1996 between the Company
            and Rhone-Poulenc Rorer Inc.     
     
  10.40     Stock Purchase Agreement dated November 14, 1996 between the
            Company and Rhone-Poulenc Rorer Inc.     
     
  11.1**    Statement re computation of pro forma net loss 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.     
     
  23.3      The consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
                   
  24.1**    Power of Attorney.     
     
  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.
   
**Previously filed.     
          
+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
       
  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 amendment to the 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 18th 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)
   
  Pursuant to the requirements of the Securities Act of 1933, this amendment
to the 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 18, 1996
    R. Douglas Armstrong, Ph.D.      and Director (Principal Executive Officer)

          Todd E. Simpson*
____________________________________ Vice President, Finance & Administration   November 18, 1996
          Todd E. Simpson            and Chief Financial Officer (Principal
                                     Financial and Accounting Officer)

          Robert J. Kunze*
____________________________________ Chairman of the Board and Director         November 18, 1996
          Robert J. Kunze

       Albert B. Deisseroth*
____________________________________ Director                                   November 18, 1996
 Albert B. Deisseroth, M.D., Ph.D.

        Stephen G. Emerson*
____________________________________ Director                                   November 18, 1996
  Stephen G. Emerson, M.D., Ph.D.

         G. Bradford Jones*
____________________________________ Director                                   November 18, 1996
         G. Bradford Jones

          Horst R. Witzel*
____________________________________ Director                                   November 18, 1996
     Horst R. Witzel, Dr.-Ing.

          Edward C. Wood*
____________________________________ Director                                   November 18, 1996
        Edward C. Wood, Jr.
</TABLE>
    

   
*By: /s/ R. Douglas Armstrong    
    -------------------------
   
    R. Douglas Armstrong     
   
     Attorney-in-Fact     
 
                                     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.     
     
  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.     

<PAGE>
 
     
  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    Form of Subscription Agreement for the purchase of Series D
           Preferred Stock (Enterprise Development Fund L.P., Enterprise
           Development Fund II, L.P. and Northwest Ohio Venture Fund Limited
           Partnership).     
     
  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.     
     
  10.32+   Governance Agreement dated September 15, 1995 between the Company
           and Rhone-Poulenc Rorer Inc.     
     
  10.33+   License Agreement dated September 15, 1995 between the Company and
           Rhone-Poulenc Rorer Inc.     
     
  10.34    Stock Purchase Agreement dated September 15, 1995 between the
           Company and Rhone-Poulenc Rorer Inc.     
     
  10.35    Letter Agreement dated November 11, 1996 between the Company and
           Cobe Laboratories, Inc.     
     
  10.36    Form of Subscription Agreement for the purchase of Series D
           Preferred Stock (Brentwood Associates V, L.P., Candice E. Appleton
           Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life Science
           Technology Fund, H&Q London Ventures, State Treasurer of the State
           of Michigan and Windpoint Partners II, Limited Partnership).     
          
  10.37    Subscription Agreement dated December 11, 1995 between the Company
           and Northwest Ohio Venture Fund Limited Partnership.     
         

<PAGE>
 
     
  10.38     Subscription Agreement dated May 30, 1995 between the Company and
            Cobe Laboratories, Inc.     
     
  10.39     Termination Agreement dated November 14, 1996 between the Company
            and Rhone-Poulenc Rorer Inc.     
     
  10.40     Stock Purchase Agreement dated November 14, 1996 between the
            Company and Rhone-Poulenc Rorer Inc.     
     
  11.1**    Statement re computation of pro forma net loss 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.     
     
  23.3      The consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
                   
  24.1**    Power of Attorney.     
     
  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.     
   
**Previously filed.     
       
       
          
+The Company has applied for confidential treatment with respect to certain
portions of these documents.     





<PAGE>
 
                                                                   EXHIBIT 10.24

                                PROMISSORY NOTE

                                                             Ann Arbor, Michigan
$120,000                                                       November 18, 1993
                                                                           11/96


     1.   As repayment for a cash loan made by Aastrom Biosciences, Inc., a
Michigan Corporation ("AASTROM"), to R. Douglas Armstrong ("Maker"), Maker
hereby promises to pay to the order of AASTROM, at Ann Arbor, Michigan, or at
such other place as AASTROM may direct in writing, the principal amount of
$120,000, together with interest on the outstanding principal balance owing from
time to time at the rate of four percent (4%) per annum.

     2.   Accrued interest shall be payable on each anniversary date of this
Note.

     3.   The principal and all unpaid accrued interest owing on this Note shall
mature and be fully due and payable on the third anniversary of the date of this
                                           -----------------
Note.  Maker may prepay any or all of the principal and interest owing on this
Note at any time without penalty or premium.

     4.   If any installment of interest owing on this Note is not paid within
ten (10) days after Maker receives a written notice of default, then Aastrom may
accelerate the maturity date and declare all sums of principal and accrued
interest immediately due and payable.

     5.   If this Note is not paid when due, Maker promises to pay all costs
incurred by Aastrom in collecting amounts due on this
 Note, including reasonable
attorney's fees.

     6.   Payments owing on this note shall be payable (i) in lawful money of
the United States of America or, (ii) at the option of Maker, by Maker's
surrender of common stock of Aastrom owned by Maker, with said common stock
being valued at the public trading price for Aastrom's common stock on the date
the stock is surrendered, if Aastrom's common stock is publicly traded; or if
Aastrom's common stock is not publicly traded, then the value of the stock shall
be the fair market value of the common stock as determined by the Board of
Directors of Aastrom,  or (iii) at the option of Maker, by Maker's surrender of
vested stock options to purchase common stock of Aastrom, with said stock
options valued at the "spread" between the then current fair market value of the
stock (as determined above) and the option exercise price.

     7.   This Note has been executed and delivered by Maker in the State of
Michigan, and shall be governed by and construed in accordance with the laws of
the State of Michigan.

     8.   Maker acknowledges that Maker has personal liability on this Note, and
that this Note is a "full recourse" note.

MAKER:

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

<PAGE>
 
                       FIRST AMENDMENT TO PROMISSORY NOTE

     This Amendment (the "Amendment") to the Promissory Note (the "Note") dated
November 18, 1993, payable to Aastrom Biosciences, Inc., a Michigan corporation
(the "Company"), executed by R. Douglas Armstrong ("Maker"), is dated as of
October 30, 1996.

     WHEREAS, Section 3 of the Note provides that all principal and accrued but
unpaid interest is due and payable on the third anniversary of the date of the
Note (i.e. November 18, 1996).

     WHEREAS, the Company desires to amend the Note to provide that all
principal and accrued but unpaid interest shall be due and payable on June 30,
1997.

     NOW, THEREFORE, the Company hereby amends the Note as follows:

               1.  Section 3 of the Note is hereby amended to read in its 
     entirety as follows:

               "The principal and all unpaid accrued interest owing on this Note
               shall mature and be fully due and payable on June 30, 1997.
               Maker may prepay any or all of the principal and interest owing
               on this Note at any time without penalty or premium."

               2.  All other provisions of the Note shall remain in full force 
     and effect.

     IN WITNESS WHEREOF, the undersigned has caused this Amendment to be
executed by its duly authorized officer as of the date set forth above.



                               AASTROM BIOSCIENCES, INC.


                               By:   /s/ ROBERT J. KUNZE
                                    -------------------------------------
                                    Robert J. Kunze
                                    Chairman of the Board



<PAGE>
 
                                                                   EXHIBIT 10.30
                           AASTROM BIOSCIENCES, INC.

                            SUBSCRIPTION AGREEMENT



AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106
Attention: R. Douglas Armstrong, Ph.D.

Gentlemen:

              1.  Subscription.  The undersigned (the "undersigned" or the
                  ------------                                            
"Purchaser"), hereby agrees and subscribes to purchase from AASTROM Biosciences,
Inc., a Michigan corporation (the "Company"), ________ shares (the "Shares") of
the Series D Preferred Stock of the Company (the "Series D Stock") at a purchase
price of $4.00 per Share, for an aggregate purchase price of $________ (the
"Purchase Price").  This subscription is submitted to you in accordance with and
subject to the terms and conditions described in this Subscription Agreement,
the Memorandum (as defined in Section 5.c.) and the Articles (as defined in
Section 5.c.) relating to the offering (the "Offering") by the Company of up to
2,500,000 shares of Series D Stock.

              2.  Subscription and Payment.  The undersigned is returning to
                  ------------------------                                  
the Company two signed and completed copies of this Subscription Agreement,
together with payment of the Purchase Price.  Payment of the Purchase Price is
being made by delivery to the Company of a check payable to the order of the
Company, or by wire transfer of the Purchase
 Price to the Company.  Subject to
the satisfaction of the conditions in Section 8, a closing (the "Closing") for
the purchase and sale of shares of Series D Stock will be held on April 24,
1995.  As soon as practicable after the Closing, the Company shall issue and
deliver to the undersigned a stock certificate or certificates, registered in
the name of the undersigned, representing the Shares being purchased.

              3.  Acceptance of Subscription.  The undersigned understands and
                  --------------------------                                  
agrees that the Company in its sole discretion reserves the right to accept or
reject this subscription for the Shares.  The Company shall have no obligation
hereunder until the Company shall execute and deliver to the undersigned an
executed copy of this Subscription Agreement.  This Subscription Agreement shall
continue in full force and effect to the extent this subscription was accepted.

              4.  Stock Registration Rights.  The undersigned shall have the
                  -------------------------                                 
stock registration rights as have been granted pursuant to Sections 2.4 through
2.14 of that

<PAGE>
 
certain Amended and Restated Investors' Rights Agreement dated April 7, 1992 by
and among the Company and certain investors and shareholders of the Company,
attached hereto as Exhibit A.

              5.  Representations and Warranties of Purchaser.  In order to
                  -------------------------------------------              
induce the Company to sell the Shares to the undersigned, the undersigned hereby
acknowledges, represents, warrants and agrees as follows:

                  a.  None of the Shares of Series D Stock are (and the
shares of common stock, no par value ("Common Stock") issuable upon conversion
thereof ("Conversion Shares") will not be) registered under the Securities Act
of 1933 (as amended, the "Securities Act") or any state securities laws.  The
undersigned understands that the sale of the Shares is intended to be exempt
from registration under Section 4(2) of the Securities Act and/or the provisions
of Regulation D promulgated thereunder, based, in part, upon the
representations, warranties and agreements contained in this Subscription
Agreement;

                  b.  Neither the Securities and Exchange Commission nor any
state securities commission has approved any of the Shares or passed upon or
endorsed the merits of this transaction;

                  c.  Prior to its execution of this Subscription Agreement,
the undersigned has received from the Company (i) the Confidential Private
Placement Memorandum of the Company dated April 5, 1995 (together with any
exhibits thereto, the "Memorandum"), which supersedes in its entirety the draft
Memorandum previously delivered to the undersigned, (ii) a copy of the amendment
to the Restated Articles of Incorporation of the Company (the "Articles"), for
the purpose of creating the Series D Stock, and (iii) the audited financial
statements of the Company for the years ended June 30, 1994, 1993 and 1992, the
unaudited financial statements of the Company for the month ended January 31,
1995 (the "Most Recent Financial Statements"), and the unaudited balance sheet
of the Company at February 28, 1995 (collectively, the "Financial Statements").

                  d.  The undersigned acknowledges that all documents,
records and books pertaining to the investment in the Shares, including the
Memorandum, have been made available for inspection by the undersigned, or by
its attorney, accountant, purchaser representative and/or tax advisor
(collectively, the "Advisors") and that the undersigned and/or its Advisors have
completed such review as they deem to be necessary to make the decision to
purchase the Shares.  Notwithstanding the foregoing, the parties acknowledge and
agree that the Purchaser is relying solely on the representations and warranties
set forth in Section 6 hereof, which reference the documents set forth in
Section 5.c;

                  e.  The undersigned has reviewed the merits and risks of an
investment in the Shares.  The undersigned and the Advisors have had a
reasonable opportunity to ask questions of and receive answers from members of
management

                                      -2-

<PAGE>
 
of the Company concerning the offer and sale of the Shares and all such
questions have been answered to the full satisfaction of the undersigned;

                  f.  In evaluating the suitability of an investment in the
Company, the undersigned has not relied upon any representation or other
information (oral or written) other than as contained in documents or answers to
questions so furnished to the undersigned or its Advisors by the Company;

                  g.  No oral or written representations have been made or
oral or written information furnished to the undersigned or its Advisors in
connection with the Offering which were in any way inconsistent with the
information provided to the undersigned or its Advisors, including the
Memorandum.

                  h.  The undersigned, together with the Advisors, have such
knowledge and experience in financial, tax and business matters so as to enable
each of them to utilize the information made available to each of them in
connection with the purchase of the Shares to evaluate the merits and risks of
an investment in the Shares and to make an informed investment decision with
respect thereto;

                  i.  The undersigned is not relying on the Company with
respect to the tax and other economic considerations of an investment in the
Shares, and the undersigned has relied on the advice, or has consulted with,
only its own Advisors concerning tax matters;

                  j.  The undersigned is acquiring the Shares solely for its
own account, for investment, and not with a view to or for subdivision, resale
or distribution, in whole or in part, and no other person has or will have a
direct or indirect beneficial interest in the Shares, other than for any partner
or shareholder owners of the undersigned, if any;

                  k.  The undersigned must bear the economic risk of the
investment indefinitely because none of the Shares of Series D Stock (or
Conversion Shares) may be sold, hypothecated or otherwise disposed of unless (i)
subsequently registered under the Securities Act and applicable state securities
laws, or (ii) an exemption from registration is available.  Legends shall be
placed on the Shares (and the Conversion Shares) to the effect that they have
not been registered under the Securities Act or applicable state securities laws
and appropriate notations thereon will be made in the Company's stock books;

                  l.  The undersigned has adequate means of providing for the
undersigned's current financial needs and foreseeable contingencies and the
undersigned can accept the fact that an investment in the Shares will not be
liquid;

                  m.  The undersigned is aware that an investment in the
Shares involves a number of very significant risks and, in particular,
acknowledges that the Company is in the development stage.  The undersigned
understands that the risks

                                      -3-

<PAGE>
 
associated with an investment in the Shares could result in, and the undersigned
can sustain, a complete loss of its investment;

                  n.  The undersigned is an "accredited investor" as such
term is defined in the regulations promulgated under the Securities Act, and has
completed and signed the Accredited Investor Certification attached as Exhibit B
hereto supporting this conclusion;

                  o.  The undersigned represents that it has full power and
authority to execute and deliver this Subscription Agreement and all other
related agreements and certificates and to carry out the provisions hereof and
thereof and to purchase and hold the Shares, and this Subscription Agreement is
a legal, valid and binding obligation of the undersigned.  The execution and
delivery of this Subscription Agreement will not violate or be in conflict with
any order, judgment, injunction, agreement or controlling document to which the
undersigned is a party or by which it is bound;

                  p.  The undersigned represents to the Company that the
information contained herein is complete and accurate and may be relied upon by
the Company in determining the availability of an exemption from registration
under federal and state securities laws.  The undersigned further represents and
warrants that it will notify the Company immediately upon the occurrence of any
material change to the information contained herein occurring prior to the
Company's issuance of the Shares;

                  q.  The undersigned is unaware of, and in no way relying
on, any form of general solicitation or general advertising in connection with
the offer and sale of the Shares.

              6.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                  The Company represents and warrants to the Purchaser that:

               6.01   Organization, Qualifications and Corporate Power.
                      ------------------------------------------------ 

          The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Michigan and is duly licensed or
qualified to transact business as a foreign corporation and is in good standing
in each other jurisdiction in which the nature of the business transacted by it
or the character of the properties owned or leased by it requires such licensing
or qualification.  The Company has the corporate power and authority to own and
hold its properties and to carry on its business as now conducted and as
proposed to be conducted, to execute, deliver and perform this Subscription
Agreement, to issue, sell and deliver the Series D Stock, and to issue and
deliver the Conversion Shares as provided in the Articles.

                                      -4-

<PAGE>
 
               6.02  Authorization of Agreement.
                     -------------------------- 

          (a) The execution and delivery by the Company of this Subscription
Agreement, the performance by the Company of its obligations hereunder, the
issuance, sale and delivery of the Series D Stock and the issuance and delivery
of the Conversion Shares have been duly authorized by all requisite corporate
action and will not violate any provision of law, any order of any court or
other agency of government, the Articles or the Bylaws of the Company (the
"Bylaws"), or any provision of any indenture, agreement or other instrument to
which the Company or any of its properties or assets is bound, or conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under any such indenture, agreement or other instrument, or result in
the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company.

          (b) The Series D Stock has been duly authorized and, when issued in
accordance with this Subscription Agreement, will be validly issued, fully paid
and nonassessable shares of the Company with no personal liability attaching to
the ownership thereof and will be free and clear of all liens, charges,
restrictions, claims and encumbrances imposed by or through the Company except
as set forth herein.  The Conversion Shares have been duly reserved for issuance
upon conversion of the Series D Stock and, when so issued, will be duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
with no personal liability attaching to the ownership thereof and so long as the
Series D Stock tendered for conversion is free and clear of liens or
encumbrances, will be free and clear of all liens, charges, restrictions, claims
and encumbrances imposed by or through the Company except as set forth herein.
Neither the issuance, sale or delivery of the Series D Stock nor the issuance or
delivery of the Conversion Shares is subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other right in
favor of any person which right has not been waived.

               6.03   Validity.
                      -------- 

          This Subscription Agreement has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable in accordance with its terms.

               6.04   Authorized Capital Stock.
                      ------------------------ 

          (a) The authorized capital stock of the Company consists of (1)
8,540,000 shares of Preferred Stock, and (2) 17,000,000 shares of Common Stock.
Immediately prior to the Closing, 2,592,610 shares of Common Stock and 5,540,000
shares of Preferred Stock will be validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof.
The stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other), if any, to
purchase or

                                      -5-

<PAGE>
 
otherwise acquire equity securities of the Company prior to the Closing Date
(the "Original Shareholders") and the number of shares of Common Stock and the
number of such subscriptions, warrants, options, convertible securities, and
other such rights, if any, held by each, are as set forth in the Memorandum.
The designations, powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class of authorized capital stock of the Company
are as set forth in the Articles, a copy of which has previously been delivered
to each Purchaser, and all such designations, powers, preferences, rights,
qualifications, limitations and restrictions are valid, binding and enforceable
and in accordance with all applicable laws.  Except as set forth in the attached
Schedule 6.04 or in the Memorandum, (a) no person owns of record or is known to
the Company to own beneficially any share of Common Stock, (b) no subscription,
warrant, option, convertible security, or other right (contingent or other) to
purchase or otherwise acquire equity securities of the Company is authorized or
outstanding and (c) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset.  Except as provided for in the Articles or as set forth
herein, the Company has no obligation (contingent or other) to purchase, redeem
or otherwise acquire any of its equity securities or any interest therein or to
pay any dividend or make any other distribution in respect thereof.  Except as
set forth herein or in the Memorandum, there are no voting trusts or agreements,
stockholders agreements, pledge agreements, buy-sell agreements, rights of first
refusal, preemptive rights or proxies relating to any securities of the Company
(whether or not the Company is a party thereto).  All of the outstanding
securities of the Company were issued in compliance with all applicable Federal
and state securities laws.

          (b) Upon sale by the Company of shares of Series D Stock having an
aggregate purchase price of $5,000,000, with one or more new investors
purchasing at least $1,000,000 of Series D Stock, if the Company exercises a
                                                  --                        
"put option," Cobe Laboratories, Inc. will be legally required to purchase
$5,000,000 of Series D Stock, subject to customary closing conditions.

               6.05   Litigation.
                      ---------- 

          (a) The Company is aware of a possible claim against it by Software
Publishers Association, relating to the alleged use of unregistered software on
the Company's PCs.  The Company is in negotiations with such association and
believes the matter can be resolved without material adverse consequence to the
Company.  Except for such action, there is no (a) action, suit, claim,
proceeding or investigation pending or, to the best of the Company's knowledge,
threatened against or affecting the Company or its directors, officers, or
management, at law or in equity, or before or by any Federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (b) arbitration proceeding relating to the
Company pending under collective bargaining agreements or otherwise or (c)
governmental inquiry pending or, to the best of the Company's knowledge,

                                      -6-

<PAGE>
 
threatened against or affecting the Company (including without limitation any
inquiry as to the qualification of the Company to hold or receive any license or
permit), and, to the best knowledge of the Company, there is no basis for any of
the foregoing.  Without waiving any applicable attorney-client privilege, the
Company has not received any opinion or memorandum or legal advice from legal
counsel to the effect that it is exposed, from a legal standpoint, to any
liability or disadvantage which may be material to its business, prospects,
financial condition, operations, property or affairs.  To the best knowledge of
the Company, the Company is not in default with respect to any order, writ,
injunction or decree known to or served upon the Company of any court or of any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign.

          (b) The Company has written letters to a former employee, Richard M.
Schwartz, Ph.D. and Dr. Schwartz's new employer, SyStemix, (i) reminding them of
Dr. Schwartz's duty to maintain strict confidentiality as to the Company's trade
secrets; and (ii) asking if there has been any breach of this confidentiality
obligation; and (iii) commenting that a new invention by Systemix's appears to
be derived from the Company's trade secrets.  Systemix and Dr. Schwartz have
denied any use of the Company's trade secrets.  The Company has reserved its
rights in this matter, but does not presently contemplate pursuing this
potential claim in the near future.

               6.06   Financial Statements.
                      -------------------- 

          The Company has furnished to the Purchasers the Financial Statements.
Except as disclosed herein or in the Memorandum, the Financial Statements are
true and correct in all material respects and have been prepared in accordance
with generally accepted accounting principles.  The balance sheets included in
the respective Financial Statements accurately reflects the financial condition
and all assets and liabilities of the Company at the times referred to therein.
The statements of income and cash flows accurately reflect the operations of the
Company for the periods referred to therein.  There are no undisclosed
liabilities in the Financial Statements.

               6.07   No Convictions.
                      -------------- 

          During the past ten (10) years, none of the directors, officers, or
management of the Company have been arrested or convicted of any material crime,
including any felony (whether material or not), have been indicted, have been
bankrupt or an officer or director of a bankrupt company (except for directors
designated by venture capital investors), nor have any of them been restricted
in any way from bidding on contracts with the government of the United States.

                                      -7-

<PAGE>
 
               6.08   Brokers.
                      ------- 

          Except for a fee payable to Key Investments, Inc., an affiliate of
Society Bank of Michigan, the Company has no knowledge of any brokerage or
finders fee due in conjunction with the transactions contemplated by this
Subscription Agreement.

               6.09   Subsidiaries.
                      ------------ 

          The Company has no subsidiaries.  The Company does not (i) own of
record or beneficially, directly or indirectly: (A) any shares of capital stock
or securities convertible into capital stock of any corporation; or (B) any
participating interest in any partnership, joint venture or other non-corporate
business enterprise; or (ii) control, directly or indirectly, any other entity.

               6.10   Directors and Officers.
                      ---------------------- 

          The Memorandum sets forth the names of the directors and officers of
the Company, together with the title of each such person.

               6.11   No Material Adverse Change.
                      -------------------------- 

          Since the date of the Most Recent Financial Statements, (a) there has
been no change in the assets, liabilities or financial condition of the Company
from that reflected in the Most Recent Financial Statements, except for changes
in the ordinary course of business which in the aggregate have not been
materially adverse and (b) none of the business, prospects, financial condition,
operations, property or affairs of the Company has been materially adversely
affected by any occurrence or development, individually or in the aggregate,
whether or not insured against.

               6.11   Taxes.
                      ----- 

          The Company has filed all tax returns, Federal, state, county and
local, required to be filed by it, and the Company has paid all taxes shown to
be due by such returns as well as all other taxes, assessments and governmental
charges which have become due or payable, including without limitation all taxes
which the Company is obligated to withhold from amounts owing to employees,
creditors and third parties.  All such taxes with respect to which the Company
has become obligated pursuant to elections made by the Company in accordance
with generally accepted practice have been paid and adequate reserves have been
established for all taxes accrued but not yet payable.  The Federal income tax
returns of the Company have never been audited by the Internal Revenue Service.
No deficiency assessment with respect to or proposed adjustment of the Company's
Federal, state, county or local taxes is pending or, to the best of the
Company's

                                      -8-

<PAGE>
 
knowledge, threatened.  There is no tax lien, whether imposed by any Federal,
state, county or local taxing authority, outstanding against the assets,
properties or business of the Company.  Neither the Company nor, to the
Company's knowledge, any of its stockholders, has ever filed consent pursuant to
Section 341(f) of the Code, relating to collapsible corporations.

               6.13   Employee Benefit Plans.
                      ---------------------- 

          To the knowledge of the Company, each of the Company's employee
benefit plans (and each related trust or insurance contract) complies in form
and in operation in all respects with the applicable requirements of the
Employee Retirement Income Security Act of 1974 and the Internal Revenue Code of
1986, as amended.  To the knowledge of the Company, all required reports and
descriptions have been filed or distributed appropriately with respect to each
employee benefit plan.  There have been no prohibited transactions with respect
to any employee benefit plan.  No fiduciary has any liability for breach of
fiduciary duty or any other failure to act or comply in connection with the
administration or investment of the assets of any employee benefit plans.  No
charge, complaint, action, suit, proceeding, hearing, investigation, claim, or
demand with respect to the administration or the investment of the assets of any
employee benefit plan (other than routine claims for benefits) is pending or, to
the Company's knowledge, threatened.  The Company and its directors and officers
(and employees with responsibility for employee benefits matters) have no
knowledge of any basis for any such charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand.

               6.14   Title to Properties.
                      ------------------- 

          The Company has good and marketable title to its properties and assets
reflected in the Financial Statements or acquired by its since the date of the
Financial Statements (other than properties and assets disposed of in the
ordinary course of business since the date of the Financial Statements), and all
such properties and assets are free and clear of mortgages, pledges, security
interests, liens, charges, claims, restrictions and other encumbrances, except
for liens to secure payment of obligations reflected in the Financial Statements
and for current taxes not yet due and payable and minor imperfections of title,
if any, not material in nature or amount and not materially detracting from the
value or impairing the use of the property subject thereto or impairing the
operations or proposed operations of the Company.

               6.15   Leasehold Interests.
                      ------------------- 

          Each lease or agreement to which the Company is a party under which it
is a lessee of any property, real or personal is a valid and subsisting
agreement without any material default of the Company thereunder and, to the
best of the Company's knowledge, without any default by the Company of any
material

                                      -9-

<PAGE>
 
term thereunder; the Company has not been notified of any default and has no
reason to believe that it is in default of any term thereunder.  To the best of
the Company's knowledge, no other party to any such lease or agreement is in
default of a material term thereunder.  No event has occurred and is continuing
which, with due notice or lapse of time or both, would constitute a default or
event of default by the Company under any such lease or agreement or, to the
best of the Company's knowledge, by any other party thereto.  The Company's
possession of such property has not been disturbed and, to the best of the
Company's knowledge, no claim has been asserted against the Company adverse to
its rights in such leasehold interests.

               6.16   Insurance.
                      --------- 

          The Company maintains as to its properties and business, with
financially sound and reputable insurers, insurance against such casualties and
contingencies and of such types and in such amounts as is customary for
companies similarly situated.

               6.17   Other Agreements.
                      ---------------- 

          With respect to each material contract to which the Company is a
party, the Company and, to the best of the Company's knowledge, each other party
thereto, have in all material respects performed all the obligations required to
be performed by them to date, have received no notice of default and are not in
default (with due notice or lapse of time or both) under any material lease,
agreement or contract now in effect to which the Company is a party or by which
it or its property may be bound.  The Company has no present expectation or
intention of not fully performing all its obligations under each such material
lease, contract or other agreement and the Company has no knowledge of any
breach or anticipated breach by the other party to any contract or commitment to
which the Company is a party.

               6.18   Patents, Trademarks, Etc.
                      ------------------------ 

          (a) Schedule 6.18, attached hereto, accurately sets forth all material
patents, patent rights, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names and copyrights, and all
material applications for such which are in the process of being prepared, owned
by or registered in the name of the Company, or of which the Company is a
licensor or licensee or in which the Company has any right, and in each case a
brief description of the nature of such right.  The Memorandum contains an
accurate and complete description of all material licenses.  The Company is in
compliance in all material respects with each of such licenses.  The Company
owns or possesses adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, manufacturing processes, formulae, trade
secrets and know how (collectively, "Intellectual Property") necessary to the
conduct of its business as

                                     -10-

<PAGE>
 
conducted, and no claim is pending or, to the best of the Company's knowledge,
threatened to the effect that the operations of the Company infringe upon or
conflict with the asserted rights of any other person under any Intellectual
Property, and, to the best knowledge of the Company, there is no basis for any
such claim (whether or not pending or threatened).  No claim is pending or
threatened to the effect that any such Intellectual Property owned or licensed
by the Company, or which the Company otherwise has the right to use, is invalid
or unenforceable by the Company, or that the Company is not in compliance with
any term or condition of a license, and there is no basis for any such claim
(whether or not pending or threatened).   The Company has not granted or
assigned to any other person or entity any right to manufacture, have
manufactured, assemble or sell the products or proposed products or to provide
the services or proposed services of the Company except as set forth in the
Memorandum and Schedule 6.18.

          (b) The Company has taken reasonable security measures to protect the
secrecy, confidentiality, and value of the Company's trade secrets; any of their
employees and any other persons who, either alone or in concert with others,
developed, invented, discovered, derived, programmed, or designed these secrets,
or who have knowledge of or access to information relating to them, have entered
into agreements protecting the confidentiality thereof.

               6.19   Proprietary Information of Third Parties.
                      ---------------------------------------- 

          Except as set forth herein and in Section 6.05, to the best of the
Company's knowledge, no third party has claimed or has reason to claim that any
person employed by or affiliated with the Company has (a) violated or may be
violating any of the terms or conditions of his employment, non-competition or
nondisclosure agreement with such third party, (b) disclosed or may be
disclosing or utilized or may be utilizing any trade secret or proprietary
information or documentation of such third party or (c) interfered or may be
interfering in the employment relationship between such third party and any of
its present or former employees.  No third party has requested information from
the Company which suggests that such a claim might be contemplated.  To the best
of the Company's knowledge, no person employed by or affiliated with the Company
has employed or proposes to employ any trade secret or any information or
documentation proprietary to any former employer, and to the best of the
Company's knowledge, no person employed by or affiliated with the Company has
violated any confidential relationship which such person may have had with any
third party, in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any service or
proposed service of the Company, and the Company has no reason to believe there
will be any such employment or violation.  To the best of the Company's
knowledge, none of the execution or delivery of this Subscription Agreement, or
the carrying on of the business of the Company as officers, employees or agents
by any officer, director or key employee of the Company, or the conduct or
proposed conduct of the business of the Company, will conflict with or result in
a breach of the terms, conditions or provisions of or

                                     -11-

<PAGE>
 
constitute a default under any contract, covenant or instrument under which any
such person is obligated.

               6.20   Compliance With Law.
                      ------------------- 

          The Company has complied with all laws, rules, regulations and orders
applicable to its business, operations, properties, assets, products and
services, the violation of which would have a material adverse effect upon the
Company, and the Company has all necessary permits, licenses and other
authorizations required to conduct its business as it is now conducted.  There
is no existing law, rule, regulation or order, and the Company after due inquiry
is not aware of any proposed law, rule, regulation or order, whether Federal or
state, which would prohibit or restrict the Company from, or otherwise
materially adversely affect the Company in, conducting its business, in which it
is now conducting business or in which it proposes to conduct business, other
than the customary governmental approvals required for medical products.
Without limiting the foregoing in any manner, the Company has complied in all
material respects with all applicable laws relating to the employment of labor,
including provisions relating to wages, hours, equal opportunity, collective
bargaining and the payment of Social Security and other taxes, with the Employee
Retirement Income Security Act of 1974, as amended, with the Occupational Health
and Safety Act, and with the Americans With Disabilities Act.  The Company is in
full compliance with the Immigration Reform and Control Act of 1986, as amended,
and, to the best of the Company's knowledge, all key employees who are not
United States citizens are currently authorized under United States immigration
laws to hold United States employment and will continue to have such employment
authorization throughout the term of the Series D Stock investment, and are
otherwise in compliance with United States immigration laws.

               6.21   Loans and Advances.
                      ------------------ 

          The Company does not have any outstanding loans or advances to any
person and is not obligated to make any such loans or advances, except as
reflected on the Financial Statements, and except, in each case, for advances to
employees of the Company in respect of reimbursable business expenses
anticipated to be incurred by them in connection with their performance of
services for the Company.

               6.22   Assumptions, Guaranties, Etc. of Indebtedness of Other
                      ------------------------------------------------------
Persons.
- ------- 

          Except as disclosed in the Financial Statements, the Company has not
assumed, guaranteed, endorsed or otherwise become directly or contingently
liable on any indebtedness of any other person (including, without limitation,
liability by way of agreement, contingent or otherwise, to purchase, to provide
funds for payment, to supply funds to or otherwise invest in the debtor, or

                                     -12-

<PAGE>
 
otherwise to assure the creditor against loss), except for guaranties by
endorsement of negotiable instruments for deposit or collection in the ordinary
course of business.

               6.23   Governmental Approvals.
                      ---------------------- 

          Subject to the accuracy of the representations and warranties of the
Purchaser set forth in Section 5, no registration or filing with, or consent or
approval of or other action by, any Federal, state or other governmental agency
or instrumentality is or will be necessary for the valid execution, delivery and
performance by the Company of this Agreement, the issuance, sale and delivery of
the Series D Stock or, upon conversion of the Series D Stock, the issuance and
delivery of the Conversion Shares, other than (a) filings pursuant to state
securities laws (all of which filings have been or will be made by the Company)
in connection with the sale of the Series D Stock and (b) with respect to the
Registration Rights as set forth in Exhibit A, the registration of the shares
covered thereby with the Commission and filings pursuant to state securities
laws.

               6.24   Disclosure.
                      ---------- 

          The Company's Private Placement Memorandum dated April 5, 1995 with
respect to the Series D Stock (the "Memorandum"), contains true and accurate
facts and representations.  Neither this Subscription Agreement, nor any
Schedule or Exhibit to this Agreement, contains an untrue statement of a
material fact or omits a material fact necessary to make the statements
contained herein or therein not misleading.  To the best of the Company's
knowledge, none of the statements, documents, certificates or other items
prepared or supplied by the Company with respect to the transactions
contemplated hereby contains an untrue statement of a material fact or omits a
material fact necessary to make the statements contained therein not misleading.
As of the date hereof, no facts have come to the attention of the Company which
would, in its opinion, require the Company to revise or amplify the  Memorandum.

               6.25   Offering of Shares.
                      ------------------ 

          The Offering is being made by the Company pursuant to an exemption
from the registration requirements of the Securities Act.

               6.26   Transactions With Affiliates.
                      ---------------------------- 

          Except as set forth in the Memorandum, no director, officer, employee
or stockholder of the Company, or member of the family of any such person, or
any corporation, partnership, trust or other entity in which any such person, or
any member of the family of any such person, has a substantial interest in or is
an officer, director, trustee, partner or holder of more than 5% of the
outstanding capital stock thereof, is a party to any transaction with the
Company, including any contract, agreement or other arrangement providing for
the

                                     -13-

<PAGE>
 
employment of, furnishing of services by, rental of real or personal property
from or otherwise requiring payments to any such person or firm.

               6.27   Obsolescence.
                      ------------ 

          To the best of the Company's knowledge, there are no new products,
inventions, procedures, or methods of manufacturing or processing that any
competitors or other third parties have developed and which reasonably could be
expected to supersede or make obsolete any of the Company's products or
processes.

              7.  Compliance with Regulation D and Applicable State Securities
                  ------------------------------------------------------------
Laws.  The undersigned understands and agrees that the following restrictions
- ----                                                                         
and limitations are applicable to its purchase of the Shares and any resales,
mortgages, pledges, hypothecations, or other transfers thereof, pursuant to
Regulation D under the Securities Act and applicable state securities laws:

                  a.  The undersigned agrees that the Shares may not be sold,
mortgaged, pledged, hypothecated or otherwise transferred unless the Shares are
registered under the Securities Act and applicable state securities laws or are
exempt from registration thereunder.

                  b. A legend in substantially the following form will be placed
on the certificate(s) evidencing the Shares:

          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933.  THESE SECURITIES HAVE
          BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR
          RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR
          OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
          SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, OR UNLESS AN
          EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.

                  c.  FOR CALIFORNIA RESIDENTS ONLY:  THE SALE OF THE
                      -----------------------------                  
SECURITIES THAT IS THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT HAS NOT BEEN
QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND
THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS
AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE.  THE RIGHTS OF ALL PARTIES TO
THIS SUBSCRIPTION AGREEMENT ARE EXPRESSLY

                                     -14-

<PAGE>
 
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION THEREFROM
BEING AVAILABLE.


              8.  Conditions to Obligations of the Purchasers.  The Purchasers'
                  -------------------------------------------                  
obligation to purchase the Shares at the Closing is subject to the fulfillment,
at or prior to the Closing, of all of the following conditions, any of which may
be waived by a majority in interest of the Purchasers:

                  a.  The Restated Articles of Incorporation of the Company,
in the form previously delivered to each Purchaser, shall have been filed with
the Secretary of State of the State of Michigan;

                  b.  The Company shall have received from Purchasers at
least $5,000,000 in subscriptions, which funds shall be held in escrow by the
Company and released at the Closing;

                  c.  The Company shall have delivered to the Purchasers an
opinion of counsel, substantially in the form attached hereto as Exhibit C.

              9.  Board Observer Rights.   Purchasers of Series D Preferred 
                  ---------------------                  
Stock who were not previously holders of capital stock of the Company ("New
Investors") shall have the following rights:  a majority in interest of New
Investors shall have the right from time to time to designate one
representative, who shall be entitled to attend all meetings of the Board of
Directors, in a nonvoting observer capacity only.  The Company will include such
representative in oral reports given by the Board and give such representative
copies of all materials that it provides to its directors including but not
limited to all materials delivered to directors outside of meetings; provided,
however, that such representative shall be reasonably acceptable to the Company
and shall enter into a confidentiality agreement acceptable to the Company.

          Additionally, the New Investors shall have the rights to information
and inspection set forth in Sections 3.1 through 3.3 of the Amended and Restated
Investors Rights Agreement dated April 7, 1992 by and among the Company and
certain investors and shareholders of the Company.

              10. Additional Sales of Series D Preferred Stock.  The Company
                  --------------------------------------------              
hereby agrees that following the completion of the Offering, it will not issue
and sell additional shares of Series D Stock at a purchase price per share of
less than the applicable conversion price then in effect with respect to the
Series D Stock.

              11. Irrevocability; Binding Effect.  The undersigned hereby
                  ------------------------------                         
acknowledges and agrees that the subscription hereunder is irrevocable by the
undersigned, except as required by applicable law, and that this Subscription
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors, legal representatives, and permitted assigns.

                                     -15-

<PAGE>
 
              12. Modification.  This Subscription Agreement shall not be
                  ------------                                           
modified or waived except by an instrument in writing signed by the party
against whom any such modification or waiver is sought.

              13. Notices.  A notice or other communication required or
                  -------                                              
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given (a) if to the Company, at the address set forth
above, or (b) if to the undersigned, at the address set forth on the signature
page hereof (or, in either case, to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section 13).  Any
notice or other communication shall be deemed given at the time it is received
at the party's address.

              14. Assignability.  This Subscription Agreement and the rights,
                  -------------                                              
interests and obligations hereunder are not transferable or assignable by the
undersigned, except to an affiliate of the undersigned who qualifies as an
"accredited investor," and the undersigned further agrees that the transfer or
assignment of the Shares shall be made only in accordance with all applicable
laws.

              15. Applicable Law.  This Subscription Agreement shall be governed
                  --------------                                                
by and construed in accordance with the internal laws of the state of Michigan
without regard to its conflicts of laws principles.

              16. Blue Sky Qualification.  The undersigned's right to purchase
                  ----------------------                                      
Shares under this Subscription Agreement is expressly conditioned upon the
exemption from qualification of the offer and sale of the Shares from applicable
federal and state securities laws.  The Company shall not be required to qualify
this transaction under the securities laws of any jurisdiction and, should
qualification be necessary, the Company shall be released from any and all
obligations to maintain its offer, and may rescind any sale contracted, in the
jurisdiction.

              17. Confidentiality.  The undersigned acknowledges and agrees that
                  ---------------                                               
any information or data it has acquired from or about the Company, not otherwise
properly in the public domain, was received in confidence.  The undersigned
agrees not to divulge, communicate or disclose, except as may be required by law
or for the performance of this Subscription Agreement, or use to the detriment
of the Company or for the benefit of any other person or persons, or misuse in
any way, any confidential information of the Company, including any scientific,
technical, trade or business secrets of the Company and any scientific,
technical, trade or business materials that are treated by the Company as
confidential or proprietary, including, but not limited to, ideas, discoveries,
inventions, developments and improvements belonging to the Company and
confidential information obtained by or given to the Company about or belonging
to third parties.

                                     -16-

<PAGE>
 
              18. Miscellaneous.
                  ------------- 

                  a.  This Subscription Agreement, together with the Articles
and the attached stock registration rights, constitutes the entire agreement
between the undersigned and the Company with respect to the subject matter
hereof and supersedes all prior oral or written agreements and understandings,
if any, relating to the subject matter hereof.  The terms and provisions of this
Subscription Agreement may be waived, or consent for the departure therefrom
granted, only by a written document executed by the party entitled to the
benefits of such terms or provisions.

                  b.  The undersigned's representations and warranties made
in this Subscription Agreement shall survive the execution and delivery hereof
and of the Shares.

                  c.  Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Subscription Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.

                  d.  All pronouns and any variations thereof used herein
shall be deemed to be to the masculine, feminine, neuter, singular or plural as
the identity of the person or persons referred to may require.

                  e.  This Subscription Agreement may be executed in one or
more counterparts each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument.  Signatures may be
transmitted by facsimile.

                  f.  Each provision of this Subscription Agreement shall be
considered separable and if for any reason any provision or provisions hereof
are determined to be invalid or contrary to applicable law, such invalidity
shall not impair the operation of or affect the remaining portions of this
Subscription Agreement, so long as the material economic benefits remain
enforceable.

                  g.  Paragraph titles are for descriptive purposes only and
shall not control or alter the meaning of this Subscription Agreement as set
forth in the text.

                                     -17-

<PAGE>
 
If the purchaser is an INDIVIDUAL, and if purchased INDIVIDUALLY, as JOINT
TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY:


______________________________             ______________________________
Print Name(s)                              Social Security Number(s)


______________________________             ______________________________
Signature(s) of Purchaser(s)


______________________________             ______________________________
Date                                       Address


                                           ______________________________



                                     -18-

<PAGE>
 
If the purchaser is a PARTNERSHIP, CORPORATION, or TRUST:

______________________________            ______________________________
Name of Partnership,                      Federal Taxpayer
Corporation or Trust                      Identification Number


______________________________
Date


By:___________________________            ______________________________
                                          State of Organization


Name:_________________________


Title: _______________________             ______________________________
                                           Address

                                           ______________________________


SUBSCRIPTION ACCEPTED AND AGREED
this __ day of __________, 1995


AASTROM BIOSCIENCES, INC.



By:  ___________________________
     R. Douglas Armstrong, Ph.D., President
     and Chief Executive Officer



                                     -19-

<PAGE>
 
                                                                       EXHIBIT B
                       Accredited Investor Certification
                       ---------------------------------
                        (Check the appropriate box(es))

    ___              i. I am a natural person who had individual income of more
               than $200,000 in each of the most recent two years or joint
               income with my spouse in excess of $300,000 in each of the most
               recent two years and reasonably expect to reach that same income
               level for the current year;

    ___              ii. I am a natural person whose individual net worth, or
               joint net worth with my spouse, will at the time of purchase of
               the Shares be in excess of $1,000,000;

    ___              iii. The undersigned is an institutional investor
               satisfying the requirements of Section 501(a)(1), (2) or (3) of
               Regulation D promulgated under the Securities Act;
 
    ___              iv. The undersigned is a trust, which trust has total
                assets in excess of $5,000,000, which is not formed for the
                specific purpose of acquiring the Shares offered hereby and
                whose purchase is directed by a sophisticated person as
                described in Rule 506(b)(2)(ii) of Regulation D and who has such
                knowledge and experience in financial and business matters that
                it is capable of evaluating the risks and merits of an
                investment in the Shares;

    ___              v. The undersigned is an entity (other than a trust) in
               which all of the equity owners meet the requirements of at least
               one of the above subparagraphs.



                                        __________________________________

                  
                                        By:_______________________________



<PAGE>
 
                                                                   EXHIBIT 10.31


                           STOCK PURCHASE AGREEMENT
                                by and between
                           AASTROM BIOSCIENCES, INC.
                                    and the
                        INVESTORS LISTED ON SCHEDULE A




                                January 8, 1996

<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
1.   Purchase and Sale of Stock............................................   1
     1.1    Sale and Issuance of Series E Preferred Stock..................   1
     1.2    Closing........................................................   1

2.   Representations and Warranties of the Company.........................   2
     2.1    Organization, Good Standing and Qualification..................   2
     2.2    Subsidiaries...................................................   2
     2.3    Authorization..................................................   2
     2.4    Capitalization.................................................   2
     2.5    Valid Issuance of Preferred and Common Stock...................   3
     2.6    Financial Statements...........................................   4
     2.7    Governmental Consents..........................................   4
     2.8    Litigation.....................................................   4
     2.9    Patents and Trademarks.........................................   5
     2.10   Compliance With Other Instruments..............................   5
     2.11   Compliance With Law............................................   6
     2.12   Agreements; Action.............................................   6
     2.13   Corporate Documents............................................   7
     2.14   Title to Property and Assets...................................   7
     2.15   Employee Benefit Plans.........................................   7
     2.16   Leasehold Interests............................................   8
     2.17   Tax Returns and Payments.......................................   8
     2.18   Insurance......................................................   8
     2.20   Changes........................................................   9
     2.21   Related-Party Transactions.....................................   9
     2.22   Small Business Matters.........................................  10
     2.23   Hazardous Materials............................................  11
     2.24   Disclosure.....................................................  11

3.   Representations, Warranties and Covenants of Each Investor............  11
     3.1    Authorization..................................................  11
     3.2    Purchase Entirely for Own Account..............................  11
     3.3    Disclosure of Information......................................  12
     3.4    Investment Experience..........................................  12
     3.5    Restricted Securities..........................................  12
     3.6    Further Limitations on Disposition.............................
  12
     3.7    Legends........................................................  13
     3.8    Accredited Investor............................................  13
</TABLE>

                                      i

<PAGE>
 
                          TABLE OF CONTENTS (cont'd)
                          --------------------------


<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
     3.9    Removal of Legends; Further Covenants..........................  13

4.   California Commissioner of Corporations...............................  14
     4.1    Corporate Securities Law.......................................  14

5.   Conditions of Each Investor's Obligations at Closing..................  14
     5.1    Representations and Warranties.................................  14
     5.2    Performance....................................................  14
     5.3    Qualifications.................................................  14
     5.5    Opinion of Company Counsel.....................................  15
     5.6    Investor Rights Agreement......................................  15

6.   Conditions of the Company's Obligations at Closing....................  15
     6.1    Representations and Warranties.................................  15

7.   Covenants.............................................................  15
     7.1    Observer Rights................................................  15
     7.2    Registration Rights............................................  16
     7.3    Financial Information, Etc.....................................  16
     7.4    Information Rights and Related Covenants.......................  16
     7.5    Right of First Offer...........................................  16
     7.6    Best Efforts on Sale of Stock..................................  16

8.   Miscellaneous.........................................................  16
     8.1    Successors and Assigns.........................................  16
     8.2    Governing Law..................................................  16
     8.3    Counterparts...................................................  17
     8.4    Titles and Subtitles...........................................  17
     8.5    Notices........................................................  17
     8.6    Brokers and Finders............................................  17
     8.7    Expenses.......................................................  17
     8.8    Severability...................................................  17
     8.9    Entire Agreement...............................................  17
     8.10   Assurances.....................................................  18
</TABLE>


SCHEDULE A - Schedule of Investors
SCHEDULE B - Schedule of Exceptions

                                      ii

<PAGE>
 
                           STOCK PURCHASE AGREEMENT
                           ------------------------

     THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of January 8,
1996 by and between AASTROM Biosciences, Inc., a Michigan corporation (the
"Company"), and the investors listed on Schedule A hereto, each of which is
herein referred to as an "Investor" and all of which are referred to
collectively as the "Investors."

     In consideration of the mutual covenants contained herein and such other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:

     1.  Purchase and Sale of Stock.
         ---------------------------

         1.1   Sale and Issuance of Series E Preferred Stock.
               --------------------------------------------- 

               (a) The Company shall adopt and file with the Secretary of State
of the State of Michigan on or before the Closing Date, as defined below, the
Restated Articles of Incorporation in the form previously reviewed and approved
by the Investors (the "Restated Articles").

               (b) Subject to the terms and conditions of this Agreement, on the
Closing Date, each Investor agrees to purchase and the Company agrees to sell
and issue to each Investor that number of shares of the Company's Series E
Preferred Stock (the "Series E Preferred Stock") set forth opposite such
Investor's name on Schedule A hereto at the purchase price of $4.25 per share,
for the aggregate consideration set forth on Schedule A hereto.

               (c) The Company may sell shares of the Series E Preferred Stock
not sold on the Closing Date to the State Treasurer of the State of Michigan
(the "State of Michigan") in an amount equal to the number of shares set forth
opposite such Investor's name on Schedule A hereto at one additional closing,
provided that the closing of any such additional sale of shares must occur on or
before January 31, 1996, and provided, further, that the total number of shares
of Series E Preferred Stock so sold, together with those shares of Series E
Preferred Stock sold on the Closing Date, shall not exceed 1,411,765. Such
purchaser shall be deemed to be an Investor for purposes of this Agreement, and
the shares so sold shall be deemed to have been acquired on the same terms and
conditions as are set forth in this Agreement.

         1.2   Closing. The purchase and sale of the Series E Preferred Stock
               -------
(the "Closing") shall take place at the offices of Riordan & McKinzie, 300 South
Grand Avenue, 29th Floor, Los Angeles, California 90071, on January 8, 1996, or
at such other time and place as the Company and the Investors mutually agree
upon (the "Closing Date"). At the Closing the Company shall deliver to each
Investor a certificate representing the number of shares of Series E Preferred
Stock purchased by such Investor against delivery

<PAGE>
 
to the Company by such Investor of the aggregate purchase price therefor by the
wire transfer of immediately available funds to an account designated by the
Company at least two (2) days prior to the Closing Date.

     2.  Representations and Warranties of the Company. The Company hereby
         ---------------------------------------------
represents and warrants to each Investor that, except as set forth on the
Schedule of Exceptions attached hereto as Schedule B, which exceptions shall be
deemed to be representations and warranties as if made hereunder, and which
exceptions, though referencing specific sections, shall serve to modify each and
every section relevant thereto:

         2.1   Organization. Good Standing and Qualification. The Company is a
               ---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Michigan and has all requisite corporate power and authority to
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and in good standing in each
jurisdiction in which the nature of the business conducted by it or its
ownership or leasing of property makes such qualification necessary and in which
the failure so to qualify would have a material adverse effect on the Company's
operations, financial condition, business prospects or properties (a "Material
Adverse Effect").

         2.2   Subsidiaries. The Company has no subsidiaries, and does not own,
               ------------
directly or indirectly, (a) any shares of the capital stock, or securities
convertible into capital stock, of any corporation or (b) any interest in any
partnership, joint venture or similar business enterprise, and the Company does
not control any entity.

         2.3   Authorization. All corporate action on the part of the Company,
               -------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder and the authorization, the issuance (or reservation for
issuance) and delivery of the Series E Preferred Stock being sold hereunder and
the Common Stock issuable upon conversion of the Series E Preferred Stock has
been taken or will be taken on or prior to the Closing Date. This Agreement
constitutes a valid and legally binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to applicable
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
creditors' rights and remedies generally.

         2.4   Capitalization. The authorized capital of the Company consists,
               --------------
or will consist on the Closing Date, of:

               (a)   Preferred Stock. 8,540,000 shares of preferred stock, of
                     ---------------
which 2,500,000 shares have been designated Series A Preferred Stock (the
"Series A Preferred Stock"), all of which are issued and outstanding, 3,030,000
shares have been designated Series B Preferred Stock (the "Series B Preferred
Stock"), all of which are issued

                                       2

<PAGE>
 
and outstanding, 10,000 shares have been designated Series C Preferred Stock
(the "Series C Preferred Stock"), all of which are issued and outstanding,
3,000,000 shares have been designated Series D Preferred Stock (the "Series D
Preferred Stock"), all of which are issued and outstanding, and 1,411,765 have
been designated Series E Preferred Stock, none of which is issued and
outstanding. The rights, preferences and privileges of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock will be as stated in the Restated Articles, a
copy of which was provided to each Investor. Based upon the Company's records
the outstanding shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock are held by the persons
and in the numbers indicated on the stockholders list made available to the
Investors prior to the Closing Date. The Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock are sometimes collectively referred to herein as the "Preferred
Stock."

               (b)   Common Stock. 17,000,000 shares of common stock, no par
                     ------------
value (the "Common Stock"), 2,592,610 shares of which are issued and outstanding
and, based upon the Company's records, are owned by the persons and in the
numbers indicated on the stockholders list made available to the Investors.

               (c) Agreements for Purchase of Shares. Except as set forth on
                   ---------------------------------
the Schedule of Exceptions hereto, there are no outstanding subscriptions,
options, warrants, rights (including conversion or preemptive rights) or
agreements of any kind or nature whatsoever under which the Company is obligated
to issue any shares of its capital stock or any securities of any kind
representing an ownership interest in the Company, and no holder of any security
of the Company is entitled to preemptive or other similar rights to purchase any
securities of the Company that have not been waived in contemplation of the sale
and issuance of Series E Preferred Stock pursuant to the terms of this
Agreement.

         2.5   Valid Issuance of Preferred and Common Stock.
               -------------------------------------------- 

               (a) The Series E Preferred Stock which is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms hereof, for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and, based in part upon the representations
of the Investors in this Agreement, will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Series E Preferred Stock purchased under this Agreement has
been duly and validly reserved for issuance and, upon issuance and in accordance
with the terms of the Restated Articles, will be duly and validly issued, fully
paid and nonassessable and will be issued in compliance with all applicable
federal and state securities laws.

               (b) The outstanding shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Series D Preferred Stock and

                                       3

<PAGE>
 
Common Stock of the Company have been duly and validly authorized, issued and
delivered, and are validly outstanding, fully paid and nonassessable. The Common
Stock issuable upon conversion of the outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock has been duly and validly reserved for issuance and, when issued in
accordance with the Restated Articles, will be duly and validly issued, fully
paid and nonassessable. The outstanding shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
and Common Stock have been issued in compliance with all applicable federal and
state securities laws.

         2.6   Financial Statements. The Company has delivered to each
               --------------------
Investor audited financial statements, which include the Company's balance
sheet, statement of operations and statement of cash flows, for itself at and
for the fiscal years ended June 30, 1995, 1994 and 1993 and its unaudited
balance sheet and income statement at and for the five (5)-month period ended
November 30, 1995 (the "Financial Statements"). The Financial Statements are
complete and correct in all material respects, subject to normal year-end
adjustments and to other adjustments made in the ordinary course of business and
relating to grants, licenses and other similar items, and have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods indicated and are consistent with each other. The
Financial Statements accurately set out and describe the financial condition and
operating results of the Company as of the dates, and for the periods, indicated
therein, subject, in the case of the unaudited financial statements, to normal
year-end audit adjustments. Except as set forth in the Financial Statements, or
as approved by the Board of Directors in the ordinary course of business, the
Company has no liabilities, contingent or otherwise, other than (a) liabilities
incurred in the ordinary course of business subsequent to June 30, 1995, and (b)
obligations under contracts and commitments incurred in the ordinary course of
business, which, individually or in the aggregate, are not material to the
financial condition or operating results of the Company.

         2.7   Governmental Consents. To the best knowledge of the Company, no
               ---------------------
consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state, local or provincial
governmental authority on the part of the Company is required in connection with
the consummation of the transactions contemplated by this Agreement, except for
the filings pursuant to applicable federal and state securities laws.

         2.8   Litigation. Except as set forth on the Schedule of Exceptions,
               ----------
there is no action, suit, proceeding or investigation pending or, to the best
knowledge of the Company, currently threatened against the Company, its
directors or officers that questions the validity of this Agreement or the right
of the Company to enter into this Agreement or to consummate the transactions
contemplated hereby or which might result, either individually or in the
aggregate, in a Material Adverse Effect, or any change in the current equity
ownership of the Company, nor is the Company aware that there is any basis for
the

                                       4

<PAGE>
 
foregoing. The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees, their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or the obligations of such employees under any
agreements with prior employers. The Company is not a party or subject to the
provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or which the Company presently
intends to initiate.

         2.9   Patents and Trademarks. The Company has good and exclusive
               ----------------------
ownership of, or an exclusive license or right of use with respect to, those
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes that are necessary for its
business as now conducted and as proposed to be conducted, and, to the best
knowledge of the Company, after reasonable inquiry, the Company's current use or
planned use of its patents and other proprietary rights do not and will not
conflict with or infringement of the rights of others. Except as set forth in
the Schedule of Exceptions hereto, there are no outstanding options, licenses or
agreements of any kind relating to the foregoing, nor is the Company bound by or
a party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information, proprietary rights and processes of any other person or
entity which would be material to the business of the Company. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees and consultants is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of his or her best efforts to promote the
interests of the Company or that would conflict with the Company's business as
proposed to be conducted. Neither the execution nor delivery of this Agreement,
nor the carrying on of the Company's business by the employees and consultants
of the Company, nor the conduct of the Company's business as proposed, will, to
the Company's knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract,
covenant or instrument under which any of such employees and consultants is now
obligated, which conflict or default would have a Material Adverse Effect on the
Company.

         2.10  Compliance With Other Instruments. To the best knowledge of the
               ---------------------------------
Company, the Company is not in violation or default of any provisions of the
Restated Articles or Bylaws or of any instrument, permit, judgment, order, writ,
decree or contract to which it is a party or by which it is bound or of any
provision of any federal or state statute, rule or regulation applicable to the
Company, which violation or default would have a Material Adverse Effect on the
Company. The execution, delivery and performance of this

                                       5

<PAGE>
 
Agreement and the consummation of the transactions contemplated hereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event which results in the revocation, impairment or forfeiture of a material
permit or license, or the creation of any material lien, charge or encumbrance
upon any of the assets of the Company.

         2.11  Compliance With Law. To the best knowledge of the Company, the
               -------------------
Company has complied with all laws, rules, regulations and orders applicable to
its business, operations, properties, assets, products and services, the
violation of which would have a Material Adverse Effect upon the Company, and
the Company has all necessary permits, licenses and other authorizations
required to conduct its business as it is now conducted. There is no existing
law, rule, regulation or order, and the Company after due inquiry is not aware
of any proposed law, rule, regulation or order, whether federal or state, which
would prohibit or restrict the Company from, or otherwise have a Material
Adverse Effect on the Company in, conducting its business, other than the
customary governmental approvals required for medical products. The current
status with respect to the review and approval of the Company's products by the
U.S. Food and Drug Administration is set forth on the Schedule of Exceptions.
Without limiting the foregoing in any manner, the Company has complied in all
material respects with all applicable laws relating to the employment of labor,
including provisions relating to wages, hours, equal opportunity, collective
bargaining and the payment of Social Security and other taxes, with ERISA, as
defined below, with the Occupational Health and Safety Act and with the
Americans With Disabilities Act. The Company is in full compliance with the
Immigration Reform and Control Act of 1986, as amended, and, to the best of the
Company's knowledge, all key employees who are not United States citizens are
currently authorized under United States immigration laws to hold United States
employment and will continue to have such employment authorization through the
foreseeable future and are otherwise in compliance with United States
immigration laws.

         2.12  Agreements; Action.
               ------------------

               (a) Except as set forth on the Schedule of Exceptions, there are
no agreements, understandings, instruments or contracts to which the Company is
a party or by which it is bound which involve (i) obligations of, or payments
to, the Company in excess of One Hundred Thousand Dollars ($100,000), other than
obligations with respect to compensation under employment or consulting
agreements previously disclosed to each Investor, (ii) the license of any
patent, copyright, trade secret or other proprietary right of the Company, (iii)
agreements relating to the development, manufacture or distribution of the
Company's products, (iv) indemnification by the Company with respect to
infringement of proprietary rights or (v) any other material agreement.

                                       6

<PAGE>
 
               (b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or
incurred any other liabilities individually in excess of One Hundred Thousand
Dollars ($100,000) or in excess of One Hundred Fifty Thousand Dollars ($150,000)
in the aggregate, other than obligations with respect to compensation under
employment or consulting agreements, (iii) made any loans or advances to any
person, other than ordinary advances for travel expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than the
sale of its inventory in the ordinary course of business and other than sales,
exchanges or dispositions which would result in a Material Adverse Effect on the
Company.

               (c) The Company is not a party to or bound by any contract,
agreement or instrument, or subject to any restriction under the Restated
Articles or Bylaws, which would have a Material Adverse Effect on its business
as now conducted or as proposed to be conducted.

               (d) The Company has not engaged and is not presently engaged in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than twenty-five
percent (25%) of the voting power of the Company is disposed of or (iii)
regarding any other form of liquidation, dissolution or winding up of the
Company.

         2.13  Corporate Documents. The Restated Articles and Bylaws of the
               -------------------
Company are in the form made available to the Investors.

         2.14  Title to Property and Assets. The Company has good and
               ----------------------------
marketable title to its properties and assets reflected in the Financial
Statements or acquired by it since the date of the Financial Statements (other
than properties and assets disposed of in the ordinary course of business since
the date of the Financial Statements), and all such properties and assets are
free and clear of mortgages, pledges, security interests, liens, charges,
claims, restrictions and other encumbrances, except for liens to secure payment
of obligations reflected in the Financial Statements and for current taxes not
yet due and payable and minor imperfections of title, if any, not material in
nature or amount and not materially detracting from the value or impairing the
use of the property subject thereto or impairing the operations or proposed
operations of the Company.

         2.15  Employee Benefit Plans. To the best knowledge of the Company,
               ----------------------
each of the Company's employee benefit plans, as such term is defined in the
Employee Retirement Income Securities Act of 1974, as amended ("ERISA"),
complies in form and in operation in all respects with the applicable
requirements of ERISA and the

                                       7

<PAGE>
 
Internal Revenue Code of 1986, as amended (the "Code"). All required reports and
descriptions have been filed or distributed appropriately with respect to each
such employee benefit plan and there have been no prohibited transactions with
respect to any such plan. No fiduciary has any liability for breach of fiduciary
duty or any other failure to act or comply in connection with the administration
or investment of the assets of any employee benefit plan. No charge, complaint,
action, suit, proceeding, hearing, investigation, claim or demand with respect
to the administration or the investment of the assets of any employee benefit
plan (other than routine claims for benefits) is pending or, to the Company's
knowledge, threatened. The Company (and employees with responsibility for
employee benefits matters) have no knowledge of any basis for any such charge,
complaint, action, suit, hearing, investigation, claim or demand.

         2.16  Leasehold Interests. Each lease or agreement to which the
               -------------------
Company is a party under which it is a lessee of any property, real or personal,
is a valid and subsisting agreement without any material default of the Company
with respect to any term thereof and the Company has not been notified of any
default and has no reason to believe that it is in default of any term
thereunder. To the best of the Company's knowledge, no other party to any such
lease or agreement is in default of a material term thereunder. No event has
occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been disturbed
and no claim has been asserted against the Company adverse to its rights in such
leasehold interests.

         2.17  Tax Returns and Payments. The Company has filed all federal,
               ------------------------
state and local tax returns and reports as required by law and has paid all
taxes and other assessments due prior to the date that any penalty would accrue
thereon, or adequate reserves for the payment thereof have been set forth in the
Financial Statements. The provision for taxes of the Company are adequate for
taxes due or accrued as of the date thereof. No deficiency assessment with
respect to or proposed adjustment of the Company's federal, state, county or
local taxes is pending or, to the best of the Company's knowledge, threatened.
There is no tax lien, whether imposed by any federal, state, county or local
taxing authority, outstanding against the assets, properties or business of the
Company.

         2.18  Insurance. The Company maintains as to its properties and
               ---------
business, with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies similarly situated.

         2.19  Labor Agreements and Actions. The Company is not bound by or
               ----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any

                                       8

<PAGE>
 
of the employees of the Company. There is no strike or other labor dispute
involving the Company pending, or to the knowledge of the Company threatened,
which could have a Material Adverse Effect on the Company, nor is the Company
aware of any labor organization activity involving its employees. The Company is
not aware that any officer or key employee, or that any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.

         2.20  Changes. Since June 30, 1995, there has not been:
               -------

               (a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Financial
Statements, except changes in the ordinary course of business, including but not
limited to transactions with Rhone-Poulenc Rorer, Inc. and Immunex, which have
not been, in the aggregate, materially adverse;

               (b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);

               (c) any waiver by the Company of a valuable right or of a
material debt owed to it;

               (d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and which is not material to the assets, properties,
financial condition, operating results or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);

               (e) any material change or amendment to a material contract or
agreement by which the Company or any of its assets or properties is bound or
subject;

               (f) any material change in any compensation arrangement or
agreement with any officer, director or employee; or

               (g) to the Company's knowledge, any other event or condition of
any character that could be reasonably expected to result in a Material Adverse
Effect on the Company.

         2.21  Related-Party Transactions. No employee, officer or director of
               --------------------------
the Company, or member of his or her immediate family is indebted to the
Company, nor

                                       9

<PAGE>
 
is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers or directors of the Company, and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. Except as set forth on the Schedule of Exceptions, no member
of the immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.

         2.22  Small Business Matters.
               ---------------------- 

               (a) The Company, together with its "affiliates" (as that term is
defined in Title 13, Code of Federal Regulations, (S)121.401), is a "small
business concern" within the meaning of the Small Business Investment Act of
1958, as amended (the "SBIA") and the regulations thereunder, including Title
13, Code of Federal Regulations, (S)121.802. The information set forth in the
Small Business Administration Forms 480, 652 and Part A of Form 1031 regarding
the Company and its affiliates is accurate and complete. Copies of such forms
shall have been completed and executed by the Company and delivered to any
Investor requesting such forms (each, an "SBIC Investor").

               (b) The proceeds from the sale of the Series E Preferred Stock
will be used by the Company for general working capital purposes, for its growth
modernization and expansion. No portion of the proceeds of any SBIC Investor (i)
will be used to provide capital to a corporation licensed under the SBIA, (ii)
will be used outside the United States (except (x) to acquire abroad materials
and industrial property rights for a domestic operation or (y) for transfer to a
controlled foreign Subsidiary, so long as at least fifty-one percent (51%) of
the Company's assets and activities will remain within the United States), or
(iii) will be used for any purpose contrary to the public interest (including
without limitation, activities which are in violation of law) or inconsistent
with free competitive enterprise, in each case, within the meaning of 13 C.F.R.
(S)107.901.

               (c) The Company's primary business activity does not involve,
directly or indirectly, providing funds to others, the purchase or discounting
of debt obligations, factoring or long-term leasing of equipment with no
provision for maintenance or repair, and the Company is not classified under
Major Group 65 (Real Estate) of the SIC Manual.

               (d) If the Company breaches the representations in subsections
(b) or (c) above in any material respect, then in addition to all other remedies
available to the SBIC Investors, each SBIC Investor may demand that the Company
immediately repurchase all securities acquired by the SBIC Investor at the
purchase price therefor.

                                      10

<PAGE>
 
         2.23  Hazardous Materials. To the best knowledge of the Company, the
               -------------------
Company has never spilled or released any Hazardous Materials at any site owned
or leased by it. To the best knowledge of the Company, all materials used by the
Company have been and are handled, packaged, labeled, stored, used and disposed
of in accordance with all applicable federal, state and local requirements. To
the best knowledge of the Company, no third party has ever generated, used,
handled, stored, treated, disposed of, spilled or released any Hazardous
Materials at any site owned or leased by the Company, nor has there been or is
there threatened any release of any Hazardous Materials on or at any such site.
To the best knowledge of the Company, there are not underground storage tanks at
any site owned or leased by the Company. For purpose of this Section 2.23,
"Hazardous Materials" shall mean any element, substance, compound or mixture
(including, without limitation, any pollutant, contaminant, chemical or
industrial, toxic or hazardous substance or waste and any break-down product
thereof), whether solid, liquid or gaseous, that (i) has been, is or shall be in
the future subject to regulation of any kind (including, without limitation,
regulation by statute, rule, regulation, ordinance, order, decree, notice, plan
or demand letter) by any federal, state or local governmental authority with
regard to protection of the environment or protection of environmental health
and safety, or (ii) the presence, existence or threat of which shall at any time
give rise, under any theory of law or equity, to any liability of any kind or
nature whatsoever.

         2.24  Disclosure. The Company has fully provided each Investor with 
               ----------
all the material information which such Investor has requested for deciding
whether to purchase the Series E Preferred Stock. Neither this Agreement nor any
other statements or certificates made or delivered in connection herewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not, in light of the
circumstances under which such statements are made, misleading.

     3.  Representations Warranties and Covenants of Each Investor. This
         ---------------------------------------------------------
Agreement is made with each Investor in reliance upon such Investor's
representation and warranties to the Company, which by such Investor's execution
of this Agreement such Investor hereby confirms, that:

         3.1   Authorization. This Agreement constitutes its valid and legally
               -------------
binding obligation, enforceable against the Investor in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and remedies generally.

         3.2   Purchase Entirely for Own Account. The Series E Preferred Stock
               ---------------------------------
to be received by Investor and the Common Stock issuable upon conversion thereof
(collectively, the "Securities") will be acquired only for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, each

                                      11

<PAGE>
 
Investor further represents that such Investor does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. Each Investor represents that it has full power and authority to
enter into this Agreement.

         3.3   Disclosure of Information. Investor has received all the
               -------------------------
information it considers necessary or appropriate for deciding whether to
purchase shares of Series E Preferred Stock and has received all information it
has requested from the Company. Such Investor further represents that it has had
an opportunity to ask questions of management of the Company regarding the
Company, its business and the terms and conditions of the offering of the
Securities and that all such questions have been answered to the satisfaction of
such Investor. In entering into this Agreement, the Investor has not relied on
any written or oral representation or other information except as provided to
the Investor by the Company and its agents. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 2
of this Agreement or the right of the Investors to rely thereon.

         3.4   Investment Experience. The Investor is aware that an investment
               ---------------------
in the Series E Preferred Stock involves very significant risks and that, in
particular, the Company is in the development stage. Investor is an investor in
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk and complete loss of its
investment in the Series E Preferred Stock and has such knowledge and experience
in financial or business matters that it is capable of evaluating the merits and
risks of the investment in shares of Series E Preferred Stock. Such Investor has
not been organized solely for the purpose of acquiring the Securities.

         3.5   Restricted Securities. Each Investor understands that the
               ---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "Securities Act"), only in certain
limited circumstances. In this connection each Investor represents that it is
familiar with Securities and Exchange Commission ("SEC") Rule 144, as presently
in effect, and understands the resale limitations imposed thereby and by the
Securities Act.

         3.6   Further Limitations on Disposition. Without in any way limiting
               ----------------------------------
the representations set forth above, each Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until:

               (a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or

                                      12

<PAGE>
 
               (b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company and
its counsel, that such disposition will not require registration of such shares
under the Securities Act, provided that the Company will not require the State
of Michigan to deliver an opinion under Section 3.6.

               (c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor which is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his spouse or to the
siblings, lineal descendants or ancestors of such partner or his spouse, if the
transferee agrees in writing to be subject to the terms hereof to the same
extent as if he were an original Investor hereunder.

         3.7   Legends. It is understood that the certificates evidencing the
               -------
Securities may bear the following legend:

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
         UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED
         FOR INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY
         NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
         WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER
         THE SECURITIES ACT OF 1933, OR UNLESS AN EXEMPTION FROM REGISTRATION
         UNDER SUCH ACT IS AVAILABLE.

         3.8   Accredited Investor. Each Investor is an accredited investor as
               -------------------
defined in Rule 501(a) of Regulation D, as amended, of the SEC under the
Securities Act.

         3.9   Removal of Legends; Further Covenants.
               -------------------------------------

               (a) Any legend endorsed on a certificate pursuant to Section 3.8
hereof shall be removed (i) if the Securities represented by such certificate
shall have been effectively registered under the Securities Act or otherwise
lawfully sold in a public transaction, (ii) if such Securities may be
transferred in compliance with Rule 144(k)

                                      13

<PAGE>
 
promulgated under the Securities Act or (iii) if the holder of such Securities
shall have provided the Company with an opinion of counsel, in form and
substance acceptable to the Company and its counsel and from attorneys
reasonably acceptable to the Company and its counsel, stating that a public
sale, transfer or assignment of such Securities may be made without
registration.

               (b) Any legend endorsed upon a certificate pursuant to Section
3.8 hereof shall be removed if the Company receives an order of the appropriate
state authority authorizing such removal or if the holder of such Securities
provides the Company with an opinion of counsel, in form and substance
acceptable to the Company and its counsel and from attorneys reasonably
acceptable to the Company and its counsel, stating that such state legend may be
removed.

     4.  California Commissioner of Corporations.
         --------------------------------------- 

         4.1   Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
               ------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM
QUALIFICATION BY SECTIONS 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.

     5.  Conditions of Each Investor's Obligations at Closing. The obligations
         ----------------------------------------------------
of each Investor under Section 1.2 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
in writing thereto:

         5.1   Representations and Warranties. The representations and
               ------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.

         5.2   Performance. The Company shall have performed and complied with
               -----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.

         5.3   Qualifications. The offer and sale of the Series E Preferred
               --------------
Stock and the underlying shares of Common Stock to the Investors shall be
either registered

                                      14

<PAGE>
 
and qualified with the securities administration of all relevant states or
pursuant to this Agreement, or such offer and sale shall be exempt from such
registration qualification.

         5.4   Proceedings and Documents. All corporate and other proceedings
               -------------------------
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to each Investor and its counsel, and each Investor shall have
received all such counterpart original, certified and other copies of such
documents as such Investor may reasonably request.

         5.5   Opinion of Company Counsel. Each Investor shall have received 
               --------------------------
from Pepper, Hamilton & Scheetz, counsel for the Company, an opinion, dated as
of the Closing, in form and substance satisfactory to the Investors.

         5.6   Investor Rights Agreement. The Investors and the Company shall
               -------------------------
have entered into the Investor Rights Agreement.

     6.  Conditions of the Company's Obligations at Closing. The obligations
         --------------------------------------------------
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by such
Investor:

         6.1   Representations and Warranties. The representations and
               ------------------------------
warranties of the Investor contained in Section 3 hereof shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.

     7.  Covenants. In connection with the transactions contemplated hereby, the
         ---------
Company hereby covenants and agrees as follows:

         7.1   Observer Rights. At any time after the date hereof, the
               ---------------
Investors shall have the right to have one (1) designated representative (the
"Designated Representative") attend any and all meetings of the Company's Board
of Directors, in a nonvoting capacity. The initial Designated Representative
shall be Gregory J. Forrest, who may be replaced at any time and from time to
time by Investors holding a majority of the Series E Preferred Stock, provided
that each subsequent Designated Representative shall be reasonably acceptable to
the Company. The Company will provide such Designated Representative with all
usual and customary communications made to the Board and give such Designated
Representative copies of all materials delivered to the Board and/or other non-
voting observers outside of meetings. At the request of the Company, the
Designated Representative shall enter into a confidentiality agreement with the
Company in the form that has been previously delivered to the Company by other
non-voting observers to the Board. The provisions of this Section 7.1 shall
terminate automatically and be of no further force and effect upon the
consummation by the Company of an initial public offering under the Securities
Act.

                                      15

<PAGE>
 
         7.2   Registration Rights. The Company hereby grants to each Investor
               -------------------
all of the rights and benefits set forth in Sections 2.4 through 2.14,
inclusive, of that certain Amended and Restated Investors' Rights Agreement
dated as of April 7, 1992, as amended to date (the "Investors' Rights
Agreement").

         7.3   Financial Information, Etc. The Company hereby agrees to comply
               --------------------------
with those affirmative covenants set forth in Sections 3.1 through 3.7,
inclusive, of the Investors' Rights Agreement and to afford each Investor with
the rights and benefits set forth therein.

         7.4   Information Rights and Related Covenants.
               ----------------------------------------

               (a) Within ninety (90) days after the date hereof, the Company
shall provide to each Investor seeking such information a certificate of its
chief financial officer (i) verifying the use of the proceeds of each SBIC
Investor from the sale of Series E Preferred Stock and (ii) certifying
compliance by the Company with the provisions of this Agreement. In addition to
any other rights granted hereunder, the Company shall provide each such Investor
and the U.S. Small Business Administration (the "SBA") access to its books and
records for the purpose of verifying the use of the proceeds of such Investor's
financing.

               (b) The Company will at all times comply with the
nondiscrimination requirements of 13 C.F.R., Parts 112, 113 and 117.

         7.5   Right of First Offer. The Company hereby grants to each
               --------------------
Investor all of the rights and benefits of Section 4.1 of the Investors' Rights
Agreement.

         7.6   Best Efforts on Sale of Stock. The Company agrees to use its 
               -----------------------------
best efforts to include a pro rata portion of the shares of Series E Preferred
Stock held by the Investors in any sale of any of the capital stock of the
Company by any other investor in the Company.

     8.  Miscellaneous.
         ------------- 

         8.1   Successors and Assigns. The terms and conditions of this
               ----------------------
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

         8.2   Governing Law. This Agreement shall be governed by and
               -------------
construed under the laws of the State of Michigan.

                                      16

<PAGE>
 
         8.3   Counterparts. This Agreement may be executed in two or more
               ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

         8.4   Titles and Subtitles. The titles and subtitles used in this
               --------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

         8.5   Notices. Unless otherwise provided, any notice required or
               -------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or, if sent
by telecopier, upon confirmation of transmission, or three (3) days after
deposit with the United States Post Office, by registered or certified mail, or
one (1) day after deposit with an overnight air courier, in each case postage
prepaid and addressed to the party to be notified at the address indicated for
such party on the signature page hereof, or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties.

         8.6   Brokers and Finders. Each party represents that it neither is
               -------------------
nor will be obligated for the payment of any broker or finder fee or commission
in connection with this transaction. Each Investor agrees to indemnify and hold
harmless the Company from any liability for any commission or compensation in
the nature of a broker or finder fee (and the costs and expenses of defending
against such liability or asserted liability) for which the Investor or any of
its officers, partners, employees or representatives is responsible. The Company
agrees to indemnify and hold harmless each Investor from any liability for any
commission or compensation in the nature of a broker or finder fee (and the
costs and expenses of defending against such liability or asserted liability)
for which the Company or any of its officers, employees or representatives is
responsible.

         8.7   Expenses. The Company shall pay the reasonable fees and
               --------
expenses of Riordan & McKinzie acting as counsel to SBIC Partners, L.P.

         8.8   Severability. If one or more provisions of this Agreement are
               ------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of this Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

         8.9   Entire Agreement. This Agreement and the Investors Rights
               ----------------
Agreement constitute the entire agreement among the parties hereto pertaining to
the subject matter hereof and supersede all prior agreements, term sheets,
letters, discussions and understandings of the parties in connection therewith.

                                      17

<PAGE>
 
         8.10  Assurances. Each party to this Agreement shall execute all
               ----------
instruments and documents and take all actions as may be reasonably required to
effectuate this Agreement, whether before, concurrently with or after the
consummation of the transactions contemplated hereby.

                                      18

<PAGE>
 
     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

COMPANY:                           AASTROM BIOSCIENCES, INC. 
                                   P.O. Box 376              
                                   Ann Arbor, Michigan 48106 
                                   Fax: (313) 930-5546       
                                                             
                                   By: /s/ R. DOUGLAS ARMSTRONG, Ph.D.
                                       -------------------------------------
                                       R. Douglas Armstrong, Ph.D. 
                                       President and Chief Executive Officer 
                                                                         
INVESTORS:                         SBIC PARTNERS, L.P.                   
                                   201 Main Street, Suite 2302           
                                   Fort Worth, Texas 76102               
                                   Fax: (817) 338-2047                   
                                                                         
                                   By: Forrest Binkley & Brown L.P.,     
                                       General Partner                       
                                                                         
                                       By: Forrest Binkley & Brown Venture Co.,
                                           General Partner

                                           By: /s/ JEFFREY J. BROWN
                                               -------------------------------
                                               Jeffrey J. Brown
                                               Office of the President
                                                                         
                                   By: SL-SBIC Partners, L.P.,           
                                       General Partner                       
                                                                         
                                       By: FW-SBIC, Inc.,                   
                                           General Partner
                                                                         
                                           By: /s/ PETER STERLING
                                               -------------------------------
                                               Name:  Peter Sterling
                                               Title: Chairman

                   [Signatures continued on following page]

                                      19

<PAGE>
 
                   [Signatures continued from previous page]

                                   STATE TREASURER OF THE STATE OF MICHIGAN,
                                   CUSTODIAN OF THE MICHIGAN PUBLIC SCHOOL
                                   EMPLOYEES' RETIREMENT SYSTEM, STATE
                                   EMPLOYEES' RETIREMENT SYSTEM, MICHIGAN STATE
                                   POLICE RETIREMENT SYSTEM, AND MICHIGAN JUDGES
                                   RETIREMENT SYSTEM
                                   c/o Alternative Investments Division
                                   430 West Allegan
                                   Treasury Building, 3rd Floor
                                   Lansing, Michigan 48933 
                                   Fax: (517) 335-3668

                                   By: /s/ PAUL E. RICE
                                       ---------------------------------------
                                       Name: Paul E. Rice, Administrator
                                       Title: Alternative Investments Division

                                   By: 
                                       ---------------------------------------
                                       Name:
                                              --------------------------------
                                       Title:
                                              --------------------------------

                                      20

<PAGE>
 
                                  Schedule A

                             SCHEDULE OF INVESTORS
                             ---------------------


<TABLE> 
<CAPTION> 
                                 Number                   Aggregate
Investor                       of Shares               Purchase Price
- --------                       ---------               --------------
<S>                            <C>                     <C> 
SBIC Partners, L.P.              941,177                $4,000,002.25

State Treasurer of the
State of Michigan                470,588                $1,999,999
                               ---------                -------------
           Totals:             1,411,765                $6,000,001.25
</TABLE>
 

                                 Schedule A-1



<PAGE>
 
                                                                   EXHIBIT 10.32

                             GOVERNANCE AGREEMENT

                                    Between

                           AASTROM BIOSCIENCES, INC.

                                      and

                            RHONE-POULENC RORER INC.

<PAGE>
 
                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                            Page
- --------------------------------------------------------------------------------
<S>    <C>                                                                  <C>
1.     Definitions.............................................................2

2.     First Option Period.....................................................5
2.1    Time Duration...........................................................5
2.2    First Option Payment....................................................6
2.3    First Option Period R&D Budget..........................................6
2.4    Standstill..............................................................6
2.5    Due Diligence Investigation by RPR......................................6
2.6    Election to Proceed with the Second Option Period.......................6
2.7    RPR Election to Terminate...............................................7

3.     Second Option Period....................................................7
3.1    Time Duration...........................................................7
3.2    Second Option Payment...................................................7
3.3    Second Option Period R&D Budget.........................................7
3.4    Standstill..............................................................8
3.5    Due Diligence Investigation by RPR......................................8
3.6    Election to Proceed with the Third Option Events........................8
3.7    RPR Election to Terminate...............................................8

4.     Execution of Stock Purchase Agreement; Purchase of Additional ABI
       Capital Stock...........................................................9

5.     Execution of License Agreement; Grant of License to RPR.................9

6.     Execution of Supply Agreement...........................................9

7.     Negotiation and Execution of Research and Development Collaboration
       Agreement...............................................................9

8.     Termination of Letter of Intent.........................................9

9.     Public Announcement....................................................10

10.    ABI Merger Contingency.................................................10
</TABLE>
 

<PAGE>
 
                           TABLE OF CONTENTS(Cont'd)


<TABLE> 
<CAPTION>
                                                                            Page
- --------------------------------------------------------------------------------
<S>    <C>                                                                  <C>
11.    Representations........................................................11
11.1   Mutual Representations.................................................11
11.2   Representations from Implementing Agreements...........................11

12.    Arbitration............................................................11
12.1   Equitable Court Remedies...............................................11

13.    Confidentiality........................................................11

14.    General Provisions.....................................................12
14.1   Independent Contractors................................................12
14.2   Consents Not Unreasonably Withheld.....................................12
14.3   Assignment.............................................................12
14.4   Binding Upon Successors and Assigns....................................12
14.5   Entire Agreement; Modification.........................................13
14.6   Applicable Law.........................................................13
14.7   Headings...............................................................13
14.8   Severability...........................................................13
14.9   No Waiver..............................................................13
14.10  Export Controls........................................................13
14.11  No Implied Licenses....................................................13
14.12  Notices................................................................14
14.13  Compliance with Laws...................................................14
14.14  Counterparts...........................................................14
 
IN WITNESS
 WHEREOF............................................................15

Exhibit A - First Option Period R & D Budget...................................i
Exhibit B - Second Option Period R & D Budget.................................ii
Exhibit C - Provisions to be Included as Part of R & D Collaboration 
            Agreement........................................................iii
</TABLE>
 

<PAGE>
 
                              GOVERNANCE AGREEMENT

          This Governance Agreement is entered into as of September 15, 1995
(the "Effective Date") by and between Aastrom Biosciences, Inc., a Michigan
corporation ("ABI"), and Rhone Poulenc Rorer Inc., a Delaware corporation
("RPR"), with respect to the following facts:

          A.   RPR and ABI entered into the Letter of Intent, which included a
term sheet concerning the development and sale of the CPS for Lymphoid Cell
Applications.  Pursuant to the Letter of Intent, RPR paid ABI $250,000 for ABI
to "standstill" with respect to negotiating transactions with third parties
which would be inconsistent with ABI entering into the transactions with RPR as
contemplated by the Letter of Intent, with an exception for discussions directed
to the sale of substantially all of ABI's assets to, or a merger of ABI with, a
third party.

          B.   The purpose of this Agreement is to implement, replace and
supersede the Letter of Intent, effective as of the date of this Agreement.

          C.   The parties have negotiated, drafted and executed certain
additional agreements as contemplated by the Letter of Intent and this
Agreement, consisting of:

               1.  Supply Agreement;                                  
                                                                      
               2.  License Agreement                                  
                                                                      
               3.  Stock Purchase Agreement; and                      
                                                                      
               4.  Arbitration Agreement (pending).                    

          D.   This Agreement, the License Agreement and the Stock Purchase
Agreement are effective as of the date hereof.  Pursuant to the terms of this
Agreement, prior to the end of the First Option Period, the parties will
negotiate and execute the Arbitration Agreement, effective as of its execution
date, and the Research and Development Collaboration Agreement.  The Research
and Development Collaboration Agreement together with the Supply Agreement,
shall become effective only after RPR delivers the Third Option Event Notice.

          E.   Pursuant to the Letter of Intent, RPR has paid to ABI $225,000 as
an research and development deposit to enable ABI to initiate preliminary
research and development for manufacturing the ten Manual CPS units which have
been, or, prior to initiation of the First Option Period are to be, installed at
AIS.

                                                                          Page 1

<PAGE>
 
          F.   RPR has conducted due diligence investigation concerning ABI, the
CPS, and potential issues concerning the future development of the CPS for
Lymphoid Cell Applications.

          G.   The parties have negotiated and agreed upon a budget for ABI to
conduct research and development for the CPS during the First Option Period,
which budget is hereinafter referred to as the "First Option Period R&D Budget"
and  is attached hereto as Exhibit A.

          WHEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, mutually agree as follows:
 
1.   Definitions.  As used in this Agreement, the following terms have the
     -----------                                                          
meanings set forth below.

     "ABI" means AASTROM Biosciences, Inc., a Michigan corporation.

     "Activation Date" shall mean the date RPR delivers the Third Option Event
Notice.

     "Affiliate" means any company or other legal entity in which a party holds,
directly or indirectly, at least forty percent (40%) or more of (i) the capital,
(ii) the income interest in the company or other legal entity, (iii) the voting
rights, or (iv) the right to elect or appoint directors.

     "AIS" means Applied Immune Sciences, a Delaware corporation, which is an
Affiliate of RPR.

     "Arbitration Agreement" means the Agreement executed by ABI and RPR prior
to the end of the First Option Period and governing the resolution of disputes
involving the Implementing Agreements.

     "Automated CPS" means the cell production system developed by ABI as a
system for growing cells ex vivo for therapeutic purposes which, in its basic
format consists of Disposables and Durables, together with modifications and
improvements thereof.

     "Automated CPS Package" means the deliverable items referenced in Section
2.1 hereof, consisting of three CPS incubators (beta level), one CPS processor
(beta level), three machined, reusable-shell cell cassettes, one CPS monitor and
50 bioreactors and associated tubing sets.

     "Cobe Distribution Agreement" has the meaning provided in the License
Agreement.

                                                                          Page 2

<PAGE>
 
     "Confidentiality Agreement" means the Mutual Confidentiality Agreement
dated January 13, 1995 between RPR, ABI, AIS and Rhone-Poulenc Rorer
Pharmaceuticals Inc.

     "Confidential Information" means all confidential information, trade
secrets and other proprietary information which belongs to a party and which the
party keeps confidential for the business advantage of the party. Without
limiting the generality of the foregoing, a party's confidential information
includes the following information and items which the party endeavors to keep
confidential: technology, know-how, inventions, pending patent applications,
data, formula, studies, devices, materials, investigations, reports, lists of
actual or potential customers, clients and vendors, financial reports and
projections, marketing reports and projections, software programs, manufacturing
pre-production drawings, prototypes, business plans, business records,
scientific evaluations, and so forth. Notwithstanding the foregoing,
"Confidential Information" does not include information which:

          (a)  is publicly disclosed, except by breach of an agreement of
confidentiality;

          (b)  the receiving party can establish by written proof was in its
possession at the time of disclosure by the owning party and was not acquired
directly or indirectly from the owning party or from any third party under an
agreement of confidentiality to the owning party;

          (c)  the receiving party receives from a third party legally in a
position to provide the receiving party with such information, provided that
such information was not obtained by said third party directly or indirectly
under an obligation of secrecy; or

          (d)  has been independently developed by the receiving party without
the aid, application or use of the owning party's Confidential Information.


     "CPS" means any system or device for substantially increasing, the number
of cells, ex vivo, for human therapeutic uses, that may be configured in
different component structures (such as described for the Automated CPS or the
Manual CPS). For purposes of clarity, CPS does not include a system or device
(i) which provides for cell manipulation, such as for gene transfer into cells
through steps, that does not grow a substantially increased number of cells,
such as the Aastrom Gene Loader, or (ii) which stores cells, but which does not
grow a substantially increased number of cells.

     "Disposables" means the cell growth cassette configured to be received and
operated by the Automated CPS incubator and/or Automated CPS processor, and

                                                                          Page 3

<PAGE>
 
consisting of a medium supply container unit and a separate unit consisting of a
cell growth chamber, a waste medium container, and a harvest container (or means
for attachment of a harvest container); all such units appropriately connected
as a fluid pathway and manufactured as a sterile product for the expansion of
cells; each as more completely described in ABI's product specifications for the
Automated CPS.

     "Durables" means the major components of the Automated CPS (other than the
Disposables), including (1) the Automated CPS incubator, an instrument
configured to receive and operate the Disposables; (2) the Automated CPS
processor, an instrument configured to receive and operate the Disposables for
medium priming, cell distribution and/or cell harvesting; and (3) the Automated
CPS monitor, an instrument configured to display information to the user
regarding the operational status of one or more of the Automated CPS incubators;
each as more completely described in ABI's product specifications for the
Automated CPS.

     "First Option Payment" means the sum of $1,500,000 payable by RPR to ABI as
specified in Section 2.2 hereof.

     "First Option Period" has the meaning specified in Section 2.1 hereof.

     "First Option Period Initiation Date" has the meaning specified in Section
2.1 hereof.

     "First Option Period R&D Budget" means the budgeted funding to be provided
by RPR to ABI, as specified in Section 2 hereof and Exhibit A attached hereto.

     "Implementing Agreements" means this Agreement, the License Agreement, the
Supply Agreement, the Research and Development Collaboration Agreement, the
Stock Purchase Agreement and the Arbitration Agreement.

     "IPO" means the first underwritten offering by ABI to the public of ABI's
common stock registered under the Securities Act of 1933, as amended.

     "Letter of Intent" means the letter from RPR to ABI dated June 9, 1995, and
the related Term Sheet, concerning using the CPS for Lymphoid Cell Applications.

     "License Agreement" means the agreement with that title between RPR and
ABI, dated as of the date hereof.

     "Lymphoid Cell" means lymphoid stem cell (e.g., a cell capable of
generating cells solely of lymphoid lineage) and any cell derived therefrom,
including but not limited to the subcortical thymocyte, cortical thymocyte,
medullary thymocyte, lymphocyte, B-cell, plasma cell, immunoblast,
lymphoplasmacytoid cell and the NK-cell.

                                                                          Page 4

<PAGE>
 
     "Lymphoid Cell Applications" means any production, expansion, selection or
genetic manipulation, including genetic transformation, of Lymphoid Cells,
provided that either the starting cell population is a lymphoid selected cell
mixture or that the mature lymphoid cell production is not derived ex vivo from
a pre-lymphoid cell-type (e.g., multipotent stem cell).

     "Manual CPS" means the 750 cm2 radial flow bioreactor, the tubing kit for
medium conduit, a medium supply container, a waste container, and a cell harvest
bag, as more completely described in ABI's product specifications for the Manual
CPS.

     "Research and Development Collaboration Agreement" has the meaning provided
in Section 7 hereof.

     "RPR" means Rhone-Poulenc Rorer Inc., a Delaware corporation.

     "Second Option Payment" means the sum of $2,000,000 payable by RPR to ABI
as specified in Section 3.2 hereof.

     "Second Option Period" has the meaning provided in Section 3.1 hereof.

     "Second Option Period Initiation Date" has the meaning specified in Section
3.1 hereof.

     "Second Option Period R&D Budget" has the meaning provided in Section 2.6
hereof.

     "Stock Purchase Agreement" means the agreement with that title between RPR
and ABI, dated as of the date hereof.

     "Supply Agreement" means the agreement with that title between RPR and ABI,
dated as of the date hereof, which will become effective if RPR exercises the
Third Option Event Notice.

     "Third Option Events" has the meaning provided in Section 3.6 hereof.

     "Third Option Event Notice" means the notice to be delivered by RPR to ABI
in accordance with Section 3.6 hereof, pursuant to which RPR notifies ABI of its
election to proceed with the Third Option Events.

2.   First Option Period.
     ------------------- 

2.1  Time Duration.  The First Option Period shall commence on the date (the
     -------------                                                          
"First Option Period Initiation Date") that is the later of (i) the date of this
Agreement, and (ii) the delivery at AIS of 10 manually operated CPS devices
(including all necessary Disposables) and shall extend until the latter of (i)
the date that is six months

                                                                          Page 5

<PAGE>
 
thereafter, and (ii) the date that is three business days after ABI installs at
AIS the Automated CPS Package, unless RPR otherwise elects to initiate the
Second Option Period prior to the above dates.

2.2  First Option Payment.  Within ten (10) days after the First Option Period
     --------------------                                                     
Initiation Date, RPR shall pay to ABI, by wire transfer, the sum of $1,500,000
(the "First Option Payment") ; provided, however, that RPR shall not be
obligated to make such payment until the Cobe Distribution Agreement has been
amended as contemplated by Section 2.4 of the License Agreement.  The First
Option Payment shall be applied to the purchase by RPR of ABI capital stock in
accordance with the terms of the Stock Purchase Agreement.

2.3  First Option Period R&D Budget. RPR hereby agrees to pay to ABI certain
     ------------------------------                                         
funds for ABI to complete the production of the Manual CPS, and to perform
related research and development of, and to produce the Automated CPS Package,
in accordance with the First Option Period R&D Budget attached hereto as Exhibit
A.  RPR shall make payments to ABI pursuant to said budget on a monthly basis,
payable monthly in advance, in accordance with the schedule and criteria set
forth in the First Option Period R&D Budget.  Said monthly payments shall be
made by wire transfer on or before the first day of each calendar month during
the First Option Period.  The first monthly installment shall be paid by RPR to
ABI within ten days after the date of this Agreement; provided, however, that
RPR shall not be obligated to make any payments until the Cobe Distribution
Agreement has been amended as contemplated by Section 2.4 of the License
Agreement.  ABI hereby represents and warrants that it believes that the funds
to be provided to ABI pursuant to the First Option Period R&D Budget will be
adequate to accomplish the objectives set forth in such budget.  ABI shall
provide RPR with copies of third party invoices and other necessary explanatory
documentation relating to the First Option Period R & D Budget on a monthly
basis.

2.4  Standstill.  During the First Option Period, ABI shall not discuss with a
     ----------                                                               
third party any sale or license of any intellectual property or distribution,
marketing, promotion or manufacturing rights owned or licensed to ABI relating
to the use of any ABI device or technology for Lymphoid Cell Applications,
except for discussions directly related to the sale of substantially all of the
assets of ABI to, or a merger of ABI with, a third party.

2.5  Due Diligence Investigation by RPR.  During this First Option Period, RPR
     ----------------------------------                                       
shall continue to conduct further due diligence investigation concerning ABI,
the CPS, and the potential use of the CPS for Lymphoid Cell Applications.  ABI
shall cooperate with and assist RPR with this due diligence investigation.

2.6  Election to Proceed with the Second Option Period.  At any time prior to
     -------------------------------------------------                       
the expiration of the First Option Period, RPR may elect to initiate the Second
Option Period, subject to and in accordance with the terms hereof, by delivering
a written notice of said election to ABI (the "Second Option Notice").  RPR
shall be entitled to 

                                                                          Page 6

<PAGE>
 
initiate the Second Option Period only so long as RPR is (i) not in default of
its obligations to fund the First Option Period R&D Budget, and (ii) not
otherwise in material default of its obligations pursuant to this Agreement.
 
2.7    RPR Election to Terminate. At any time during the First Option Period,
       -------------------------
RPR may elect to terminate the transactions contemplated by this Agreement. Said
election shall be made by RPR delivering a written notice thereof to ABI. Upon
any such termination, (i) RPR shall have no obligation to provide further funds
for the First Option Period R&D Budget, so long as RPR has already paid to ABI
(a) the funds specified by that budget up through the date of the termination,
and (b) funds necessary to reimburse ABI for expenses reasonably incurred by it
pursuant to the First Option Period R&D Budget prior to the date of termination,
(ii) the License, Supply and Governance Agreements shall terminate, (iii) the
$1,500,000 First Option Payment shall be credited as payment of the purchase
price for the stock of ABI, pursuant to Section 2.2 of the Stock Purchase
Agreement, (iv) the Stock Purchase, Arbitration and Confidentiality Agreements
shall remain in full force and effect, (v) all technology and other intellectual
property rights conceived and/or developed solely by ABI shall remain the sole
property of ABI, with RPR having no rights therein, and (vi) ABI shall not be
obligated to refund any monies which have been paid by RPR to ABI. ABI shall
provide RPR with copies of third party invoices and other necessary explanatory
documentation relating to the Second Option Period R & D Budget on a monthly
basis.

3.     Second Option Period.
       -------------------- 

3.1    Time Duration.  The Second Option Period shall commence on the date (the
       -------------                                                           
"Second Option Period Initiation Date") that is the later of (i) the date RPR
delivers the Second Option Notice in accordance with the provisions of Section
2.6, and (ii) the date that is three business days after ABI installs at AIS the
Automated CPS Package and shall extend for six months thereafter.

3.2    Second Option Payment.  Within ten (10) days after Second Option Period
       ---------------------                                                  
Initiation Date, RPR shall pay to ABI, by wire transfer, the sum of $2,000,000
(the "Second Option Payment").  The Second Option Payment shall be applied to
the purchase of ABI capital stock in accordance with the terms of the Stock
Purchase Agreement.

3.3    Second Option Period R&D Budget.  During the First Option Period, the
       -------------------------------                                       
parties shall negotiate additional research and development work to be performed
by ABI during the Second Option Period, and the payments to be made to ABI for
such work.  Such work and payments shall be set forth on the Second Option
Period R&D Budget to be attached hereto as Exhibit B (the "Second Option Period
R&D Budget"). RPR shall make payments to ABI pursuant to said budget on a
monthly basis, payable monthly in advance, in accordance with the schedule and
criteria set forth in the Second Option Period R&D Budget.  Said monthly
payments shall be made by wire transfer on or 

                                                                          Page 7

<PAGE>
 
before the first day of each calendar month during the Second Option Period. The
first monthly installment shall be paid by RPR to ABI within ten days after the
Second Option Period Initiation Date.

3.4    Standstill.  During the Second Option Period, ABI shall not discuss with
       ----------
a third party any sale or license of any intellectual property or distribution,
marketing, promotion or manufacturing rights owned or licensed to ABI relating
to the use of any ABI device or technology for Lymphoid Cell Applications,
except for discussions directly related to the sale of substantially all of the
assets of ABI to, or a merger of ABI with, a third party.

3.5    Due Diligence Investigation by RPR.  During the Second Option Period, RPR
       ----------------------------------                                       
shall continue to conduct further due diligence investigation concerning ABI,
the CPS, and the potential use of the CPS for Lymphoid Cell Applications.  ABI
shall cooperate with and assist RPR with this due diligence investigation.

3.6    Election to Proceed with the Third Option Events.  At any time prior to
       ------------------------------------------------
the expiration of the Second Option Period, RPR may elect to proceed with the
Third Option Events (defined below), subject to and in accordance with the terms
hereof, by delivering to ABI a written notice of said election (the "Third
Option Event Notice"). Upon delivery of the Third Option Event Notice, (i) the
Supply Agreement and the Research and Development Collaboration Agreement shall
each become effective, and (ii) RPR shall become obligated to acquire an
additional $9.0 million of ABI capital stock in accordance with the terms of the
Stock Purchase Agreement (collectively, the "Third Option Events"). RPR shall be
entitled to proceed with the Third Option Events only so long as RPR is not then
in material default under its obligations pursuant to this Agreement. Upon
delivery of the Second Option Notice, RPR shall have no obligation to provide
further funds for the First Option Period R&D Budget, other than (i) funds
payable pursuant to that budget up through the date RPR delivers the Second
Option Notice, and (ii) funds necessary to reimburse ABI for expenses reasonably
incurred by it pursuant to the First Option Period R&D Budget prior to the date
RPR delivers the Third Option Notice.

3.7    RPR Election to Terminate.  At any time during the Second Option Period,
       -------------------------                                               
RPR may elect to terminate the transactions contemplated by this Agreement.
Said election shall be made (a) by RPR's delivering written notice thereof to
ABI, or (b) by RPR's failing to deliver, prior to the expiration of the Second
Option Period, the Third Option Event Notice.  Upon any such termination, (i)
RPR shall have no obligation to provide further funds for the Second Option
Period R&D Budget, so long as RPR has already paid to ABI (a) the funds
specified by that budget up through the date of the termination, and (b) funds
necessary to reimburse ABI for expenses reasonably incurred by it pursuant to
the Second Option Period R&D Budget prior to the date of termination, (ii) the
License, Supply and Governance Agreements shall terminate, (iii) the First
Option Payment and the Second Option Payment shall be credited as payment of the
purchase price for the stock of ABI, pursuant to Section 2.2 of the Stock

                                                                          Page 8

<PAGE>
 
Purchase Agreement, (iv) the Stock Purchase, Arbitration and Confidentiality
Agreements shall remain in full force and effect, (v) all technology and other
intellectual property rights conceived and/or developed solely by ABI shall
remain the sole property of ABI, with RPR having no rights therein, and (vi) ABI
shall not refund any monies which have been paid by RPR to ABI.

4.     Execution of Stock Purchase Agreement; Purchase of Additional ABI Capital
       -------------------------------------------------------------------------
Stock.
- ----- 

4.1    On the date hereof, ABI and RPR shall execute the Stock Purchase
Agreement.

4.2    If RPR elects to proceed with the Third Option Events, RPR may become
obligated to purchase an additional $5.0 million of ABI capital stock upon the
occurrence of the IPO, all in accordance with the terms of Section 8 of the
Stock Purchase Agreement.

5.     Execution of License Agreement; Grant of License to RPR.
       ------------------------------------------------------- 

       On the date hereof, ABI and RPR shall execute the License Agreement,
pursuant to which ABI shall grant RPR a worldwide, exclusive license under
certain ABI intellectual property rights to the CPS for Lymphoid Cell
Applications, all in accordance with the terms and conditions of the License
Agreement.

6.     Execution of Supply Agreement.  On the date hereof, ABI and RPR shall
       -----------------------------                                        
execute the Supply Agreement, which shall become effective only upon delivery by
RPR of the Third Option Event Notice.

7.     Negotiation and Execution of Research and Development Collaboration
       -------------------------------------------------------------------
Agreement.   During the First Option Period, the parties shall negotiate an
- ---------                                                                  
agreement which specifies the terms and conditions under which ABI shall conduct
on behalf of RPR research and development with respect to the use of the CPS for
Lymphoid Cell Applications (the "Research and Development Collaboration
Agreement").  The Research and Development Collaboration Agreement shall include
the terms set forth on Exhibit C hereto and such other commercially reasonable
terms as the parties shall agree upon.  The Research and Development
Collaboration Agreement shall become effective only upon delivery by RPR of the
Third Option Event Notice.

8.     Termination of Letter of Intent.  Effective upon the execution by both
       -------------------------------                                       
parties of this Agreement and each of the Other Implementing Agreements (except
for the Research and Development Collaboration Agreement), the Letter of Intent
is terminated and shall be of no further force and effect.

                                                                          Page 9

<PAGE>
 
9.     Public Announcement.
       ------------------- 

       Any news release or other public announcement relating to this Agreement
or any of the other Implementing Agreements, including any of the terms of any
such agreement, or to the performance hereunder or thereunder, must be approved
by both parties, which approval shall not be unreasonably withheld. Once the
text or substance of an announcement has been so approved, it may be repeated
without further approval. Any disclosure which is required by law may be made
without the prior consent of the other party, although the other party shall be
given prompt notice of any such legally required disclosure and an opportunity
to comment on the proposed disclosure reasonably in advance to the extent
feasible. Further, the disclosing party shall make diligent efforts to limit the
nature and scope of any disclosure to the extent reasonably possible and to
otherwise prevent the disclosure of the non-disclosing party's Confidential
Information.

10.    ABI Merger Contingency.
       ---------------------- 

       If RPR delivers the Third Option Event Notice, and if ABI enters into a
written agreement with a third party before ninety (90) days after the
Activation Date evidencing ABI's intent to merge with or be acquired by the
third party (except COBE BCT, Cobe Laboratories or Gambro, and except a merger
or acquisition pursuant to which (i) the shareholders of ABI retain a majority
ownership interest in the surviving entity, (ii) no other shareholder (other
than ABI's current shareholders) will, upon consummation, own and/or have the
right to acquire more than 20% of the voting securities of the surviving entity,
and (iii) the senior management of ABI shall, upon consummation of the merger or
acquisition, remain employed by the surviving entity in substantially similar
capacities as the capacities in which such persons are employed prior to the
merger or acquisition), then ABI shall give written notice thereof to RPR; and
RPR shall have a right for a period of up to ninety (90) days following RPR's
receipt of said notice to elect to rescind all of the Implementing Agreements,
by delivering to ABI a written notice of rescission within said ninety (90)
days. Within ninety (90) days following ABI's receipt of said notice of
rescission, ABI shall refund to RPR all monies paid by RPR to ABI pursuant to
the Letter of Intent and the Implementing Agreements (including without
limitation all funds paid pursuant to the First Option Period Budget and the
Second Option Period Budget), together with interest thereon accruing from the
date ABI received the monies until the monies are refunded to RPR, using as the
interest rate the average of the prime rate reported by the Bank of New York
during the period from June 20, 1995 through the date of the payment. Upon
receipt of such funds, RPR shall deliver to ABI for cancellation all
certificates representing shares of ABI capital stock acquired by RPR pursuant
to the Stock Purchase Agreement. ABI shall keep RPR fully informed as to the
terms, status and progress of the proposed merger or sale transaction with the
third party, excluding only such Confidential Information which the merger or
sale party requires to be kept secret.

                                                                         Page 10

<PAGE>
 
11.    Representations.
       --------------- 

11.1   Mutual Representations.  ABI and RPR each represent to the other party
       ----------------------                                                
that (i) it has the authority and right to enter into and perform this Agreement
and the other Implementing Agreements, and (ii) its execution, delivery and
performance of this Agreement and the other Implementing Agreements will not
conflict in any material manner with the terms of any other agreement to which
it is or becomes a party.

11.2   Representations from Implementing Agreements.  ABI and RPR each hereby
       --------------------------------------------                          
incorporate by reference in this Agreement the representations and warranties
made by such party in the other Implementing Agreements.

12.    Arbitration.  Except as set forth in subparagraph 12.1 below, any
       -----------                                                      
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by binding arbitration in accordance with the
Arbitration Agreement.  If the parties cannot timely execute the Arbitration
Agreement, the dispute shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA").

12.1   Equitable Court Remedies.  Each party recognizes and acknowledges that a
       ------------------------                                                
breach by the other of any of its covenants, agreements or undertakings
hereunder relating to confidentiality and non-use of confidential information
and ownership and use of intellectual property will cause irreparable damage
which cannot be readily remedied in damages and in an action at law, and may, in
addition thereto, constitute an infringement of a party's proprietary rights,
thereby entitling such party to equitable remedies and costs.  Accordingly,
notwithstanding the provisions of this Section 12, each party reserves the right
(and the other party agrees not to contest such right) to seek injunctive relief
and other equitable remedies in a court of competent jurisdiction, instead of
arbitration, with respect to the enforcement by each party of such rights.

13.    Confidentiality.  ABI and RPR hereby confirm the validity of, and warrant
       ---------------                                                          
their continued compliance with, the Confidentiality Agreement, which shall
continue in effect.

13.1   Additionally, each of the parties hereby agrees that during the period
begin on the date hereof, and ending on the date that is five years after
the last to expire or terminate of the Implementing Agreements, it will (i)
maintain in confidence all Confidential Information of the other party
(including without limitation all Confidential Information received or obtained
as a result of either party's performance under any of the Implementing
Agreements), (ii) not disclose the other party's Confidential Information
without the prior written consent of such party, and (iii) will not use the
other party's Confidential Information for any purpose except those permitted by
the Implementing Agreements.

                                                                         Page 11

<PAGE>
 
13.2   A party shall have the right to disclose the other party's Confidential
Information to those of its directors, officers, employees and consultants to
whom disclosure is necessary to enable such party's performance under the
Implementing Agreements, provided that such persons have undertaken
confidentiality obligations at least as strict as those undertaken in this
Agreement.

13.3   In fulfilling its obligations under this Section 13, a party shall use
the same level of efforts to protect from disclosure the other party's
Confidential Information as it uses to protect its own most sensitive
Confidential Information, which efforts shall in any event be less than
reasonable efforts.

14.    General Provisions.
       ------------------ 
 
14.1   Independent Contractors.  The relationship between ABI and RPR is that of
       -----------------------                                                  
independent contractors.  ABI and RPR are not joint venturers, partners,
principal and agent, master and servant,  or employer or employee, and they have
no other relationship other than independent contracting parties.  Neither party
shall have any power to bind or obligate the other in any manner, other than as
is expressly set forth in this Agreement.

14.2   Consents Not Unreasonably Withheld.  Whenever provision is made in this
       ----------------------------------                                     
Agreement for either party to secure the consent or approval of the other, that
consent or approval shall not be withheld unreasonably.  Whenever in this
Agreement provisions are made for one party to object to or disapprove a matter,
except as expressly provided otherwise herein (i.e., a decision to be made in
the sole discretion of the party), such objection or disapproval shall not be
exercised unreasonably or delayed.

14.3   Assignment.  Neither this Agreement nor any rights granted hereunder may
       ----------                                                              
be assigned or transferred by either party, except with the prior written
consent of the other party, which consent shall not be withheld unreasonably,
and except in the event of an assignment by a party of all other Implementing
Agreements in accordance with the terms thereof.

14.4   Binding Upon Successors and Assigns.  Subject to the limitations on
       -----------------------------------                                
assignment herein, this Agreement shall be binding upon and inure to the benefit
of any successors in interest and permitted assigns of the parties.  Any such
successor or assignee of a party's interest shall expressly assume in writing
the performance of all the terms and conditions of this Agreement to be
performed by such party.

14.5   Entire Agreement; Modification.  This Agreement, including the Exhibits,
       ------------------------------                                          
and the other Implementing Agreements and the Confidentiality Agreement, set
forth the entire agreements and understandings between the parties as to the
subject matters set forth herein and therein.  There shall be no amendments or
modifications to this 

                                                                         Page 12

<PAGE>
 
Agreement or the Exhibits, except by a written document which is signed by both
parties. The parties acknowledge that they are also approving the other
Implementing Agreements at this time.

14.6   Applicable Law.  This Agreement shall be construed and enforced in
       --------------                                                    
accordance with the internal laws of the Commonwealth of Pennsylvania.

14.7   Headings.  The headings for each article and section in this Agreement
       --------                                                              
have been inserted for convenience of reference only and are not intended to
limit or expand on the meaning of the language contained in the particular
article or section.

14.8   Severability. If any one or more of the provisions of this Agreement is
       ------------                                                           
held to be invalid or unenforceable by the arbitration proceedings specified in
Section 12 from which no appeal can be or is taken, the provision shall be
considered severed from this Agreement and shall not serve to invalidate the
remaining provisions thereof.  The parties shall make a good faith effort to
replace the invalid or unenforceable provision with a valid one which in its
economic effect is most consistent with the invalid or unenforceable provision.

14.9   No Waiver.  Any delay in enforcing a party's rights under this Agreement
       ---------                                                               
or any waiver as to a particular default or other matter shall not constitute a
waiver of such party's rights to the future enforcement of its rights under this
Agreement, excepting only as to an express written and signed waiver as to a
particular matter for a particular period of time.

14.10  Export Controls.  This Agreement is made subject to any restrictions
       ---------------                                                     
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to ABI or RPR from time
to time by the government of the United States of America.  Furthermore, ABI and
RPR each agree that it will not export, directly or indirectly, any technical
information acquired from the other under this Agreement or any products using
such technical information to any country for which the United States government
or any agency thereof at the time of export requires an export license or other
governmental approval, without first obtaining the written consent to do so from
the Department of Commerce or other agency of the United States government when
required by an applicable statute or regulation.

14.11  No Implied Licenses.  No licenses by one party to the other are granted
       -------------------                                                    
under this Governance Agreement, including the Exhibits, by implication or
estoppel.

14.12  Notices. Any notices required by this Agreement shall be in writing,
       -------                                                             
shall specifically refer to this Agreement and shall be sent by certified U.S.
mail, or by express delivery service such as Federal Express or DHL, or by
personal delivery, or by telefacsimile transmission, and shall be sent or
delivered to the respective 

                                                                         Page 13

<PAGE>
 
addresses and telefacsimile numbers set forth below unless subsequently changed
by written notice to the other party:

     For ABI:            AASTROM Biosciences, Inc.                  
                         P.O. Box 376                               
                         Ann Arbor, MI 48106                        
                         Attention:  President                      
                         Fax:  (313) 665-0485                       
                                                                    
     With copy to:       T. Knox Bell                               
                         Gray Cary Ware & Freidenrich               
                         401 B Street, Suite 1700                   
                         San Diego, CA 92101                        
                         Fax:  (619) 236-1048                       
                                                                    
     For RPR:            RPR GENCELL                                
                         Cell and Gene Therapy Division             
                         Rhone-Poulenc Rorer Inc.                   
                         500 Arcola Road                            
                         P.O. Box 1200                              
                         Collegeville, PA 19426-0107                
                         Attention:  President and General Counsel  
                         Fax:  (610) 454-8984 and 454-3808          


Notices shall be deemed delivered upon receipt at the respective party's address
or telefacsimile number as set forth above.


14.13  Compliance with Laws.  Each party shall perform its obligations and
       --------------------                                               
conduct its affairs with respect to this Agreement in compliance with all
applicable laws and governmental regulations.  If any permit, authorization,
registration, license or other governmental approval is required in connection
with the performance of this Agreement, the same shall be obtained by the party
or parties as required.

14.14  Counterparts.  This Agreement may be executed in counterparts, including
       ------------                                                            
by facsimile, each of which shall be deemed  to be an original, but all of which
shall together constitute one and the same Agreement.

                                                                         Page 14

<PAGE>
 
     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first set forth above.

                                       AASTROM BIOSCIENCES, INC.              
                                                                              
                                                                              
                                       By: /s/ R. Douglas Armstring           
                                          ----------------------------------- 
                                           Name:  R. Douglas Armstrong, Ph.D. 
                                           Title:  President and CEO          
                                                                              
                                       RHONE-POULENC RORER INC.               
                                                                              
                                                                              
                                       By: /s/ Thierry Soursac                
                                          ----------------------------------- 
                                           Name:  Thierry Soursac             
                                           Title: Senior Vice President,      
                                                  Rhone-Poulenc Rorer, Inc.   
                                                  General Manager, RPR Gencell 

                                                                         Page 15

<PAGE>
 
                   [LETTERHEAD OF AASTROM BIOSCIENCES INC.]

                                   EXHIBIT A

                                       *



                    *CONFIDENTIAL PORTION REDACTED AND FILED
                        SEPARATELY WITH THE COMMISSION 

<PAGE>
 
                                   EXHIBIT B

                        Second Option Period R&D Budget


                                       *



                    *CONFIDENTIAL PORTION REDACTED AND FILED
                         SEPARATELY WITH THE COMMISSION

<PAGE>
 
                                   EXHIBIT C

               PROVISIONS TO BE INCLUDED AS PART OF RESEARCH AND
                      DEVELOPMENT COLLABORATION AGREEMENT

 
1.  RPR will fund all research and development to be conducted pursuant to the 
Research and Development Collaboration Agreement. The scope of such research and
development will be determined by RPR after consultation with ABI.

2.  All inventions, discoveries and improvements developed, conceived or reduced
to practice during the course of or as a result of the work to be performed 
pursuant to the Research and Development Collaboration Agreement ("R & D 
Inventions") would, to the extent such R & D Inventions were invented by ABI 
(such R & D Inventions being referred to herein as ABI Invented R & D 
Inventions), be included within the definition of ABI Technology and be part of 
the License. R & D Inventions which are embodied in modifications to or improved
operation of the Aastrom CPS shall be the exclusive property of ABI, or be 
exclusively licensed to ABI, on a royalty free basis, solely for use outside the
field of Lymphoid Cell Applications.

3.  All R & D Inventions shall be the exclusive property of RPR, or be 
exclusively licensed to RPR for use in the Field, for a negotiated royalty 
and/or cost of goods pricing in a supply agreement, with the rights to 
manufacture licensed products to be apportioned among the parties in the most 
business sensible manner.

4.  The filing, prosecution and maintenance of patent applications, as well as 
the prosecution of infringement proceedings, relating to R & D Inventions would 
be as set forth in this License Agreement.

5.  It is expected that the Research and Development Collaboration Agreement 
will have a term of two (2) years.

6.  If RPR terminates the Supply Agreement, ABI shall have non-exclusive rights,
on a royalty free basis, to all R & D Inventions in which RPR has any ownership 
interest, to use for all purposes related directly to the CPS, including use of 
the CPS in the Field.



<PAGE>
 
                                                                   EXHIBIT 10.33
 
                               LICENSE AGREEMENT

                                    Between

                           AASTROM BIOSCIENCES, INC.

                                      and

                            RHONE-POULENC RORER INC.

<PAGE>
 
                               LICENSE AGREEMENT

          This Agreement is entered into as of September 15, 1995 (the
"Effective Date") by and between AASTROM Biosciences, Inc., a Michigan
corporation ("ABI"), and Rhone-Poulenc Rorer Inc., a Delaware corporation
("RPR").

                                    RECITALS

          A.   This Agreement sets forth the license to be granted by ABI to RPR
pursuant to the Governance Agreement, together with the rights and obligations
of the parties with respect to said license.

          B.   ABI is the owner of the ABI Owned Patent Rights.

          C.   ABI is the exclusive licensee of the ABI In-Licensed Patent
Rights.

          D.   ABI is the owner, licensee or assignee of the ABI Know-How.

          E.   Simultaneously with the parties entering into this Agreement, the
parties are also executing the other Implementing Agreements (other than the
Research and Development Collaboration Agreement and the Arbitration Agreement).

          IN WITNESS WHEREOF, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto, intending
to be legally bound, hereby mutually agree as follows

1.   Definitions.  As used in this Agreement, the following terms have the
     -----------                                                          
meanings set
 forth below.

     "Arbitration Agreement" means the agreement to be executed by ABI and RPR
prior to the end of the First Option Period and governing the procedures
utilized to resolve disputes involving the Implementing Agreements.

     "Aastrom Gene Loader" means the products of ABI whose principle purpose or
characteristic is the directed-motion or deposition delivery of vectors to
target cells, including devices configured to implement these processes, which
products are partially described in the patent applications listed on Exhibit 
A-1.

     "ABI" means AASTROM Biosciences, Inc., a Michigan corporation.

     "ABI Confidential Know-How" means the ABI Know-How which also is
Confidential Information.

     "ABI In-Licensed Patent Rights" means the Patent Rights described in
Exhibit

                                                                          Page 1

<PAGE>
 
B attached hereto, and any Patent Rights which ABI hereafter licenses from a
third party which RPR and ABI agree are useful for the development, manufacture
or use of the CPS (but only to the extent such Patent Rights are not already
licensed to a third party for use in the Field).

     "ABI Know-How" means any Know-How which ABI owns or has licensed from a
third party as of the date hereof and which is useful for the development,
manufacture or use of the CPS, and any other Know-How which ABI hereafter
acquires or licenses from a third party which is useful for the development,
manufacture, or use of the CPS (but only to the extent that such Know-How is
not already licensed to a third party for use in the Field).

     "ABI Owned Patent Rights" means the Patent Rights described in Exhibit A
attached hereto, and any other Patent Rights which ABI hereafter acquires or
develops which RPR and ABI agree are useful for the development, manufacture or
use of the CPS (but only to the extent that such Patent Rights are not already
licensed to a third party for use in the Field).

     "ABI Patent Rights" means the ABI Owned Patent Rights and the ABI In-
Licensed Patent Rights.

     "ABI Technology" means the ABI Owned Patent Rights, the ABI In-Licensed
Patent Rights and the ABI Know-How.

     "Addressed Application" means (i) a Grandfathered Competing Product
Application, until the expiration of the time period calculated pursuant to
Section 4.1.1 hereof, or (ii) an Application within the Field to which RPR or
its Affiliates (A) are currently using or selling Licensed Product, or (B) have
an ongoing program with respect to the development of Licensed Product or a
Potential Licensed Product for use in such Application.

     "Affiliate" shall mean any company or other legal entity in which a party
holds, directly or indirectly, at least forty percent (40%) or more of (i) the
capital, (ii) the income interest in the company or other legal entity, (iii)
the voting rights or (iv) the right to elect or appoint directors.

     "AIS" means Applied Immune Sciences, Inc., a Delaware corporation and an
Affiliate of RPR.

     "Application" means (a) the expansion of any Lymphoid Cell for one or more
therapeutic uses, or (b) the transfection of a specific Lymphoid Cell type
modified with a naturally occurring gene or a synthetic modification thereof for
a specific therapeutic use. By way of example, one Application is tumor
infiltrating lymphocytes (TIL), such that TIL therapy for renal cell carcinoma
and TIL therapy for breast cancer are part of the same Application. Similarly,
CD8 cells transfected with

                                                                          Page 2

<PAGE>
 
IL-2 and T-cells transfected with p53 constitute different Applications,
regardless of therapeutic use.

     "Automated CPS" means the automated CPS developed by ABI as a system for
growing cells ex vivo for human therapeutic purposes, which in its basic format
consists of Disposables and Durables, together with modifications and
improvements thereof.

     "Blocking Patent Rights" means with respect to an Unaddressed Application,
exclusive patent rights which are held by a third party and which RPR and ABI
shall mutually agree prevent RPR from freely using the Licensed Product for the
Unaddressed Application without obtaining a license from such third party with
respect to such exclusive patent rights.

     "Cobe" means Cobe Laboratories, Inc., a Colorado corporation.

     "Cobe Distribution Agreement" means the Distribution Agreement, dated
October 22, 1993, between ABI and COBE, as amended to the date hereof.

     "Competing Product" means any cell expansion device or process (other than
Licensed Product) which is used to grow a substantially increased number of
cells ex vivo to treat a single individual for a particular therapuetic use
within the Field. Competing Products shall be determined on a country by country
basis, and on a therapy by therapy basis, and a device shall not be deemed to be
a Competing Product in a particular country unless and until the Licensed
Product shall have received the necessary Government Approvals in that country
for the relevant therapeutic use.

     "Commercialization Plan" has the meaning provided in Section 4.2.1 hereof.

     "Confidential Information" means all confidential information, trade
secrets and other proprietary information which belongs to a party and which the
party keeps confidential for the business advantage of the party. Without
limiting the generality of the foregoing, a party's confidential information
includes the following information and items which the party endeavors to keep
confidential: technology, know-how, inventions, pending patent applications,
data, formula, studies, devices, materials, investigations, reports, lists of
actual or potential customers, clients and vendors, financial reports and
projections, marketing reports and projections, software programs, manufacturing
pre-production drawings, prototypes, business plans, business records,
scientific evaluations, and so forth. Notwithstanding the foregoing,
"Confidential Information" does not include information which:

          (a)  is publicly disclosed, except by breach of an agreement of
confidentiality ;

          (b)  the receiving party can establish by written proof was in its

                                                                          Page 3

<PAGE>
 
possession at the time of disclosure by the owning party and was not acquired
directly or indirectly from the owning party or from any third party under an
agreement of confidentiality to the owning party;

          (c)  the receiving party receives from a third party legally in a
position to provide the receiving party with such information, provided that
such information was not obtained by said third party directly or indirectly
under an obligation of secrecy; or

          (d)  has been independently developed by the receiving party without
the aid, application or use of the owning party's Confidential Information.

     "Confidentiality Agreement" means the Mutual Confidentiality Agreement,
dated as of January 13, 1995, by and between RPR, ABI, AIS and Rhone-Poulenc
Rorer Pharmaceuticals, Inc.

     "CPS" means any system or device for substantially increasing the number of
cells, ex vivo, for human therapeutic uses, that may be configured in different
component structures (such as described for the Automated CPS or the Manual
CPS). For purposes of clarity, CPS does not include a system or device (i) which
provides for cell manipulation, such as for gene transfer into cells through
steps, that does not grow a substantially increased number of cells, such as the
Aastrom Gene Loader, or (ii) which stores cells, but does not grow a
substantially increased number of cells.

     "Defaulting Party" has the meaning provided in Section 18.2.1 hereof.

     "Disposables" means the cell growth cassette configured to be received and
operated by the Automated CPS incubator and/or Automated CPS processor, and
consisting of a medium supply container unit, and a separate unit consisting of
a cell growth chamber, a waste medium container, and a harvest container (or
means for attachment of a harvest container); all such units appropriately
connected as a fluid pathway and manufactured as a sterile product for the
expansion of human cells; each as more completely described in ABI's product
specifications for the Automated CPS.

     "Durables" means the major components of the CPS (other than the
Disposables), including (i) the Automated CPS incubator, an instrument
configured to receive and operate the Disposables; (ii) the Automated CPS
processor, an instrument configured to receive and operate the Disposables for
medium priming, cell distribution and/or cell harvesting; and (iii) the
Automated CPS monitor, an instrument configured to display information to the
user regarding the operational status of one or more of the Automated CPS
incubators; each as more completely described in ABI's product specifications
for the Automated CPS.

                                                                          Page 4

<PAGE>
 
     "Exercise Period" has the meaning provided in Section 6.2 hereof.

     "Field" means Lymphoid Cell Applications.

     "First Option Period" has the meaning provided in the Governance Agreement.

     "Funding Commitment" means a commitment by a third party to provide all
reasonably anticipated funding for the development and commercialization of the
Automated CPS for a specific therapeutic indication, wherein the ability of the
third party to provide such funding is, at the time the committment is made,
reasonably certain. By way of illustration, an Unaddressed Application Proposal
made by a start-up or development stage company which is supported by a proposal
to raise the necessary funds through the sale of equity or issuance of debt
would not be deemed to include a Funding Commitment. For the avoidance of doubt,
a Funding Commitment need not consist of a guarantee by the third party to
provide the required funding under any circumstances, but rather an agreement by
the third party that it will provide such funding only to the extent it retains
any rights related to the Automated CPS for the specific therapeutic indication.

     "Governance Agreement" means the Governance Agreement of even date herewith
between ABI and RPR.

     "Government Approval" means any approvals, licenses, registrations or
authorizations, howsoever called, of any federal, state or local regulatory
agency, department, bureau or other government entity, anywhere in the world,
necessary for the use of Licensed Product in a cell therapy.

     "Grandfathered Competing Product Applications" means the "bag method"
Competing Product as used in the Major Pharmaceutical Markets for either of the
following applications: (a) TIL treatment of renal cell carcinoma; and (b)
peripheral PBMC treatment of HIV infected patients, and (c) any other
applications in the areas of TIL therapy, or PBMC therapy for HIV related
disease, for which a clinical trial has been initiated by RPR or its Affiliates
prior to the earlier of the validation and availability of the Automated CPS or
September 14, 1997.

     "Implementing Agreements" means the Governance Agreement, the Supply
Agreement, the Research and Development Collaboration Agreement, the Stock
Purchase Agreement, the Arbitration Agreement and this Agreement.

     "Know-How" means all technical data, whether or not tangible, processes,
formula, materials and information, techniques, discoveries, inventions, ideas,
methods and processes, whether or not patentable, but for which patent
applications have not been filed and published, including without limitation,
any and all data, preclinical and clinical results, drawings, plans, diagrams,
specifications, and other

                                                                          Page 5

<PAGE>
 
proprietary information.

     "License" means the exclusive license granted to RPR pursuant to the terms
of Section 2.1 hereof.

     "Licensed Product" means the Automated CPS (both the Durables and the
Disposables) as used for one or more specific Lymphoid Cell Applications, for
which product ABI and RPR have approved the specifications for the CPS and the
financial terms for ABI to manufacture and sell the CPS to RPR pursuant to the
Supply Agreement, plus such other CPS products for use in the Field for which
ABI and RPR mutually approve the specifications and financial terms pursuant to
the Supply Agreement.

     "Lymphoid Cell" means lymphoid stem cell (e.g., any cell capable of
generating cells solely of lymphoid lineage) and any cell derived therefrom,
including but not limited to, the subcortical thymocyte, cortical thymocyte,
medullary thymocyte, lymphocyte, B-cell, plasma cell, immunoblast,
lymphoplasmacytoid cell and the NK-cell.

     "Lymphoid Cell Applications" means any production, expansion, selection or
genetic manipulation, including genetic transformation, of Lymphoid Cells,
provided that either the starting cell population is a lymphoid selected cell
mixture, or that the mature lymphoid cell production is not derived ex vivo from
a pre-lymphoid cell-type (e.g., multipotent stem cell).

     "Major Pharmaceutical Market" means (i) the United States and Canada, (ii)
the aggregate of Germany, France, Spain, Italy and the United Kingdom, and (iii)
Japan (collectively, the "Initial Major Pharmaceutical Markets"), and any
additional country which hereafter shall come to constitute three percent 3% or
more of the worldwide market for pharmaceuticals, measured on the basis of
dollars spent for the consumption of pharmaceuticals.

     "Non-Defaulting Party" has the meaning provided in Section 16.2 hereof.

     "Patent Rights" means all letters patent and pending applications for
patents of the United States and all countries foreign thereto, including
regional patents, and all reissues, divisions, continuations, continuations-in-
part, extensions (including, without limitation, any extensions thereof under
the United States Patent Term Restoration Act or otherwise), substitutions,
renewals, confirmations, supplementary protection certificates, registrations,
revalidations or additions of any of the foregoing, as applicable.

     "Potential Licensed Product" means a CPS product for use in the Field for
which product ABI and RPR have not yet mutually approved the specifications and
financial terms pursuant to the Supply Agreement. By way of explanation, a

                                                                          Page 6

<PAGE>
 
Potential Licensed Product may be a concept-stage CPS which has not yet been the
topic of discussion between ABI and RPR.

     "Proposed Other Agreements" has the meaning provided in Section 6.2 hereof.

     "Regulatory Approval Plan" has the meaning provided in Section 7.1.1
hereof.

     "Research and Development Collaboration Agreement" means the agreement with
that title to be negotiated by RPR and ABI during the First Option Period, which
will become effective if RPR exercises its option to proceed with the Third
Option Events in accordance with the provisions of the Governance Agreement.

     "RPR" means Rhone-Poulenc Rorer Inc., a Delaware corporation.

     "RPR Business" has the meaning provided in Section 2.5 hereof.

     "RPR Improvements" means any ideas, discoveries or improvements relating to
the ABI Technology conceived, made or reduced to practice by ABI and/or RPR
arising out of or during the course of any work performed pursuant to the
Governance Agreement or the Research and Development Collaboration Agreement.

     "SEC" means the United States Securities and Exchange Commission.

     "Second Option Payment" means the sum of $2,000,000 payable by RPR to ABI,
as specified in Section 3.2 of the Governance Agreement.

     "Second Option Period" has the meaning provided in Section 3.1 of the
Governance Agreement.

     "Supply Agreement" means the agreement with that title between RPR and ABI,
dated as of the date hereof, which will become effective if RPR exercises its
option to proceed with the Third Option Events in accordance with the provisions
of the Governance Agreement.

     "Third Option Event Notice" has the meaning provided in Section 3.6 of the
Governance Agreement.

     "Third Party Improvements" means any ideas, discoveries or improvements
relating to the ABI Technology conceived, made or reduced to practice by ABI
and/or a third party in connection with an Unaddressed Application Agreement.

                                                                          Page 7

<PAGE>
 
     "Unaddressed Application" means an Application (other than a Grandfathered
Competing Product Application) within the Field with respect to which RPR and
its Affiliates (i) are not currently using or selling Licensed Product, or (ii)
do not have an ongoing program with respect to the development of Licensed
Product or any Potential Licensed Product for use in such Application.

     "Unaddressed Application Proposal" has the meaning provided in Section 4.3
hereof.

     "Unaddressed Market Proposal" has the meaning provided in Section 4.3
hereof.

2.     Grant of License.
       ---------------- 

2.1    Grant of License.  Subject to the terms, limitations, restrictions and
       ----------------                                                      
reservations set forth in this Agreement, ABI hereby grants to RPR a sole and
exclusive worldwide license or sublicense, as applicable, to the ABI Technology
for the CPS in the Field.

2.1.1  By way of explanation of the terms, limitations, restrictions and
reservations set forth in this Agreement provided for hereinbelow, the License
grant of Section 2.1 includes, but is not limited to, the following restrictions
and rights:

       a.  to use, sell, offer to sell, lease and/or import Licensed Product
supplied by ABI pursuant to the Supply Agreement;

       b.  to make, have made and manufacture Licensed Product in the event ABI
defaults in its obligation to manufacture and supply Licensed Product in
accordance with the terms of the Supply Agreement, but only to the extent so
permitted in the Supply Agreement; and to use, sell, offer to sell, lease and/or
import said Licensed Product;

       c.  to enforce RPR's exclusively licensed ABI Patent Rights and ABI
Confidential Know-How against ABI and/or a third party who infringes the ABI
Patent Rights or uses the ABI Confidential Know-How for the CPS in the Field,
except for rights reserved hereunder by ABI or for acts otherwise authorized
under this Agreement; and

       d.  to conduct research and development activities incidental to using
the CPS in the Field.

2.2    Right to Manufacture.  RPR hereby grants to ABI and its designees the
       --------------------                                                 
exclusive right to manufacture CPS for RPR and its Affiliates subject to the
terms of the Supply Agreement.

                                                                          Page 8

<PAGE>
 
2.3     Restriction.  For the avoidance of doubt, the License shall not include
        -----------                                                           
the grant to RPR of the right under the ABI Technology: (a) to make, have made,
use, sell, offer to sell, license, lease and/or import any CPS for any fields of
use or applications outside the Field, or (b) to make, use or sell any product
or to provide any service which would infringe the ABI Patent Rights or use the
ABI Confidential Know-How, other than for CPS.

2.4     COBE's Rights.
        ------------- 

2.4.1.  ABI has entered into the Cobe Distribution Agreement, pursuant to which
Cobe has exclusive, worldwide rights to distribute the CPS for stem cell
applications.  RPR hereby acknowledges receipt and review of a copy of the Cobe
Distribution Agreement.  On or prior to the date hereof, ABI and Cobe have
amended the Cobe Distribution Agreement to delete from Section 2.01(d) thereof
the provisions which permit Cobe to sell the Products (as such term is defined
in the Cobe Distribution Agreement) to its Affiliates (as such term is defined
in the Cobe Distribution Agreement) for Lymphoid Cell Applications.

2.4.2   In the event of any breach (actual, threatened or apparent) by Cobe of
Cobe's obligations pursuant to Sections 2.01(d), 2.05(c) (iii), 2.05(c) (iv) or
2.05 (d) of the Cobe Distribution Agreement relative to Lymphoid Cell
Applications, ABI, RPR and Cobe shall pursue good faith discussions in an
attempt to resolve the matter to the mutual satisfaction of all parties.  If a
satisfactory resolution is not reached promptly, then ABI hereby authorizes RPR
to pursue appropriate legal proceedings against Cobe to obtain remedies for such
breach, which proceedings shall be at the expense of RPR.  In the event ABI is
required to be a necessary party in said legal proceedings, then ABI shall join
as a plaintiff party in said proceedings, at the expense of RPR.  Any recovery
or other settlement obtained in such proceedings shall be the sole property of
RPR.

2.4.3   ABI hereby agrees not to amend the Cobe Distribution Agreement so as to
diminish the rights or restrictions provided in Sections 2.01(d), 2.05(c) (iii),
2.05(c) (iv) or 2.05 (d) thereof without the prior written consent of RPR.

2.4.4   Notwithstanding the provisions in Section 3.03(b) of the Cobe
Distribution Agreement, ABI hereby agrees that ABI will not provide any training
to Cobe or Cobe's Affiliates (as such term is defined in the Cobe Distribution
Agreement) or customers for use of any CPS for Lymphoid Cell Applications.

2.4.5   Notwithstanding anything to the contrary contained herein, no rights are
granted to RPR which would conflict with or impair the rights granted to Cobe in
the Cobe Distribution Agreement (as so amended).  This Agreement shall be
construed, enforced and implemented so as to define and limit the rights granted
to RPR in this Agreement so as to not conflict with or impair the rights granted
to Cobe in the Cobe Distribution Agreement (as so amended).

                                                                          Page 9

<PAGE>
 
2.5  RPR Business.  This Agreement is being entered into on the understanding
     ------------                                                            
that RPR and its Affiliates will be engaged in the business of providing cell
therapy-related services and/or products for Lymphoid Cell Applications (the
"RPR Business"). If RPR and/or its Affiliates ceases to conduct the RPR Business
after a Governmental Approval as contemplated by Section 8 hereof has been
obtained, (i) then RPR shall not be entitled to assign or sublicense its rights
under this Agreement to a third party without the prior written approval of ABI,
which approval shall be dependent upon the capability of the assignee or
sublicensee to reasonably optimize the market commercialization of Licensed
Product; and (ii) if such an assignment or sublicense does not occur, then ABI
shall be entitled to terminate this Agreement.

2.6  Reserved Rights. ABI reserves the right to use the ABI Technology within
     ---------------                                                         
the Field for (a) making and selling Licensed Product or Potential Licensed
Product (i) for the user's non-commercial research purposes or (ii) labeled "Not
For Human Use", (b) with the prior written consent of RPR, conducting
preclinical research in collaboration with commercial third parties with respect
to the use of the CPS for applications within the Field which are not being (or
to be) pursued by RPR as an Addressed Application, (c) internal research by ABI
with respect to the use of the CPS for applications within the Field, and (d)
fulfilling its obligations under the Supply Agreement and/or the Research and
Development Collaboration Agreement.

2.7  Exclusive Right.  Except as permitted by Sections 2.6, 4.3.2, 5 or 6
     ---------------                                                     
hereof, ABI shall not grant any rights to any third party, and ABI shall not
exercise any rights for itself (other than pursuant to the Supply Agreement), to
use, license, lease, make, import, market, distribute, promote, sell and/or have
sold any CPS for Lymphoid Cell Applications. Any agreement with respect to the
sale or other transfer of any CPS by ABI to any third party (other than a sale
or other transfer permitted by Sections 2.6, 4.3.2, 5 or 6) shall expressly
provide that (i) the CPS may not be used (either by the third party or its
customers) for Lymphoid Cell Applications, and (ii) RPR shall be a third party
beneficiary of such provision.

2.8  Sublicensees.  The License shall include the right to grant sublicenses
     ------------                                                           
under the License to RPR's Affiliates and to such third parties who are
participants in the RPR Business. So long as RPR and its Affiliates continue to
conduct the RPR Business in the United States, RPR may also grant sublicenses
under the License to qualified third parties in foreign countries who conduct a
business similar to the RPR Business. RPR shall also have the right to grant
sublicenses under the License to third parties solely to enable such third
parties to conduct research and development with respect to the use of the CPS
in the Field. Any RPR sublicensee shall be bound by all of the terms of this
Agreement, particularly including the limited field of use and the
confidentiality obligations. A copy of any such sublicense agreement shall be
furnished to ABI prior to the sublicensee exercising any rights thereunder.
Except as provided in this Section 2.8, RPR shall not grant any sublicenses
under the License without the prior written approval from ABI.

                                                                         Page 10

<PAGE>
 
2.9  Early Termination of License.  Pursuant to the Governance Agreement, RPR
     -----------------------------                                           
has certain options to continue the rights specified in the Governance
Agreement, including rights specified in this Agreement. Notwithstanding
anything else to the contrary contained in this Agreement, the License and this
Agreement shall terminate automatically and be of no further force or effect
in the event that RPR does not (a) pay the Second Option Payment to ABI before
the expiration of the First Option Period, or (b) deliver the Third Option Event
Notice before the expiration of the Second Option Period, all in accordance with
the terms of the Governance Agreement.

2.10 Third Party Relationships.  In order to protect the exclusivity of the
     -------------------------                                             
License, except as may otherwise be agreed upon by RPR in writing, and except as
is otherwise expressly permitted in this Agreement, ABI will not enter into any
agreement, arrangement or understanding, whether oral or written, with a third
party which would (i) grant to such third party any rights to make, have made,
use, sell, have sold, offer to sell or import Licensed Product or Potential
Licensed Product for use in the Field, or (ii) permit such third party to assert
any claim with respect to the manufacture, use, sale or importation of Licensed
Product or Potential Licensed Product for use in the Field.

2.11 Field of Use Compliance.  In order to insure field of use compliance by
     -----------------------                                                
all interested parties, a portion of the research to be conducted pursuant to
the Governance Agreement and the Research and Development Collaboration
Agreement will be focused on developing and implementing modifications to the
Automated CPS which will endeavor to prevent use of any Automated CPS sold to
RPR and its Affiliates for any field of use other than Lymphoid Cell
Applications. ABI likewise agrees to use reasonable efforts to develop and
implement modifications to ABI's other CPS products which are sold to third
parties (other than RPR and its Affiliates) which will endeavor to prevent the
use of such other CPS products for Lymphoid Cell Applications for which a
Licensed Product is available or for any other Addressed Application. Any
agreement with respect to the sale or other transfer of the CPS by RPR or its
Affiliates to any third party shall expressly provide that (a) the CPS may not
be used (either by the third party or its customers) outside the Field, and (b)
ABI shall be a third party beneficiary of such provision.

3.   Royalty.
     ------- 

3.1  Units Purchased From ABI.  Excepting only as is otherwise specified in this
     ------------------------                                                   
Agreement, with respect to units of the Durables and Disposables which RPR
purchases from ABI pursuant to the Supply Agreement, no royalty shall be
payable, so long as RPR pays the purchase price as specified in the Supply
Agreement. Notwithstanding the foregoing, if additional patent rights result
from the Research and Development Collaboration Agreement, some royalty might be
payable in accordance with the terms of said Research and Development
Collaboration Agreement.

                                                                         Page 11

<PAGE>
 
3.2    Units Not Purchased From ABI. With respect to any units of the Durables
       ----------------------------                                           
or the Disposables which RPR acquires from a party other than ABI (other than
upon expiration of the Supply Agreement with respect to the Licensed Product),
if RPR acquires said units at a price less than the price otherwise payable by
RPR under t he Supply Agreement, then RPR shall pay to ABI an earned royalty
equal to * percent *   of the then current purchase price which is then
applicable for said units under the Supply Agreement, so long as and to the
extent that said royalty does not cause the aggregate of the price paid by RPR
to acquire the units, plus the royalty payable to ABI, plus the ABI Royalties
Payable thereon to exceed the price otherwise payable by RPR under the Supply
Agreement. If the Supply Agreement is no longer in effect with respect to a
particular Licensed Product (other than upon expiration of the Supply Agreement
with respect to such Licensed Product), then the last price applicable under the
Supply Agreement shall be used for purposes of calculating the * royalty
pursuant to this Section 3.2.

3.2.1  Royalty Term.  Notwithstanding any contrary section of this agreement
       ------------                                                         
relating to the term of RPR's royalty obligation to ABI, RPR's royalty
obligation to ABI with respect to all CPS or Licensed Product manufactured, used
or sold by RPR or its Affiliates shall be * of the most recent purchase price of
said Licensed Product and shall extend until the later of (i) the last to expire
of the valid granted patents within the ABI Patent Rights covering said CPS or
Licensed Product, or any component or process thereof, if a patent within the
ABI Patent Rights is granted, or (ii) ten years from the first commercial sale
of said CPS or Licensed Product.  In the situation of subsection 3.2.1 (ii),
RPR's royalty obligation shall also include an continuing obligation of * for
years ten through twenty from the commercial sale of said Licensed Product or
other CPS manufactured using ABI Confidential Know-How.

3.2.2  For the avoidance of doubt, the provisions of this section 3.2 are
intended to be applicable only in the situations where RPR is permitted to
manufacture pursuant to the Supply Agreement.

3.3    Royalties to ABI Licensors.  ABI shall be solely responsible  for any
       --------------------------                                           
payments due its licensors arising out of the manufacture, sale or use by RPR or
its Affiliates or their customers of Licensed Product. However, the parties
acknowledge that said payments are included in calculating the purchase price to
be paid by RPR pursuant to the Supply Agreement.

4.     Commercialization Effort.
       -------------------------

4.1    RPR Obligations.
       --------------- 

(a)  RPR acknowledges that the exclusive nature of this Agreement obligates RPR
to develop and incorporate diligently the ABI Technology and CPS devices into

                    *CONFIDENTIAL PORTION REDACTED AND FILED
                         SEPARATELY WITH THE COMMISSION

                                                                         Page 12

<PAGE>
 
commercial Lymphoid Cell Therapy uses on a global basis, and includes the
obligation to maximize, over time, the commercial opportunities for ABI revenues
from the sale of CPS devices for Lymphoid Cell Applications in a manner which
does not adversely impact the RPR Business interests in cell therapy. This
diligence obligation places certain restrictions on RPR as regards implementing
competing automated cell expansion technologies to the extent that such
implementation would injure the interests of ABI; however, this restriction is
not intended to injure the cell therapy business interests of RPR. Accordingly,
notwithstanding anything which might be construed inconsistently in the other
subsections of Section 4 of this Agreement, RPR agrees to maintain reasonable
business awareness of market opportunities for the use of the CPS for Lymphoid
Cell Applications, and RPR agrees to exercise reasonable business judgment and
to respond diligently with good business sense to market demands and
opportuniites for the use of the CPS for Lymphoid Cell Applications.

(b)  Pursuant to subsection (a) above,  RPR shall use commercially reasonable,
diligent and good faith efforts to exploit the License by obtaining the
necessary Government Approvals for using and marketing Licensed Product within
the Field, and to develop and service the market demand therefor, in the Major
Pharmaceutical Markets. Said reasonable diligence shall be at least equal to the
level of efforts that RPR devotes to the incorporation into the RPR Business of
its other process improvements of similar market value and therapeutic status.
It is understood by the parties that RPR's obligations pursuant to this Section
4.1 shall require it, upon exercise of the Third Option, to use commercially
reasonable, diligent and good faith efforts to begin developing the Automated
CPS for use in the applications which are the then primary targets for RPR's ex
vivo cell therapy business. Such targets are currently TIL therapy and PBMC
therapy. RPR shall be obligated, from the the Activation Date, to conduct
diligently reasonable pre-clinical bioequivalency studies to support
supplemental regulatory filings to transition the Grandfathered Competing
Product Applications from the use of the "bag-method" to the use of the
Automated CPS.

4.1.1  Notwithstanding anything contained in this Section 4 to the contrary,
however, RPR shall not be obligated to use, market or sell Licensed Product in a
given country for a Grandfathered Competing Product Application during the *
following the date all necessary approvals have been obtained for the use of
such Grandfathered Competing Product Application in that country, plus such
longer time period as it may be financially or technically infeasible to
reasonably phase out a Competing Product in favor of Licensed Product used for
the Grandfathered Competing Product Application.  In the event that said
infeasibility necessitates more than said * for a transition to Licensed Product
from a Competing Product for a Grandfathered Competing Product Application, then
the parties shall negotiate in good faith to determine means to avoid injury to
Aastrom's business interests unless the delay was for causes beyond the
reasonable control of RPR.

                    *CONFIDENTIAL PORTION REDACTED AND FILED
                         SEPARATELY WITH THE COMMISSION

                                                                         Page 13

<PAGE>
 
4.1.2  By way of clarification of RPR's obligations pursuant to this Section
4.1, ABI acknowledges that RPR shall have sole discretion in determining the
manner in which a Licensed Product will be exploited in the countries within a
particular Major Pharmaceutical Market, as well as the order of the countries
within the Major Pharmaceutical Markets in which a particular Licensed Product
will be introduced.

4.1.3  On an annual basis, RPR shall prepare and deliver to ABI a report briefly
describing RPR's plans for the development and commercialization of Licensed
Product (each such plan being referred to herein as a "Development Plan"). It is
understood by the parties that Development Plans will not be static plans, but
will necessarily evolve over time as technology and market conditions change.
After receipt of a Development Plan, ABI may request that representatives of RPR
meet with representatives of ABI to discuss such Development Plan. At that time,
ABI may propose additional applications for Licensed Product that ABI may wish
to include in the Development Plan, which proposals RPR will consider in good
faith.

4.2    Use of Licensed Product in Other Venues.  As long as RPR and/or its
       ---------------------------------------                            
Affiliates is/are diligently developing and servicing the market for a specific
therapy within an Application through the ex vivo cell therapy centers, RPR's
obligations pursuant to this Section 4 (the breach of which may result in RPR's
loss of exclusive rights) shall not require RPR to market, use and/or sell a
Licensed Product for such specific therapy outside of ex vivo cell therapy
centers owned or operated by RPR or its Affiliates (such other venues being
referred to herein as "Other Venues") until at least * have elapsed from the
date of RPR's  or RPR's Affiliate's first commercial sale of such specific
therapy.  After such period, to comply with RPR's diligence obligations,  ABI
may require RPR to negotiate the marketing, use and/or sale of such Licensed
Product in the Other Venues by RPR for such specific therapy on terms and
conditions mutually satisfactory to both parties consistent with RPR's exclusive
license.

4.3    Unaddressed Application or Market Proposals.  If, at any time after  the
       -------------------------------------------                             
date that is three years after the date of the Third Option Event Notice, ABI
develops or receives from a third party a bona fide proposal with respect to (i)
the development or use of Licensed Product or a Potential Licensed Product for a
specific therapeutic indication within an Unaddressed Application  for one or
more countries in a Major Pharmaceutical Market (an "Unaddressed Application
Proposal"), or (ii) the development or use of a Licensed Product in one or more
Major Pharmaceutical Markets (other than the Initial Major Pharmaceutical
Markets) for a specific therapeutic indication within an Addressed Application,
but only if RPR is in default under Section 4.1.2 with respect to the use or
marketing of the Licensed Product for the specific therapeutic indication in
such Major Pharmaceutical Market (an "Unaddressed Market Proposal"), then ABI
shall present such proposal to RPR.

                    *CONFIDENTIAL PORTION REDACTED AND FILED
                         SEPARATELY WITH THE COMMISSION

                                                                         Page 14

<PAGE>
 
4.3.1  Upon receipt of an Unaddressed Application Proposal or an Unaddressed
Market Proposal, RPR shall have a period not to exceed ninety days to present
ABI with a bona fide plan and commitment (the "Commercialization Plan") to
initiate, within an eighteen month period, development of Licensed Product or
Potential Licensed Product for such specific therapeutic indication and for such
specific country(ies). It is expressly understood that a Commercialization Plan
may consist of a commitment by RPR to initiate discussions directly with the
applicable third party regarding the feasibility of RPR and the third party
collaborating with respect to the development of Licensed Product or Potential
Licensed Product, as applicable, for the specific therapeutic indication within
the Unaddressed Application or Addressed Application, as applicable, for the
specific country(ies). Upon delivery of said Commercialization Plan, RPR shall
be deemed to have satisfied its obligations pursuant to Section 4.1 with respect
to such Unaddressed Application; provided that RPR thereafter uses commercially
reasonable, diligent and good faith efforts to implement such Commercialization
Plan in accordance with its terms.

4.3.2  If RPR does not deliver the Commercialization Plan within the time
provided by the first sentence of Section 4.3.1, or if RPR notifies ABI in
writing of its intention not to deliver the Commercialization Plan within the
relevant time period, RPR shall grant back rights (on commercially reasonable
terms to be negotiated, including without limitation, whether such grant back
shall be on an exclusive or non-exclusive basis) to Aastrom in the specific
therapeutic indication in the specific market identified in the Unaddressed
Application Proposal or Unaddressed Market Proposal.

4.3.3  Notwithstanding anything contained in this Agreement to the contrary, in
no event shall RPR be required, pursuant to Section 4.3.2, to grant back any
rights with respect to the use of any Licensed Product or Potential Licensed
Product for more than one specific therapeutic indication per twelve month
period (on a cumulative basis); provided, however, that a grant back which
relates solely to a specific therapeutic indication within an Unaddressed
Application wherein the third party has Blocking Patent Rights shall not be
counted for purposes of the numerical limitation set forth in this Section
4.3.3.

5.     RPR's Use of Competing Products. If RPR markets, sells or uses
       -------------------------------                                        
commercially a Competing Product for a particular therapeutic indication within
a Lymphoid Cell Application (excluding however for the Grandfathered Competing
Product Applications to the extent permitted by Section 4.1.1) in a particular
country, then the License shall convert to a nonexclusive license for such
therapeutic indication within such Lymphoid Cell Application in the relevant
country; and, subject to the provisions of Section 6.2, ABI shall be free to
pursue any and all other arrangements for the sale and use of Licensed Product
(but not any other CPS without first offering it to RPR pursuant to the
provisions of Section 6.2) for such therapeutic indication within the Lymphoid
Cell Application in the relevant country (but not in any other country or for
any other Lymphoid Cell Application).

                                                                         Page 15

<PAGE>
 
6.   Loss of License Rights.
     ---------------------- 

6.1  RPR's Failure to Adhere to Development Plans or Commercialization Plans.
     ----------------------------------------------------------------------- 
In the event that RPR shall fail to use commercially reasonable efforts to
satisfy its Development Plans or a Commercialization Plans (as they may evolve
over time) with respect to a particular Lymphoid Cell Application in a
particular Major Pharmaceutical Market, then ABI shall have the right, upon 180
days prior written notice, for that particular Lymphoid Cell Application in that
particular Major Pharmaceutical Market, (i) to convert to nonexclusive the
License for that particular Lymphoid Cell Application in that particular Major
Pharmaceutical Market; and (ii) to terminate the License with respect to all
improvements to the applicable Licensed Product developed subsequent to such
termination without funding or assistance from RPR, but only with respect to
that particular Lymphoid Cell Application in that particular Major
Pharmaceutical Market. Upon any such conversion or termination, ABI shall,
subject to the provisions of Section 6.2, be entitled to pursue other
arrangements for commercially using and selling Licensed Product in that
particular Major Pharmaceutical Market and for that particular application
(which arrangement may be sales directly by ABI or through licensees or
assignees).

6.2  RPR's Right of First Refusal.  In exercising its rights pursuant to
     ----------------------------                                       
Sections 5 or 6.1, ABI may not enter into any agreement, arrangement or
understanding with a third party with respect to the making, using or selling of
Licensed Product or Potential Licensed Product without giving RPR written notice
of its intention to do so, along with a summary of all material provisions of
the proposed agreements (the "Proposed Other Agreements"). Upon receipt of such
notice and agreements, RPR shall have a right of first refusal to enter into a
similar agreement with ABI on terms and conditions which are identical to those
of the agreement(s) which ABI proposes to enter into with the third party. Such
right of first refusal may be exercised by RPR in writing at any time within one
month after its receipt of the notice specified in the first sentence of this
Section (the "Exercise Period"). In the event RPR does not exercise its right of
first refusal on any particular occasion, such right of first refusal shall
again become effective in the event that ABI does not enter into the Proposed
Other Agreements with the third party within six months after the first to occur
of ABI's receipt of RPR's written notification that it will not exercise its
right of first refusal or the expiration of the Exercise Period.

6.3  Failure to Commercialize on Grant Back.  In the event that ABI and/or the
     --------------------------------------                                   
third party shall not use commercially reasonable, diligent and good faith
efforts to develop and commercialize License Product in the specific field and
market for which rights have been granted back pursuant to Section 4.3.2., then
RPR shall have the right, upon 180 days prior written notice, if no cure is made
within said 180 days, to terminate the grant back, whereupon the exclusivity of
RPR's License with respect to the specific therapeutic indication covered by
such grant back shall be restored; provided that RPR, thereafter, exerts
reasonable commercial diligence with respect to 

                                                                         Page 16

<PAGE>
 
such therapeutic indication. RPR shall have third party beneficiary rights to
enforce said due diligence obligations.

6.4    Dispute Resolution.  If there is any dispute as to whether or not RPR is
       ------------------                                                      
meeting its commercialization obligations in any particular Major Pharmaceutical
Market for any particular application, or if there is any dispute as to whether
or not ABI and/or a Third Party are meeting their diligence obligations under
any rights granted back pursuant to Section 4.3.2, the parties shall pursue good
faith discussions and negotiations in an effort to resolve said dispute for a
period of at least ninety (90) days. If such discussions do not resolve the
dispute, then either party may require the dispute to be resolved through
arbitration as set forth in Section 19 hereof.

7.     Regulatory Approvals.
       -------------------- 

7.1    RPR Responsibility.
       ------------------ 

7.1.1  From and after the date hereof, RPR and its Affiliates shall be
responsible for obtaining, and shall pay for all costs necessary to obtain, any
and all Government Approvals for the marketing or use of Licensed Product for
Lymphoid Cell Applications, as may be required in any country where Licensed
Product will be commercially sold or used.  Without limiting the generality of
the foregoing, RPR and its Affiliates shall fund all clinical trials and shall
pay for all applications and license fees required of any government authority
in furtherance of its obligation pursuant to the preceding sentence.  RPR shall
prepare a plan for obtaining required Government Approvals (the "Regulatory
Approval Plan"), which shall be updated on a periodic basis as needed, and RPR
shall furnish to ABI a copy of the Regulatory Approval Plan, together with the
updates.  From time to time, RPR may confer with ABI with respect to the
implementation of the Regulatory Approval Plan.  ABI shall cooperate with and
assist RPR with respect to said Government Approval matters, all at the expense
of RPR.

7.1.2  All Government Approvals obtained for Licensed Product or a Potential
Licensed Product for Lymphoid Cell Applications shall be in the name of RPR
and/or its Affiliates and shall be owned by RPR and/or its Affiliates, excepting
only to the extent that the applicable governmental authorities require
otherwise.  In the event that the applicable governmental authorities require
that a particular Government Approval be in the name of ABI, ABI shall assign
its interest in and to such Governmental Approval to RPR and/or its Affiliates
as such interest relates to the Field.  RPR shall have the responsibility to
file all required reports and to maintain the continued effectiveness for all
Government Approvals.

7.1.3  RPR and ABI acknowledge and understand that in addition to, and perhaps
simultaneously with, RPR's efforts to obtain Government Approvals for Licensed
Product for Lymphoid Cell Applications, ABI (or its licensee) will be pursuing
efforts 

                                                                         Page 17

<PAGE>
 
to obtain regulatory approvals for the Automated CPS for stem cell applications
and for other applications outside the Field. In order to avoid conflicting
efforts for obtaining regulatory approvals for different applications of the
Automated CPS, both RPR and ABI shall use reasonable efforts to cooperate and
coordinate with each other relative to pursuing efforts for obtaining regulatory
approvals in an effort not to impact adversely the other party's regulatory
approval plan for the respective products or applications. Notwithstanding
anything contained in this Section 7.1.3 to the contrary, however, neither party
shall be required to take any action, or omit from taking any action, in
connection with any regulatory approval to the extent that such action or
omission would result in additional cost to, or otherwise adversely affect, such
party or its Affiliates or their respective customers.

7.2  Transfers.  In the event of any termination of this Agreement in accordance
     ---------                                                                  
with its terms, or in the event the License converts to a nonexclusive license
with respect to a particular Lymphoid Cell Application in a particular Major
Pharmaceutical Market, then ABI shall be entitled to utilize all data which
relates primarily to the safety of the Automated CPS (which shall expressly
exclude, among other things, any efficacy data or proprietary process data)
which has previously been used by RPR to obtain and maintain the Government
Approvals for such Lymphoid Cell Application, in order to assist ABI in
obtaining any Government Approvals to enable ABI to commercially make, use or
sell Licensed Product for such Lymphoid Cell Application in such Major
Pharmaceutical Market.

8.   Milestone Payment.  RPR shall pay to ABI a milestone payment in the
     -----------------                                                  
amount of * within ten days after the earlier to occur of (i) all necessary
Government Approvals are obtained by RPR or its Affiliates or sublicensees for
the first Lymphoid Cell Application which uses Licensed Product in any country
in a Major Pharmaceutical Market, or (ii) the first commercial revenues
(excluding revenues from clinical trials being conducted to obtain Governmental
Approvals) are received by RPR or its Affiliates or sublicensees for the first
Lymphoid Cell Applications therapy which uses Licensed Product.

9.   Patent Prosecution and Maintenance by ABI.  Subject to the requirements,
     -----------------------------------------                               
limitations and conditions set forth in this Agreement, ABI shall direct and
control (i) the preparation, filing and prosecution of the United States and
foreign patent applications for the ABI Patent Rights (including any
interferences and foreign oppositions) and (ii) the maintenance of the patents
issuing therefrom.  RPR shall have full rights of consultation with ABI and the
patent attorney selected by ABI in all matters related to the ABI Patent Rights
applicable to Lymphoid Cell Applications.  ABI shall use reasonable diligent
efforts to implement all reasonable requests made by RPR with regard to the
preparation, filing, prosecution and/or maintenance of the patent applications
and/or patents within the ABI Patent Rights. With respect to the costs for
patent matters which benefit Licensed Product or Potential Licensed Products,
RPR shall pay 50% of said costs, including attorneys' fees, governmental fees,
and all other applicable costs. RPR's obligation under this Section 9 shall
apply with respect

                    *CONFIDENTIAL PORTION REDACTED AND FILED
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                                                                         Page 18

<PAGE>
 
to costs which accrue from and after the effective date of the Governance
Agreement between the parties (i.e., September 15, 1995).

9.1  Standby Rights of RPR.  If ABI elects not to  pursue any particular action
     ---------------------                                                     
to obtain or maintain particular Patent Rights which specifically describe in
the specification thereof an application in the Field, then ABI shall promptly
notify RPR of such non-election in good time in respect of patent filing,
prosecution and maintenance deadlines.  Upon receipt of such notification, or in
the event that ABI otherwise fails to promptly pursue any particular action to
obtain or maintain particular Patent Rights useful in the Field, RPR shall be
entitled to undertake such action in its own name or in the name of ABI (or its
licensor), at the expense of RPR.  In the event RPR elects to undertake such
action, ABI shall have no further rights under the patent rights in question and
will grant to RPR all of ABI's rights and interest therein, and all necessary
authority to so file, prosecute and maintain such patent application or patent,
with the provision that RPR shall execute a document granting back to ABI
license rights in such patent application or patent, on a royalty free basis,
for use outside the Field.

9.2  Improvements.  Any improvements to the ABI Patent Rights, including any
     ------------                                                           
new inventions, conceived, developed or reduced to practice solely by ABI prior
to the Activation Date shall be owned by ABI, but shall be deemed to be part of
the ABI Owned Patent Rights which are subject to the License. Any improvements
to the ABI Patent Rights, including any new inventions, conceived and developed
during the term of the Research and Development Collaboration Agreement shall be
governed by the terms and conditions of the Research and Development
Collaboration Agreement to be negotiated by the parties during the First Option
Period, the material terms of which are attached to the Governance Agreement as
Exhibit C.

9.3  Intellectual Property Right Disclaimers.  ABI shall not disclaim any
     ---------------------------------------                             
intellectual property right or abandon any application for any intellectual
property right relating to the CPS for use in the Field without allowing RPR the
opportunity to exercise its rights under Section 9.1.

9.4  Patent Term Restoration and Other Extensions of Patent Life.  ABI shall
     -----------------------------------------------------------            
keep RPR informed of the issuance of each U.S. patent and foreign patent within
ABI Patent Rights, giving the date of issuance and patent numbers, and each
notice pertaining to any patent included within ABI Patent Rights which it
receives as patent owner pursuant to the Drug Price Competition and Patent Term
Restoration Act of 1984 or any equivalent foreign laws, including notices
pursuant to sections 101 or 103 of said Act from persons who have filed an
abbreviated NDA ("ANDA"), and also, any other notices relating to any
administrative or otherwise extensions of patent life. All such notices shall be
given promptly, but in any case within 10 days of each such patent's date of
issue or receipt of each such notice under such Act or equivalent, whichever is
applicable. The parties shall cooperate in attaining any 

                                                                         Page 19

<PAGE>
 
such permitted extensions of patent life.

10.   Infringement.
      ------------ 

10.1  RPR Prosecution Against Third Party Infringers.  In the event a party to
      ----------------------------------------------                          
this Agreement acquires information that a third party is infringing one or more
of the ABI Patent Rights, the party acquiring such information shall promptly
notify the other party in writing of such infringement. Subject to the
provisions hereof, RPR shall have the right initially to prosecute at its
discretion any and all infringements of any ABI Patent Rights to the extent that
such infringement relates to Lymphoid Cell Applications and to defend all
charges of infringement arising with respect to Licensed Products and/or
Potential Licensed Products, and to enter all settlements, judgments or other
arrangements respecting the same, all at its own expense or liability, subject
to the terms of this Section 10. Prior to initiating any infringement
proceedings, RPR shall confer and consult with ABI with respect to the potential
impact of such infringement proceedings on ABI's other Patent Rights and, in the
event that ABI shall inform RPR in good faith that such infringement proceedings
are likely to have a material adverse effect on ABI, RPR shall not institute
such proceedings unless the subject infringement is having or is likely to have
a material adverse effect on the competitive position of the ex vivo cell
therapy centers owned or operated by RPR and its Affiliates or on RPR's sales of
Licensed Product and/or Potential Licensed Products. ABI shall permit any
infringement proceedings to be brought in its name if required by law, and RPR
shall hold ABI harmless from any costs, expenses or liability respecting all
such infringements or charges of infringement, including attorneys' fees. With
respect to any infringement proceeding brought by RPR, ABI agrees to be joined
as a party plaintiff if permitted by law and if RPR so requests and to give RPR
reasonable assistance and authority to file and prosecute the suit.

10.2  Costs.  The expenses of suits that RPR elects to bring, including any
      -----                                                                
expenses of ABI incurred in conjunction with the prosecution of such suits or
the settlement thereof, shall be paid for entirely by RPR, and RPR shall hold
ABI free, clear and harmless from and against any and all costs of such
litigation, including attorneys' fees. Monetary recoveries from litigation
pursuant to Section 10.1 shall be apportioned as follows: RPR has the right to
first reimburse itself for all out-of-pocket costs and expenses of every kind
and character, including reasonable attorneys' fees, involved in the litigation
or settlement of such suit from any sums recovered in such suit or in
settlement. If, after such reimbursement, any funds shall remain from said
recovery, such funds shall be allocated equitably between the parties. It is
agreed by the parties that their relative financial support of the legal
expenses of bringing the infringement action shall be one of the material
factors in making such equitable allocation.

10.3  Failure of RPR to Prosecute Infringer.  As regards the first discovered
      -------------------------------------                                  
infringer of an ABI Patent Right:  if RPR does not bring suit against said
infringer
     
                                                                         Page 20

<PAGE>
 
pursuant to Section 10.1, or has not commenced negotiations with said infringer
for discontinuance of said infringement, as herein provided, within one hundred
eighty (180) days after receipt of notice (pursuant to Section 10.1), ABI shall
have the right, but shall not be obligated, to bring suit for such infringement
and to join RPR as a party plaintiff or to use RPR's name if required by law, in
which event ABI shall hold RPR free, clear and harmless from and against any and
all costs and expenses of such litigation, including attorneys' fees. If RPR has
commenced negotiations with an alleged infringer of the patent for
discontinuance of such infringement within such 180-day period, RPR shall have
an additional one hundred eighty (180) days from the termination of such initial
180-day period to conclude its negotiations before ABI could bring suit for such
infringement.

10.4  RPR's Retained Rights to Prosecute Infringer.  RPR shall retain its right
      --------------------------------------------                             
to initiate patent infringement litigation respecting a second and subsequent
infringer of an ABI Patent Right which is already the subject of a pending
patent infringement litigation by RPR if RPR places such infringer(s) on proper
legal notice that such infringer's infringing activities shall be addressed in a
legal action initiated subsequent to the resolution of the pending litigation.

10.5  ABI Recovery.  In the event ABI brings suit pursuant to Section 10.3, ABI
      ------------                                                             
shall have the right to reimburse itself out of any sums recovered in such suit
or settlement thereof for all out-of-pocket costs and expenses of every kind and
character, including reasonable attorneys' fees, necessarily involved in the
prosecution or settlement of such suit, and if after such reimbursement, any
funds shall remain from said recovery, and if said recovery was in part for
RPR's lost profits from Licensed Product, then such funds shall be allocated
equitably between the parties.  It is agreed by the parties that their relative
financial support of the legal expenses of bringing the infringement action
shall be one of the material factors in making such equitable allocation.

10.6  Selection of Legal Counsel.  Each party shall always have the right to be
      --------------------------                                               
represented by counsel of its own selection in any suit for infringement of the
ABI Patent Rights instituted by the other party under the terms hereof. The
expense of such counsel shall be borne by the party retaining such counsel.

10.7  Cooperation by ABI.  ABI agrees to cooperate fully with RPR at the request
      ------------------                                                        
and expense of RPR, including by giving testimony and producing documents
lawfully requested in the course of a suit prosecuted by RPR for infringement of
the ABI Patent Rights and shall endeavor to cause the employees of ABI, its
Affiliates, and sublicensees, as appropriate, to cooperate with RPR.

10.8  Approval of Settlement.  Neither party shall, without the prior written
      ----------------------                                                 
consent of the other party, compromise or settle any litigation described in
Sections 10.1 or 10.3 if such compromise or settlement imposes any obligations
or restrictions on the other party regarding the use of the Patent Rights which
were the

                                                                         Page 21

<PAGE>
 
subject of the infringement action.

11.   Equitable Adjustment of Transfer Price.  In the event that RPR and/or its
      --------------------------------------                                   
Affiliates shall be required to pay any royalties as a result of any settlement
agreed to by ABI or as a result of any judgment in which it is determined that
Licensed Product does infringe a third party's Patent Rights, then the parties
shall negotiate in good faith to determine an equitable adjustment of the
transfer price or future royalties payable by RPR and/or its Affiliates to ABI
with respect to sales of Licensed Product pursuant to the Supply Agreement.
Furthermore, on a Licensed Product-by-Licensed Product basis, and on a country-
by-country basis, RPR may offset one-half of any reasonable out-of-pocket
expenses incurred in defending any infringement proceedings for the applicable
Licensed Product in the applicable country relating to the ABI Patent Rights
from future payments payable to ABI under the Supply Agreement with respect to
such Licensed Product used or sold in such country; provided, however, in no
event may such offset result in ABI receiving payments which are less than the
sum of (i) the costs incurred directly by ABI in manufacturing such Licensed
Product, (ii) a 35% gross margin and (iii) the royalties which ABI is obligated
to pay to third party licensors with respect to the sale of such Licensed
Product from ABI to RPR; and provided, further, that the balance of any unused
offset will be carried over and applied to future payments due ABI with respect
to such Licensed Product.

12.   Indemnity.
      --------- 

12.1  RPR Indemnity.  RPR shall defend, indemnify and hold harmless ABI and its
      -------------                                                            
Affiliates and their agents, directors, officers and employees ("ABI Indemnified
Persons") from and against any and all losses, costs, liabilities, damages, fees
and expenses, including reasonable attorneys' fees and expenses (collectively,
"Liabilities"), to which an ABI Indemnified Person may become subject insofar as
the Liabilities arise out of or are alleged or claimed to arise out of (i) the
inaccuracy of any representation or warranty of RPR contained herein or in the
other Implementing Agreements, (ii) the negligence or willful misconduct of RPR
or its employees or agents.

12.2  ABI Indemnity.  ABI shall defend, indemnify and hold harmless RPR and its
      -------------                                                            
Affiliates and their agents, directors, officers and employees ("RPR Indemnified
Persons") from and against any and all Liabilities to which an RPR Indemnified
Person may become subject insofar as the Liabilities arise out of or are alleged
or claimed to arise out of (i) the inaccuracy of any representation or warranty
of ABI contained herein or in the other Implementing Agreements, (ii) the
negligence or willful misconduct of ABI or its employees or agents.

12.3  Cooperation.  In the event that either party seeks indemnification under
      -----------                                                             
this Section 12, it shall inform the other party of a claim as soon as
reasonably practical after it receives notice of the claim, shall permit the
other party to assume direction

                                                                         Page 22

<PAGE>
 
and control of the defense of the claim (including the right to settle the claim
solely for monetary consideration which, in the case of ABI, shall not include
the right to (i) grant third party(ies) licenses or other rights under the ABI
Technology which conflict with the License, (ii) or to otherwise enter into
any agreement, arrangement or understanding which would require RPR or its
Affiliates or their respective customers to pay any royalties to any third
parties), and shall cooperate as requested at the expense of the other party
with respect to documented and reasonable out-of-pocket expenses of the
cooperating party in the defense of the claim.

13.     Representations, Disclaimers and Covenants.
        ------------------------------------------ 

13.1    Authority.  ABI and RPR each represents and warrants to the other that
        ---------                                                              
(i) it has the authority to enter into and perform this Agreement, and (ii) its
execution, delivery and performance of this Agreement and the full performance
and enjoyment of the rights of RPR hereunder will not conflict with, breach, or
constitute a default under, the terms of any other license, contract or
agreement, whether written or oral, to which it is or becomes a party or by
which it or its assets is or becomes bound.

13.2    Ownership.  ABI further represents and warrants that:
        ---------                                            

13.2.1  To its knowledge, it is the exclusive owner of the ABI Owned Patent
Rights and the exclusive licensee of the ABI In-Licensed Patent Rights, and has
the full right to grant the rights and perform the obligations contemplated by
this Agreement.

13.2.2  It has no knowledge from which it can be inferred that the ABI Patent
Rights are invalid or unenforceable or that their exercise would infringe Patent
Rights of third parties.

13.2.3  During the term of this Agreement, (i) ABI will use reasonable best
efforts not to encumber or diminish the rights granted to RPR hereunder,
including without limitation, by not committing any acts or permitting the
occurrence of any omissions which would cause the breach or termination of any
agreements between third parties and ABI which extend intellectual property
rights to RPR pursuant to the terms of this Agreement (collectively, "ABI
Licenses"), and (ii) ABI will promptly provide RPR notice of any such alleged
breach.

13.2.4  As of the date hereof, ABI is not in breach of any of its obligations
under any of the ABI Licenses.

13.2.5  The inception, development and reduction to practice of the ABI
Technology for use in the Field has not been achieved with the aid of any
funding from any governmental agency or authority.

                                                                         Page 23

<PAGE>
 
13.3  Disclaimer.  EXCEPT AS PROVIDED IN THIS SECTION 13, ABI MAKES NO
      ----------                                                      
WARRANTIES CONCERNING THE ABI TECHNOLOGY, INCLUDING WITHOUT LIMITATION, ABI
MAKES NO EXPRESS OR IMPLIED WARRANTY (i) OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE (ii) THAT ANY LICENSED PRODUCT WILL BE FREE FROM AN
INFRINGEMENT ON PATENT RIGHTS OF THIRD PARTIES, (iii) AS TO THE VALIDITY OR
SCOPE OF THE ABI PATENT RIGHTS, OR (iv) THAT NO THIRD PARTIES ARE IN ANY WAY
INFRINGING THE ABI PATENT RIGHTS.

13.4  Limited Liability.  With respect to any claim by one party against another
      -----------------                                                         
party arising out of the performance or failure to perform under this Agreement,
the parties expressly agree that the liability of such party to the other party
for such breach shall be limited as specified in this Agreement or as is
otherwise limited at law or equity, and in no event shall a party be liable for
indirect, incidental or consequential damages or lost profits.

14.   Compliance With Laws.
      -------------------- 

14.1  General.  Each party shall, at its expense, comply with all laws, rules
      -------                                                                
and regulations applicable to the performance by it of its obligations under
this Agreement. RPR shall register this Agreement with any governmental agency
which requires RPR to so register, and RPR shall pay all costs and legal fees in
connection therewith.

14.2  Export Controls.  This Agreement is made subject to any restrictions
      ---------------                                                     
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to ABI or RPR from time
to time by the government of the United States of America. Furthermore, ABI and
RPR each agree that it will not export, directly or indirectly, any technical
information acquired from the other under this Agreement or any products using
such technical information to any country for which the United States government
or any agency thereof at the time of export requires an export license or other
governmental approval for such export, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.

14.3  Patent Marking.  To the extent relevant under applicable law, RPR shall
      --------------                                                         
mark Licensed Product or its container in accordance with the patent marking
laws of the country in which Licensed Product is made, used or sold.

15.   Publicity.  Any news release or other public announcement relating to this
      ---------                                                                 
Agreement, including any of its terms, or to the performance hereunder, must be
approved by both parties, which approval shall not be unreasonably withheld.
Once the text or substance of an announcement has been so approved, it may be
repeated without further approval.  Any disclosure which is required by law may
be made 

                                                                         Page 24

<PAGE>
 
without the prior consent of the other party, although the other party shall be
given prompt notice of any such legally required disclosure and an opportunity
to comment on the proposed disclosure reasonably in advance to the extent
feasible. Further, the disclosing party shall make diligent efforts to limit the
nature and scope of any disclosure to the extent reasonably possible and to
otherwise prevent the disclosure of the non-disclosing party's Confidential
Information. The parties acknowledge that ABI will be obligated to file a copy
of this Agreement with the SEC if and when ABI's stock is registered under the
Securities Act of 1933, as amended or the Securities and Exchange Act of 1934,
as amended, subject to the diligent obligations stated in the preceding
sentence. ABI shall be entitled to disclose the substance of this Agreement to
ABI's shareholders (and to prospective shareholders to whom ABI's stock is
offered for purchase) under the customary confidentiality agreement and subject
to the diligence requirements in the second sentence preceding this sentence.

16.   Confidentiality.
      --------------- 

16.1  ABI and RPR hereby confirm the validity of, and warrant their continued
compliance with, the Confidentiality Agreement, which shall continue in effect.
Additionally, each of the parties hereby agrees that during the period beginning
on the date hereof and ending on the date that is five years after the last to
expire or terminate of the Implementing Agreements, it will (i) maintain in
confidence all Confidential Information of the other party (including without
limitation all Confidential Information received or obtained as a result of
either party's performance under any of the Implementing Agreements), (ii) not
disclose the other party's Confidential Information without the prior written
consent of such party, and (iii) will not use the other party's Confidential
Information for any purpose except those permitted by the Implementing
Agreements.

16.2  A party shall have the right to disclose the other party's Confidential
Information to those of its directors, officers, employees and consultants to
whom disclosure is necessary to enable such party's performance under the
Implementing Agreements, provided that such persons have undertaken
confidentiality obligations at least as strict as those undertaken in this
Agreement.

16.3  In fulfilling its obligations under this Section 16, a party shall use the
same level of efforts to protect from disclosure the other party's Confidential
Information as it uses to protect its own most sensitive Confidential
Information, which efforts shall in any event be not less than reasonable
efforts.

17.   Trademarks and Tradenames.  The trademark and tradename of ABI shall be
      -------------------------                                              
placed on each Licensed Product manufactured by ABI, with at least the same
prominence as any other trademark or tradename placed on Licensed Product. As
long as the License shall not have terminated, RPR shall have the right to use
the applicable trademarks and tradenames of ABI in connection with RPR's use and
sale

                                                                         Page 25

<PAGE>
 
of Licensed Product.

18.    Term and Termination.
       -------------------- 

18.1   Term.  Unless terminated sooner in accordance with the provisions set
       ----                                                                 
forth herein, including Section 2.9 hereof, this Agreement, and the License,
shall commence on the date of this Agreement and terminate simultaneously with
any termination of the Supply Agreement. Provided however, if the Supply
Agreement or this Agreement is terminated due to a material default thereunder
or hereunder by ABI or due to the bankruptcy or insolvency of ABI, then the
License shall continue for the purposes as specified in Section 2.1, subject to
RPR paying the royalty as specified in Section 3.2 for so long as any ABI Patent
Rights remain in effect.

18.2   Termination Upon Default.
       ------------------------ 
18.2.1 In the event of a material default hereunder by a party ("Defaulting
Party"), the other party ("Non-Defaulting Party") may give the Defaulting Party
written notice of the default and elect to terminate this Agreement sixty (60)
days after the Defaulting Party receives the notice if, within said time period,
the Defaulting Party fails to resolve the default by (i) curing the default or
beginning the cure of the default and diligently completing the cure of the
default thereafter even if after the end of the aforementioned sixty (60) day
time period, (ii) providing a written explanation reasonably satisfactory to the
Non-Defaulting Party that a default has not occurred, or (iii) entering into a
written agreement with the Non-Defaulting Party for the cure or other resolution
of the default. Upon failure of the Defaulting Party to resolve the default as
so required, the Non-Defaulting Party may terminate this Agreement by giving
written notice to the Defaulting Party, said termination to be effective upon
the date specified in the notice. Any dispute arising hereunder shall be
resolved by binding arbitration in accordance with provisions of Section 19
hereof. If any termination relates to breaches which are limited to a particular
Licensed Product and/or Major Pharmaceutical Market, then any termination by ABI
shall apply only with respect to that Licensed Product(s) and/or that Major
Pharmaceutical Market(s). If it is determined that RPR or its Affiliates
intentionally used commercially a Licensed Product outside the Field, then ABI
may terminate this Agreement without RPR having any right to cure.

18.2.2 The rights granted to the Non-Defaulting Party pursuant to Subsection
18.2.1 shall be in addition to and not in substitution for any other remedies
that may be available to such party. Except as otherwise expressly stated
herein, termination shall not relieve the Defaulting Party from liability and
damages to the other party for breach of this Agreement.

18.3   Termination Upon Bankruptcy Event.  This Agreement may be terminated by a
       ---------------------------------                                        
party upon written notice to the other in the event that (i) the other party
shall make an assignment for the benefit of its creditors, file a petition in
bankruptcy, 

                                                                         Page 26

<PAGE>
 
petition or apply to any tribunal for the appointment of a custodian, receiver
or any trustee for it or a substantial part of its assets, or shall commence any
proceeding under any bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution or liquidation law or statute of any jurisdiction, whether now
or hereafter in effect; or (ii) if there shall have been filed against the other
party any such bona fide petition or application, or any such proceeding shall
have been commenced against it, in which an order for relief is entered or which
remains undismissed for a period of 90 days or more; or (iii) if the other party
by any act or omission shall indicate its consent to, approval of or
acquiescence in any such petition, application, or proceeding or order for
relief or the appointment of a custodian, receiver or trustee for it or any
substantial part of its assets, or shall suffer any such custodianship,
receivership or trusteeship to continue undischarged for a period of 90 days or
more (hereinafter, an "Insolvency Event"). Termination shall be effective upon
the date specified in such notice. All rights and licenses granted under or
pursuant to any section of this Agreement are, and shall otherwise be deemed to
be, for purposes of Section 36(n) of the Bankruptcy Code, licenses to
"intellectual property" as defined under Section 101(52) of the Bankruptcy Code.
The parties agree that RPR, as a licensee or sublicensee, as applicable, of such
rights under this Agreement, shall retain and may fully exercise all of its
rights and elections under the Bankruptcy Code. The parties further agree that,
if an Insolvency Event shall occur with respect to ABI, RPR shall be entitled to
a complete duplicate of (or complete access to, as appropriate) any such
intellectual property and all embodiments of such intellectual property, and the
same, if not already in its possession, shall be promptly delivered to RPR upon
any such occurrence.

18.4  Voluntary Termination.  RPR may voluntarily terminate this Agreement
      ---------------------                                               
upon one hundred eighty (180) days' prior written notice to ABI at any time with
respect to any country(ies).

18.5  Cessation of RPR Business.  If RPR ceases to conduct the RPR Business, and
      -------------------------                                                 
if RPR does not assign or sublicense its rights under this Agreement in
accordance with Section 2.5, then ABI may terminate this Agreement.

18.6  Rights Upon Termination.  Notwithstanding any other provision of this
      -----------------------                                              
Agreement, upon any termination of this Agreement in its entirety, the License
shall terminate (subject to the rights of RPR pursuant to the second sentence of
Section 18.1).  Except as permitted by Section 18.7, upon such termination, RPR
shall have no further right to develop, manufacture or market Licensed Product.
Subject to the provisions of Section 18.7, upon any termination of this
Agreement in its entirety, RPR shall promptly return all materials, samples,
documents, information, and other materials which embody or disclose the ABI
Technology.  Any termination of this Agreement  shall not relieve either party
from any obligations accrued to the date of such termination.  The parties'
obligations pursuant to Sections 12 and 16 shall survive any termination of this
Agreement.  All of the foregoing shall relate only to Licensed Product and/or
country(ies) and/or applications to which the termination relates.  

                                                                         Page 27

<PAGE>
 
Upon termination of this Agreement (except for a termination due to a material
default by ABI under this Agreement or the Supply Agreement, or due to the
bankrupcy or insolvency of ABI), RPR shall not have the right to use any ABI
valid and unexpired ABI Patent Rights or ABI Confidential Know-How to
manufacture any CPS.

18.7  Licensed Product Purchased.  With respect to all Licensed Product
      --------------------------                                       
purchased by RPR prior to any early termination of this Agreement, RPR and its
Affiliates and sublicensees and their customers shall have the continuing right
to use and sell (but not to make) Licensed Product for Lymphoid Cell
Applications.

19.   Arbitration.  Except as set forth in subparagraph 19.1 below, any
      -----------                                                      
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by binding arbitration in accordance with the
Arbitration Agreement. If the parties cannot timely execute the Arbitration
Agreement, the dispute shall be resolved in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA").

19.1  Equitable Court Remedies.  Each party recognizes and acknowledges that a
      ------------------------                                                
breach by the other of any of its covenants, agreements or undertakings
hereunder relating to confidentiality and non-use of Confidential Information
and ownership and use of intellectual property will cause irreparable damage
which cannot be readily remedied in damages and in action at law, and may, in
addition thereto, constitute an infringement of a party's proprietary rights,
thereby entitling such party to equitable remedies and costs. Accordingly,
notwithstanding the provisions of this Section 19, each party reserves the right
(and the other party agrees not to contest such right) to seek injunctive relief
and other equitable remedies in a court of competent jurisdiction, instead of
arbitration, with respect to the enforcement by each party of such rights.

20.   General Provisions.
      ------------------ 

20.1  Independent Contractors.  The relationship between ABI and RPR is that of
      -----------------------                                                  
independent contractors. ABI and RPR are not joint venturers, partners,
principal and agent, master and servant, employer or employee, and have no other
relationship other than independent contracting parties. ABI shall have no power
to bind or obligate RPR in any manner, other than as is expressly set forth in
this Agreement. Likewise RPR shall have no power to bind or obligate ABI in any
manner other than as is expressly set forth in this Agreement.

20.2  Force Majeure.  Both parties to this Agreement shall be excused from the
      -------------                                                           
performance of their obligations under this Agreement if such performance is
prevented by force majeure and the non-performing party promptly provides notice
of the prevention to the other party. Such excuse shall be continued so long as
the condition constituting force majeure continues and the non-performing party
takes 

                                                                         Page 28

<PAGE>
 
reasonable efforts to remove the condition. For purposes of this Agreement,
force majeure shall include conditions which are beyond the reasonable control
of a party and which could not have been avoided by the exercise of reasonable
diligence, including without limitation, an act of God, voluntary or involuntary
compliance with any regulation, law or order of any government, war, civil
commotion, strike or other labor disturbance, epidemic, failure or default of
public utilities or common carriers, destruction of production facilities or
materials by fire, earthquake, storm or like catastrophe. Provided however,
payments of any monies due and owing hereunder shall not be delayed by the payor
because of a force majeure affecting the payor.

20.3 Consents Not Unreasonably Withheld.  Whenever provision is made in this
     ----------------------------------                                     
Agreement for either party to secure the consent or approval of the other, that
consent or approval shall not unreasonably be withheld or delayed.  Whenever in
this Agreement provisions are made for one party to object to or disapprove a
matter, such objection or disapproval shall not unreasonably be exercised.

20.4 Assignment.  Neither this Agreement nor any rights granted hereunder may
     ----------                                                              
be assigned or transferred by either party except with the prior written consent
of the other party, which consent shall not be unreasonably withheld, except to
an Affiliate(s) of the party or to a successor-in-interest of substantially all
of the party's assets.  Upon any such permitted assignment, both the assignee
and the assignor shall be liable for the performance of the assigning party's
obligations under this Agreement.  Any such purported assignment for which
consent is required and is not obtained shall be void.

20.5 Binding Upon Successors and Assigns.  Subject to the limitations on
     -----------------------------------                                
assignment herein, this Agreement shall be binding upon and inure to the benefit
of any successors in interest and assigns of ABI and RPR.  Any such successor or
assignee of a party's interest shall expressly assume in writing the performance
of all the terms and conditions of this Agreement to be performed by such party.

20.6 Entire Agreement; Modification.  This Agreement, the other Implementing
     ------------------------------                                         
Agreements and the Confidentiality Agreement set forth the entire agreement and
understanding between the parties as to the subject matter set forth in this
Agreement.  There shall be no amendments or modifications to this Agreement,
except by a written document which is signed by both parties.

20.7 Governing Law.  This Agreement shall be construed and enforced in
     -------------                                                    
accordance with the internal laws of the Commonwealth of Pennsylvania.

20.8 Headings.  The headings for each article and section in this Agreement
     --------                                                              
have been inserted for convenience of reference only and are not intended to
limit or expand on the meaning of the language contained in the particular
article or section.

                                                                         Page 29

<PAGE>
 
20.9  Severability.  If any one or more of the provisions of this Agreement is
      ------------                                                            
held to be invalid or unenforceable by the arbitration proceedings specified in
Section 17 from which no appeal can be or is taken, the provision shall be
considered severed from this Agreement and shall not serve to invalidate the
remaining provisions thereof, so long as the essential benefits of this
Agreement will still be realized. The parties shall make a good faith effort to
replace the invalid or unenforceable provision with a valid one which in its
economic effect is most consistent with the invalid or unenforceable provision.

20.10 No Waiver.  Any delay in enforcing a party's rights under this Agreement
      ---------                                                               
or any waiver as to a particular default or other matter shall not constitute a
waiver of such party's rights to the future enforcement of its rights under this
Agreement, excepting only as to an express written and signed waiver as to a
particular matter for a particular period of time.

20.11 Name.  Whenever there has been an assignment by RPR as permitted by this
      ----                                                                    
Agreement, the term "RPR" as used in this Agreement shall also include and refer
to, if appropriate, such assignee.

20.12 Export Controls.  This Agreement is made subject to any restrictions
      ---------------                                                     
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to ABI or RPR from time
to time by the government of the United States of America. Furthermore, ABI and
RPR each agree that it will not export, directly or indirectly, any technical
information acquired form the other under this Agreement or any products using
such technical information to any country for which the United States government
or any agency thereof at the time of export requires an export license or other
governmental approval, without first obtaining the written consent to do so from
the Department of Commerce or other agency of the United States government when
required by an applicable statute or regulation.

20.13 No Implied Licenses.  No licenses by one party to another are granted
      -------------------                                                  
under this Agreement by implication or estoppel.

20.14 Notices.  Any notices required by this Agreement shall be in writing,
      -------                                                              
shall specifically refer to this Agreement and shall be sent by (i) hand
delivery, (ii) registered mail, return receipt requested, (iii) overnight
delivery service, or (iv) telefacsimile transmission, and shall be sent or
delivered to the respective addresses and telefacsimile numbers set forth below,
unless subsequently changed by written notice to the other party:

      For ABI:            AASTROM Biosciences, Inc.
                          P.O. Box 376
                          Ann Arbor, MI 48106
                          Attention:  President
                          Fax:  (313) 665-0485

                                                                         Page 30

<PAGE>
 
     With copy to:       T. Knox Bell
                         Gray Cary Ware & Freidenrich
                         401 B Street, Suite 1700
                         San Diego, CA 92101
                         Fax:  (619) 236-1048

     For RPR:            RPR GENCELL
                         Cell and Gene Therapy Division
                         Rhone-Poulenc Rorer Inc.
                         500 Arcola Road
                         P.O. Box 1200
                         Collegeville, PA 19426-0107
                         Attention:  President and General Counsel
                         Fax:  (610) 454-8984 and 454-3808

Notices shall be deemed delivered upon receipt at the respective party's address
or telefacsimile number as set forth above.

20.15 Compliance with Laws.  Each party shall perform its obligations and
      --------------------                                               
conduct its affairs with respect to this Agreement in compliance with all
applicable laws and governmental regulations. If any permit, authorization,
registration, license or other governmental approval is required in connection
with the performance of this Agreement, the same shall be obtained by the party
or parties as required.

20.16 Counterparts.  This Agreement may be executed in counterparts, each of
      ------------                                                          
which shall be deemed an original and all of which shall constitute one and the
same agreement. Signatures for this Agreement may be transmitted by
telefacsimile as binding signatures of the parties.

      IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized representatives as of the date set forth above.

AASTROM Biosciences, Inc.                         Rhone-Poulenc Rorer Inc.
 
 

By:/s/ R. Douglas Armstrong                      By: /s/ Thierry Soursac
   ---------------------------                   ------------------------------
    Print Name: R. Douglas Armstrong, Ph.D.       Print Name: Thierry Soursac
    Title:      President and CEO                 Title:Senior V.P., 
                                                        Rhone-Poulenc Rorer Inc.
                                                        General Manager, RPR
                                                        Gencell

                                                                         Page 31

<PAGE>
 
                                   EXHIBIT A
                            ABI OWNED PATENT RIGHTS
- --------------------------------------------------------------------------------


U. S. Application, Ser. # ______________________, Atty. Ref #P03 33674, P03
33754-757 Apparatus and Method for Maintaining and Growing Biological Cells
Armstrong et al.
Filed:  6/6/95
- ------        

This Application is five separate applications, drawing on the same text, but
with different claims tied to the Cell Production System and its individual
components.

                                                                          Page i

<PAGE>
 
                                  EXHIBIT A-1
                  PATENT APPLICATIONS RELATED TO GENE LOADER
- --------------------------------------------------------------------------------


     Patent applications filed to date which are related to the Aastrom Gene
Loader are identified as follows:

     1.   U.S. Application #08/134,105
          Filed:  10/8/93
          Entitled: Methods of Increasing Rates of Infection by Directing Motion
          of Vectors

     2.   U.S. Application #08/353,531
          Filed:  12/9/94
          Entitled:  Methods, Compositions and Apparatus for Cell Transfection

     3.   U.S. Application (Continuation of #08/134,105)
          Filed:  6/7/95
          Entitled: Methods of Increasing Rates of Infection by Directing Motion
          of Vectors

     As specified in the definition of cCPS, the Aastrom Gene Loader is not
treated as a CPS.

                                                                         Page ii

<PAGE>
 
                                   EXHIBIT B
                         ABI IN-LICENSED PATENT RIGHTS
- --------------------------------------------------------------------------------

A.   U.S. PATENTS AND APPLICATIONS
     -----------------------------

  1. U.S. APPLICATION, SER. NO. 07/845,969, ATTY. REF. NO. 2363-043-55

     Methods, Compositions and Devices for Maintaining and Growing Human Stem
     and/or Hematopoietic Cells
     FILED:  3/4/92; (NOW ABANDONED) continuation filed 1/6/94 (SER.
     ------                                                         
     NO.08/178,433)
     NOTICE OF ALLOWANCE:  4/17/95
     --------------------         


  2. U.S. PATENT NO. 4,839,292; JOSEPH G. CREMONESE

     Cell Culture Flask Utilizing a Membrane Barrier
     ISSUED:    6/13/89
     ------            


  3. U.S. PATENT NO. 5,437,994

     Method and Compositions for the Ex Vivo Replication of Stem Cells, for the
     Optimization of Hematopoietic Progenitor Cell Cultures, and for Increasing
     the Metabolism, GM-CSF Secretion and/or IL-6 Secretion of Human Stromal
     Cells
     FILED:  7/29/91; Continuation filed 12/10/93, (Ser. No. 08/164,779), and
     ------                                                                  
     amendment on 8/1/94
     PATENT ISSUED:  8/1/95
     --------------        


  4. U.S. PATENT NO. 5,399,493

     Method for Human Gene Therapy, Including Methods and Compositions for the
     Ex Vivo Replication and Stable Genetic Transformation of Human Stem Cells,
     for the Optimization of Human Hematopoietic Progenitor Cell Cultures and
     Stable Genetic Transformation Thereof, and for Increasing the Metabolism,
     GM-CSF Secretion and/or IL-6 Secretion of Human Stromal Cells.
     PATENT ISSUED:  3/21/95
     --------------         


  5. U.S. APP., SER. NO. 07/815,513, ATTY. REF. NO. 2363-036-55
     Methods for Regulating the Specific Lineages of Cells Produced in a Human
     Hematopoietic Cell Culture, Methods for Assaying the Effect of Substances
     on Lineage-Specific Cell Production, and Cell Compositions Produced by
     these Cultures
     FILED:    1/2/92; continuation filed 11/2/94 (SER. NO. 08/334,011)
     ------                                                            

                                                                        Page iii

<PAGE>
 
                               EXHIBIT B (CONT'D)
                         ABI IN-LICENSED PATENT RIGHTS
- --------------------------------------------------------------------------------

B.   FOREIGN PATENT FILINGS
     ----------------------

  1. PCT APP. NO. PCT/US 90/03438 (U.S. APPLICATION NO. 07/366,639)
     Attorney Reference No. 2363-22-55a epc

     Methods, Compositions and Devices for Growing Cells
     FILED:    6/14/90
     ------           
     STATUS:   National Stage filed:  12/15/91 - Canada, Japan, EPO
     -------                                                      
               South Korea filed:  2/18/91 (Application No. 700181/91)


  2. PCT APP. NO. PCT/US91/09173 (U.S. APP. NOS. 07/628,343, 07/737,024
     Attorney reference no. 2363-059-55a pct
     Methods for Culturing and Transforming Human Stem Cell-Containing
     Compositions
     FILED:    6/17/91
     ------           
     STATUS:   Publication No. WO 9211355 published 6/9/92.
     -------                                               
               National Stage filed:  6/15-17/93 - Japan, Russia, EPO, S. Korea,
                      Canada, Australia


  3. PCT APP. NO. PCT/US93/01803 (U.S. APP. NO. 07/845,969)
     Attorney Reference no. 2363-072-55a cip pct
     Methods, Compositions and Devices for Maintaining and Growing Human and/or
     Hematopoietic Cells
     FILED:    3/4/93
     ------            
     STATUS:   Publication No. WO 9318132 published 9/16/93.
     -------                                                 
               National Stages filed:  9/4/94 - Australia, Canada, EPO, Japan,
               South Korea and U.S.

                                                                         Page iv



<PAGE>
 
                                                                   EXHIBIT 10.34

                            STOCK PURCHASE AGREEMENT

                                    Between

                           AASTROM BIOSCIENCES, INC.

                                      and

                            RHONE-POULENC RORER INC.


<PAGE>
 
                            STOCK PURCHASE AGREEMENT

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION> 
                                                                              Page
                                                                              ----
<C>   <S>                                                                     <C>
1.    Definitions............................................................  2

2.    Option Periods and Option Payments.....................................  6
       2.1  First Option.....................................................  6
       2.2  Second Option....................................................  6
       2.3  Third Option.....................................................  6

3.    Purchase and Sale of Shares............................................  6
       3.1  Purchase of Shares on Activation Date............................  6

4.    Purchase of Termination Shares.........................................  7
       4.1  No Exercise of Second Option.....................................  7
       4.2  No Exercise of Third Option......................................  7

5.    Purchase Price for Activation Shares...................................  7
       5.1  After A Qualifying Issuance......................................  7
       5.2  Prior to A Qualifying Issuance...................................  8
       5.3  Termination of Options...........................................  9

6.    Closing Dates; Delivery................................................  9

7.    Conditions to the Activation Closing...................................  9
       7.1  Conditions to the Obligations of the Purchaser at the Activation
             Closing.........................................................  9
       7.2  Conditions to the Obligations of the Company at the Activation
             Closing.........................................................  10

8.    Initial Public Offering Commitment.....................................  11

9.    Representations and Warranties of the Company..........................  12
       9.1  Organization and Standing; Articles and Bylaws...................  12
       9.2  Capitalization...................................................  12
       9.3  Subsidiaries.....................................................  13
       9.4  Authorization....................................................  13
       9.5  Validity of the Shares...........................................  13
       9.6  Financial Statements.............................................  13
       9.7  Material Contracts and Agreements................................  14
       9.8  Outstanding Indebtedness.........................................  14
       9.9  Officers, Directors and Shareholders.............................  14
</TABLE>
 
                                      -i-


<PAGE>

 

<TABLE> 
<C>    <S>                                                                     <C>
       9.10  Changes.........................................................  14
       9.11  Title to Properties and Assets; Liens, etc......................  16
       9.12  Patents, Trademarks, etc........................................  16
       9.13  Compliance with Other Instruments...............................  16
       9.14  Litigation, etc.................................................  17
       9.15  Tax Returns and Payments........................................  17
       9.16  Employees.......................................................  17
       9.17  Insurance.......................................................  18
       9.18  Registration Rights.............................................  18
       9.19  Governmental Consents...........................................  18
       9.20  Offering........................................................  18
       9.21  Operating Rights................................................  18
       9.22  Full Disclosure.................................................  19
       9.23  Manufacturing Rights............................................  19
       9.24  Proprietary Information.........................................  19
       9.25  Environmental Matters...........................................  19
       9.26  Employee Benefit Plan...........................................  20
       9.27  Real Property Holding Company...................................  20
       9.28  Activation Closing Date.........................................  20
       9.29  Termination Closing.............................................  21

10.    Representations and Warranties of the Purchaser.......................  21
       10.1  Legal Power.....................................................  21
       10.2  Due Execution...................................................  21
       10.3  Investment Representations......................................  21
       10.4  Activation Closing; Termination Closing and IPO Closing.........  22

11.    Covenants of the Company..............................................  22
       11.1  Use of Proceeds.................................................  22
       11.2  Access to Information...........................................  22
       11.3  Financial Statements and Other Reports..........................  22
       11.4  Consents........................................................  23
       11.5  Restrictive Agreement...........................................  23
       11.6  Notification of Registration Under the Exchange Act.............  23
       11.7  Reservation of Shares...........................................  24
       11.8  Repurchase, Redemption and Other Actions........................  24
       11.9  Listing of Common Stock.........................................  24
       11.10 Michigan Business Corporation Act...............................  24
       11.11 Stockholders' Rights............................................  25
       11.12 Removal of Restrictive Legend...................................  25
       11.13 Board Observer..................................................  25

12.    Stock Registration and Information Rights.............................  26

13.    Activation Closing....................................................  26
       13.1   Opinion of the Company's Counsel...............................  26
</TABLE>


                                     -ii-


<PAGE>
 

<TABLE> 
<C>    <S>                                                                     <C> 
       13.2   Receipt of Purchase Price......................................  26
       13.3   Implementing Agreements........................................  26
       13.4   Delivery of Stock Certificates and Other Documents.............  26

14.    Termination Closing...................................................  26
       14.1   Opinion of the Company's Counsel...............................  26
       14.2   Credit for Purchase Price......................................  27
       14.3   Delivery of Stock Certificates and Other Documents.............  27

15.    IPO Closing                                                             27
       15.1   Opinion of the Company's Counsel...............................  27
       15.2   Receipt of Purchase Price......................................  27
       15.3   Delivery of Stock Certificates and Other Documents.............  27

16.    Miscellaneous.........................................................  27
       16.1   Governing Law..................................................  27
       16.2   Survival.......................................................  27
       16.3   Successors and Assigns.........................................  28
       16.4   Entire Agreement...............................................  28
       16.5   Separability...................................................  28
       16.6   Amendment and Waiver...........................................  28
       16.7   Delays or Omissions............................................  28
       16.8   Notices........................................................  29
       16.9   Finder's Fees..................................................  29
       16.10  Fees and Expenses..............................................  30
       16.11  Information Confidential.......................................  30
       16.12  Titles and Subtitles...........................................  30
       16.13  Counterparts...................................................  30
       16.14  Arbitration....................................................  30

EXHIBIT A
       SCHEDULE OF EXCEPTIONS................................................  32

EXHIBIT B
       FORM OF OPINION OF COUNSEL
       ACTIVATION CLOSING....................................................   4

EXHIBIT C
       FORM OF OPINION OF COUNSEL
       TERMINATION CLOSING...................................................   3

EXHIBIT D
       SUMMARY OF SERIES E PREFERRED STOCK...................................   3
</TABLE>


                                     -iii-


<PAGE>
 
                            STOCK PURCHASE AGREEMENT


     This Stock Purchase Agreement (this "Agreement") is made as of September
15, 1995, by and between Aastrom Biosciences, Inc., a Michigan corporation (the
"Company"), and Rhone-Poulenc Rorer Inc., a Delaware corporation (the
"Purchaser"), with respect to the factual recitals set forth below.

     Certain terms used in this Agreement are defined in Section 1 of this
Agreement.

                                    RECITALS
                                    --------

     A.     The Company and the Purchaser have entered into a Governance
Agreement dated as of September 15, 1995 (the "Governance Agreement"), setting
forth, among other things, the terms and conditions of a preliminary research
collaboration between the parties concerning the development and sale of the CPS
for Lymphoid Cell Applications.

     B.     As specified in the Governance Agreement, certain option payments
paid by the Purchaser to the Company in connection with the parties'
collaboration shall be applied toward the purchase by the Purchaser of shares of
the capital stock of the Company.

     C.     As specified in the Governance Agreement, the Purchaser has the
option to purchase $12.5 million of the capital stock of the Company, including
an obligation to purchase $9.0 million of the capital stock of the Company if it
exercises the Third Option.

     D.     As specified in the Governance Agreement, if the Purchaser exercises
the Third Option, the Purchaser is also obligated under certain circumstances to
purchase $5.0 million of the capital stock of the Company in the event of a
Qualifying IPO.

     E.     The Company has previously furnished to the Purchaser (i) a copy of
the Memorandum, (ii) a copy of the Articles, and (iii) a copy of the Bylaws
(collectively, the "Series D Documents").

     F.     As specified in the Governance Agreement, the Company and the
Purchaser have negotiated, drafted and executed the following additional
implementing agreements of even date herewith (hereinafter collectively called,
together with this Agreement, the "Implementing Agreements"):

                                       1

<PAGE>
 
                    a.  Governance Agreement;
                    b.  Supply Agreement;
                    c.  License Agreement;
                    d.  Arbitration Agreement; and
                    e.  Research and Development Collaboration Agreement.


          1.  Definitions.
              ----------- 

          "Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.

          "Activation Closing" means the closing for the purchase and sale of
the Activation Shares, as contemplated by Section 6.1 hereof.

          "Activation Closing Date" means the date of the Activation
Closing, as contemplated by Section 6.1 hereof.

          "Activation Date" means the date on which the Purchaser delivers the
Third Option Event Notice in accordance with the provisions of the Governance
Agreement.

          "Activation Shares" means the shares of the Company's capital stock to
be purchased by Purchaser pursuant to Section 3.1 hereof.

          "Arbitration Agreement" means the agreement of that title of even date
herewith between the Purchaser and the Company.

          "Articles" means the Company's Amended and Restated Articles of
Incorporation.

          "Bylaws" means the Company's Amended and Restated Bylaws.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Commission" means the United States Securities and Exchange
Commission.

          "Common Stock" means shares of Common Stock of the Company, no
par value per share.

          "Company Benefit Plan" means any 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 ERISA Affiliates or with respect to which the Company or any

                                       2

<PAGE>
 
ERISA Affiliates could incur liability under Sections 4069, 4201 or 4212(c) or
ERISA.

          "Conversion Shares" means the shares of Common Stock or other
securities which are issuable upon conversion of any Preferred Stock which may
be purchased hereunder.

          "CPS" has the meaning provided in the License Agreement.

          "Environmental Laws" means any federal, state, local or foreign law,
regulation, agency interpretation, policy, order, decree, judgment or judicial
opinion relating to (x) the manufacture, transport, use, treatment, storage,
recycling, disposal, release or threatened release of Hazardous Substances, or
(y) 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.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, together with the rules and regulations promulgated thereunder.

          "ERISA Affiliates" means any trade or business (whether or not
incorporated) that is part of the same controlling 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 Exchange Act of 1934, as
amended.

          "Financial Statements" means the financial statements of the
Company as specified in Section 9.6 hereof.

          "First Option Payment" has the meaning provided in the Governance
Agreement.

          "First Option Period" has the meaning provided in the Governance
Agreement.

          "Governance Agreement" means the Governance Agreement, dated as of the
date hereof, setting forth, among other things, the terms and conditions of a
preliminary research collaboration between the parties concerning the
development and sale of the CPS for Lymphoid Cell Applications.

                                       3

<PAGE>
 
          "Hazardous Substance" 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. 9601 et seq.; the Resource Conservation and
                                      -------                               
Recovery Act, 42 U.S.C. 6901 et seq.; the Federal Water Pollution Control Act,
                             -------                                          
33 U.S.C. 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. 2601 
et seq.; and the Clean Air Act, 42 U.S.C. 7401 et seq.; each as amended, (b) any
- -------                                        -------    
petroleum products or by-products, asbestos containing material, polychlorinated
biphenyl, 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.

          "Implementing Agreements" has the meaning provided in Recital F.

          "IPO" shall mean the first underwritten offering by the Company to the
public of Common Stock, registered under the Act.

          "IPO Closing" means the closing for the purchase and sale of the
IPO Shares, as contemplated by Section 8.5 hereof.

          "IPO Shares" means the shares of Common Stock having an aggregate
value of $5.0 million which may be purchased by the Purchaser pursuant to
Section 8 hereof.

          "Licenses" means the operating authority, licenses, franchises,
permits, certificates, consents, rights and privileges of the Company
contemplated by Section 9.21 hereof.

          "Lymphoid Cell Applications" has the meaning provided in the
Governance Agreement.

          "Memorandum" means the Company's Private Placement Memorandum, dated
April 5, 1995, relating to an offering of the Company's Series D Preferred
Stock, which sets forth relevant information concerning the Company.

          "Non-Coupon Preferred Stock" means any preferred stock of the Company
that carries no fixed dividend and is convertible by the holder into shares of
Common Stock.

          "Preferred Stock" means shares of Series E Preferred Stock of the
Company, no par value per share, having the rights, privileges and preferences
set forth on Exhibit D to this Agreement.

                                       4

<PAGE>
 
          "Premium" means the premium specified in Section 8.2 of this
Agreement.

          "Private Placement" means an offering and sale of the Company's
securities in a transaction not involving a Public Offering.

          "Public Offering" means a public offering of the Company's securities
registered on a registration statement under the Act.

          "Purchaser Observer" has the meaning provided in Section 11.13
hereof.

          "Qualifying IPO" means an IPO in which the proceeds to the Company
(net of offering expenses and underwriting discounts and commissions) are at
least $10.0 million (excluding any IPO Shares purchased by the Purchaser).

          "Qualifying Issuance" means a Qualifying IPO or a Qualifying
Private Placement, as the case may be.

          "Qualifying Private Placement" means a Private Placement after the
date hereof but prior to the first anniversary of the Activation Date, involving
the issuance by the Company of Common Stock or shares of the Company's Non-
Coupon Preferred Stock solely for cash, and in which the gross proceeds to the
Company are not less than $5 million, at least half of which comes from new
investors.  Qualifying Private Placement shall include a Private Placement that
has multiple closings for the sale of shares of the same securities at the same
price within any six-month period.  For the avoidance of doubt, a transaction or
series of related transactions involving the issuance of Common Stock or shares
of the Company's Non-Coupon Preferred Stock shall not be deemed to constitute a
Qualifying Private Placement if, as part of such transaction or series of
transactions, the purchaser receives anything of value (including, without
limitation, any rights with respect to the Company's intellectual property or
the manufacturing, marketing or sale of the Company's products) other than the
Common Stock or Non-Coupon Preferred Stock being sold in such transaction(s).

          "Second Option Payment" has the meaning provided in the
Governance Agreement.

          "Second Option Period" has the meaning provided in the Governance
Agreement.

          "Series D Documents" means the Memorandum, the Articles and the
Bylaws.

          "Shares" means the shares of the Company's capital stock to be
purchased by Purchaser hereunder.

                                       5

<PAGE>
 
          "Termination Closing" means the closing for the purchase and sale of
the Termination Shares, as contemplated by Section 6.2 hereof.

          "Termination Shares" means the shares of the Company's capital stock
to be purchased by Purchaser pursuant to Section 4.1 hereof.

          "Third Option" has the meaning provided in the Governance
Agreement.

          "USRPHC" means United States real property holding corporation.

          "1934 Act Registration Statement" means a registration statement filed
pursuant to the requirements of Section 12 of the Exchange Act or pursuant to
any equivalent provision of any similar federal law then in effect.

      2.  Option Periods and Option Payments.
          ---------------------------------- 

          2.1  First Option.  As specified in the Governance Agreement, the
               ------------                                                
Purchaser has certain rights during a First Option Period, for which the
Purchaser has paid to the Company a $1.5 million First Option Payment.

          2.2  Second Option.  As specified in the Governance Agreement, the
               -------------                                                
Purchaser has the option to extend the Governance Agreement for a Second Option
Period if the Purchaser pays to the Company a $2.0 million Second Option
Payment.

          2.3  Third Option.  As specified in the Governance Agreement, if the
               ------------                                                   
Purchaser pays the Second Option Payment and exercises its Third Option during
the Second Option Period, the Supply Agreement and the Research and Development
Collaboration Agreement shall become activated, and the obligations of the
parties as of and following the Activation Date under this Agreement shall
become irrevocable.

      3.  Purchase and Sale of Shares.
          --------------------------- 

          3.1  Purchase of Shares on Activation Date.  In the event the
               -------------------------------------                   
Purchaser exercises the Third Option, on the Activation Date, this Agreement
shall become effective in all respects and the Purchaser shall purchase from the
Company, and the Company shall issue and sell to the Purchaser, such number of
Shares (the "Activation Shares") having an aggregate value equal to $12.5
million, at a purchase price per share determined in accordance with Section 5
hereof.  The purchase price for the Activation Shares shall be paid as follows:

               3.1.1  On the Activation Closing Date, the Purchaser shall pay to
the Company in immediately available funds the amount of $9.0 million, and

                                       6

<PAGE>
 
the Company shall credit toward the purchase of the Activation Shares, the
amounts of the First Option Payment ($1.5 million) and the Second Option Payment
($2.0 million), for an aggregate of $12.5 million.

               3.1.2  On the Activation Date, if the Company has previously
closed its IPO, the Purchaser shall also purchase the IPO Shares, subject to the
provisions of Section 8 hereof.

          3.2  Class of Capital Stock.  The Shares to be issued and
               ----------------------                              
sold to the Purchaser pursuant to this Agreement shall be (i) Preferred Stock if
the issuance is prior to the closing of the Company's IPO, or (ii) Common Stock
if the issuance is after the closing of the Company's IPO.

          3.3  Voting Rights.  Once the final purchase price for the Activation
               -------------                                        
Shares is determined pursuant to Section 5 hereof, the Common Stock equivalent
of the Activation Shares can be determined, and each such Common Stock
equivalent shall have one vote. From the Activation Closing Date until the final
purchase price is determined, the Activation Shares shall have voting rights
equal to 1,500,000 shares of Common Stock. The voting rights for the Termination
Shares shall be one vote per share commencing with the Termination Closing.

      4.  Purchase of Termination Shares.
          ------------------------------ 

          4.1  No Exercise of Second Option.  If the Purchaser has not exercised
               ----------------------------                                     
the Second Option within the time frames contemplated by the Governance
Agreement, then the Purchaser shall, at the Termination Closing, purchase from
the Company, and the Company shall issue and sell to the Purchaser, 88,235
Shares having an aggregate value of $1.5 million, at a purchase price per Share
of $17.00.

          4.2  No Exercise of Third Option.  If the Purchaser has exercised the
               ---------------------------                                     
Second Option, but not the Third Option, within the time frames contemplated by
the Governance Agreement, then the Company shall, at the Termination Closing,
issue and sell to the Purchaser 205,882 Shares having an aggregate value of $3.5
million, at a purchase price per Share of $17.00.  The shares purchased pursuant
to Section 4.1(a) or 4.1(b) are referred to herein as the "Termination Shares."

      5.  Purchase Price for Activation Shares.  The purchase price per Share
          ------------------------------------                         
for the Activation Shares shall be determined as follows:

          5.1  After A Qualifying Issuance.  In the event that the Activation
               ---------------------------                                   
Date shall occur after a Qualifying Issuance, then the purchase price per
Activation Share shall be the higher of (i) the price per share in the most
recent Qualifying Private Placement (on a common stock conversion equivalent
basis),

                                       7

<PAGE>
 
plus a premium of 30% (but subject to adjustment pursuant to Section 5.2(a) or
(b)), or (ii) the average of the closing sales price per share of Common Stock
for the fifteen trading days immediately preceding the Activation Date, but not
below the purchase price per share in the Qualifying IPO, plus a premium of 30%;
In either such event, the Series E Conversion Price shall initially be the
purchase price per Activation Share.  If the Qualifying Issuance under this
Section 5.1 shall have been a Qualifying Private Placement and, the Company has
a Qualifying IPO within four months after the Activation Date, the Series E
Conversion Price shall be adjusted to the purchase price per share in the
Qualifying IPO plus a premium of 30%.

          5.2  Prior to A Qualifying Issuance.  In the event that the Activation
               ------------------------------                                   
Date shall occur prior to a Qualifying Issuance, then on the Activation Closing
Date, the Purchaser shall purchase from the Company, and the Company shall issue
and sell to the Purchaser, 1,000,000 Activation Shares, at a nominal purchase
price of $12.50 per Activation Share.   The Series E Conversion Price shall
initially be $12.50, and shall be subject to adjustment as follows:

               (a) If the Company has a Qualifying IPO within four months
following the Activation Date, then the Series E Conversion Price shall be the
price per share in the Qualifying IPO, plus a premium of 30%.

               (b) If the Company has a Qualifying Private Placement (and does
not have a Qualifying IPO) within four months following the Activation Date,
then the Series E Conversion Price shall be the price per share in the
Qualifying Private Placement (on a common stock conversion equivalent basis),
plus a premium of 25%.

               (c) If the Company has either a Qualifying IPO or a Qualifying
Private Placement more than four months, but less than twelve months, after the
Activation Date, then the Series E Conversion Price shall be the price per share
in the Qualifying IPO or Qualifying Private Placement (on a common stock
conversion equivalent basis), as the case may be, plus a declining premium, as
follows:


<TABLE>
<CAPTION>
                   Month            Premium
                  -------           --------
                  <S>               <C>
                     5                 23
                     6                 21
                     7                 19
                     8                 17
                     9                 15
                    10                 13
                    11                 11
                    12                 10
</TABLE>


                                       8

<PAGE>
 
                        (d)  If the Company has not had a Qualifying Issuance
prior to the first anniversary of the Activation Date, then the Series E
Conversion Price shall be $7.50.

              5.3  Termination of Options.  In order to clarify the
                   ----------------------                  
understanding of the parties hereto, the Purchaser acknowledges that if the
Purchaser does not exercise the Third Option and purchase an aggregate of $12.5
million of Shares, the Purchaser shall nevertheless be obligated to purchase the
Termination Shares as provided in Section 4, and the purchase price per
Termination Share shall be $17.00. In such event, the Company shall credit
toward the purchase of such Termination Shares the amounts of the First Option
Payment ($1.5 million) and the Second Option Payment ($2.0 million), if
applicable.

          6.  Closing Dates; Delivery.  The closings of the sale and purchase of
              -----------------------                                           
the Shares under this Agreement shall occur as follows:

              6.1  The closing for the purchase and sale of the Activation
Shares (the "Activation Closing") shall occur on the Activation Date, or such
other date as shall be agreed upon by the parties (the "Activation Closing
Date"), by means of the parties delivering all necessary signed documents and by
the Purchaser paying the full purchase price for the Activation Shares by wire
transfer and credits of the First Option Payment and the Second Option Payment,
at the Company's offices in Ann Arbor, Michigan. At the Activation Closing, the
parties shall deliver the documents, instruments and certificates specified in
Section 13 hereof.

              6.2  The closing for the purchase and sale of the Termination
Shares (the "Termination Closing") shall occur within ten days following any
termination or expiration of the Purchaser's options under the Governance
Agreement without the options being extended or exercised. At the Termination
Closing, the parties shall deliver the documents, instruments and certificates
specified in Section 14 hereof.

              6.3  The closing for the purchase of the IPO Shares (the "IPO
Closing") shall occur as specified in Section 8.5 hereof.

          7.  Conditions to the Activation Closing.
              ------------------------------------ 

              7.1  Conditions to the Obligations of the Purchaser at the
                   -----------------------------------------------------
Activation Closing.  The obligation of the Purchaser to purchase the Activation
- ------------------                                                             
Shares at the Activation Closing is subject to the satisfaction on or prior to
the Activation Closing Date of the following conditions, any of which may be
waived by the Purchaser.

                   7.1.1  The Purchaser shall have received the opinion of
counsel contemplated by Section 13.1.

                                       9

<PAGE>
 
                   7.1.2  The representations and warranties of the Company
contained herein in Sections 9.1, 9.4, 9.5, 9.13, 9.19 and 9.20 shall be true
and correct in all material respects at and as of the Activation Closing Date.

                   7.1.3  All of the covenants and agreements of the Company
contained in this Agreement and required to be performed on or prior to the
Activation Closing Date shall have been performed in a manner reasonably
satisfactory in all respects to the Purchaser.

                   7.1.4  No action or proceeding before any court or
governmental body shall be pending or threatened wherein an unfavorable
judgment, decree or order will prevent the carrying out of this Agreement or the
other Implementing Agreements or of any of the transactions contemplated hereby
or thereby, declare unlawful the transactions contemplated by this Agreement or
the other Implementing Agreements, or cause such transactions to be rescinded.

                   7.1.5  All consents required to enable the Company to observe
and comply with all of its obligations contemplated hereby shall have been
obtained and all "blue sky" filings necessary at or prior to the Activation
Closing in connection with the issuance and sale of the Activation Shares shall
have been made.

                   7.1.6  The Company shall have delivered the documents
described in Section 13.4.

                   7.1.7  All corporate, shareholder and other proceedings taken
or to be taken by the Company in connection with the transactions contemplated
hereby to be consummated at or prior to the Activation Closing, and all
documents incident thereto, shall be reasonably satisfactory in form and
substance to the Purchaser.

                   7.1.8  The other Implementing Agreements shall be in full
force and effect.

              7.2  Conditions to the Obligations of the Company at the
                   ---------------------------------------------------     
Activation Closing. The obligation of the Company to issue and sell the
- ------------------
Activation Shares at the Activation Closing is subject to the satisfaction on or
prior to the Activation Closing Date of the following conditions, any of which
may be waived by the Company:

                   7.2.1  All of the representations and warranties of the
Purchaser contained herein shall be true and correct in all material respects at
and as of the Activation Closing Date with the same effect as if made on the
Activation Closing Date.

                                       10

<PAGE>
 
                   7.2.2  All of the covenants and agreements of the Purchaser
contained in this Agreement and required to be performed on or prior to the
Activation Closing Date shall have been performed in a manner reasonably
satisfactory in all respects to the Company.

                   7.2.3  No action or proceeding before any court or
governmental body shall be pending or threatened wherein an unfavorable
judgment, decree or order will or could prevent the carrying out of this
Agreement or the other Implementing Agreements or of any of the transactions
contemplated hereby, declare unlawful the transactions contemplated by this
Agreement or the other Implementing Agreements, or cause such transactions to be
rescinded.

                   7.2.4  All consents required to enable the Purchaser to
observe and comply with all of its obligations contemplated hereby shall have
been obtained.

                   7.2.5  The other Implementing Agreements shall be in full
force and effect.


      8.  Initial Public Offering Commitment.
          ---------------------------------- 

          8.1  In the event that the Company closes a Qualifying IPO prior to
the Activation Date, the Purchaser shall have the option, but shall not be
obligated, to participate in the Qualifying IPO and purchase an additional
number of Shares having an aggregate value of $5.0 million, at a purchase price
per Share equal to the price per share of Common Stock in the Qualifying IPO.
The Purchaser may also elect to delay purchasing the IPO Shares until the
Activation Date.

          8.2  If the Purchaser has elected to delay its participation in the
Qualifying IPO until the Activation Date, then on the Activation Date, the
Purchaser shall purchase the IPO Shares at a purchase price per Share equal to
the higher of (i) the price per share of Common Stock in the Qualifying IPO,
plus the Premium, if applicable, or (ii) the average of the closing sales price
per share of Common Stock for the fifteen trading days immediately preceding the
Activation Date, plus the Premium, if applicable. The Premium shall be
calculated by adding 5% (on a non-compounded basis) to the purchase price for
each full month after November 9, 1996, until the purchase price is paid, up to
a maximum Premium of 20%.

          8.3  If the Purchaser does not exercise the Third Option, the
Purchaser shall have no obligation to purchase the IPO Shares.

          8.4  If the Purchaser exercises the Third Option, and the Company
subsequently has a Qualifying IPO, then the Purchaser shall be obligated to
purchase the IPO Shares (unless the Purchaser has previously purchased IPO

                                       11

<PAGE>
 
Shares pursuant to Section 8.1 above), at the time specified in Section 8.5
below, at a purchase price per Share equal to the price per share of Common
Stock in the Qualifying IPO; provided, however, that the Purchaser shall have no
obligation to purchase the IPO Shares if the Supply Agreement shall have been
terminated more than two years prior to the Qualifying IPO.

          8.5  The IPO Closing shall occur as follows:

               (a) If the Qualifying IPO occurs before the Activation Date, and
the Purchaser elects to purchase the IPO Shares pursuant to Section 8.1 hereof,
then the purchase and IPO Closing shall occur simultaneously with the closing of
the Qualifying IPO.

               (b) If the Qualifying IPO occurs before the Activation Date, and
the Purchaser did not elect for an early purchase at the time of the IPO
pursuant to Section 8.1, then the purchase and IPO Closing shall occur on the
Activation Date, simultaneous with the Activation Closing.

               (c) If the Qualifying IPO occurs after the Activation Date, then
the purchase and IPO Closing shall occur simultaneous with the Company closing
its Qualifying IPO.

      9.  Representations and Warranties of the Company.
          --------------------------------------------- 

          The Company hereby represents and warrants to the Purchaser as of the
date hereof, the following, subject to the exceptions set forth on the Schedule
of Exceptions attached hereto as Exhibit A, or, as provided in particular
representations and warranties below, subject to the Memorandum.  At the
Activation Closing, the Company shall make the representations and warranties
contained in Sections 9.1, 9.4, 9.5, 9.13, 9.19 and 9.20.

          9.1  Organization and Standing; Articles and Bylaws.  The Company
               ----------------------------------------------              
is a corporation duly organized, validly existing, and in good standing under
the laws of the State of Michigan, and has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as presently conducted and to enter into and perform this Agreement and
the other Implementing Agreements.  The nature of the Company's activities and
its properties (both owned and leased) do not make it necessary for the Company
to qualify to do business in any other jurisdiction, except where the failure to
so qualify would not have a material adverse effect upon the business and
operations of the Company.

          9.2  Capitalization.  As of the date of this Agreement, the
               --------------                                        
authorized capital stock of the Company is as described in Schedule 9.2 of
Exhibit A to this Agreement and consists of (a) 17,000,000 shares of Common
Stock, and (b) 8,540,000 shares of preferred stock.  All issued and outstanding

                                       12

<PAGE>
 
shares of the Company's capital stock have been duly authorized and validly
issued and are fully paid and nonassessable.  Except as set forth in the
Schedule of Exceptions, there are no outstanding rights of first refusal,
preemptive rights or other rights, options, warrants, conversion rights, or
other agreements either directly or indirectly providing for the purchase or
acquisition from the Company of any shares of its capital stock.  All of the
outstanding shares of capital stock of the Company have been duly and validly
issued in compliance with federal and state securities laws.

          9.3  Subsidiaries.  The Company has no subsidiaries.  The Company
               ------------                                                
does not presently own or control, directly or indirectly, any equity interest
in any corporation, association or business entity.  The Company is not,
directly or indirectly, a participant in any joint venture or partnership.

          9.4  Authorization.  All corporate action on the part of the
               -------------                                          
Company, its officers, directors and shareholders necessary for the
authorization, execution and delivery of this Agreement, and the performance of
the Company's obligations under this Agreement, has been taken.  At or prior to
the Activation Closing, or the Termination Closing, as applicable, all corporate
action on the part of the Company, its officers, directors and shareholders
necessary for the authorization, issuance, sale and delivery of the Shares (and
the Conversion Shares) will have been taken. This Agreement, when executed and
delivered by the Company and the Purchaser, shall constitute the valid and
legally binding obligation of the Company, enforceable in accordance with its
terms, subject to laws of general application relating to bankruptcy, insolvency
and the relief of debtors.

          9.5  Validity of the Shares.  The sale of the Shares (including any
               ----------------------                                        
Conversion Shares) is not and will not be subject to any preemptive rights or
rights of first refusal that have not been waived.  When issued, sold and
delivered in compliance with the provisions of this Agreement, the Shares will
be validly issued, fully paid and nonassessable, and will be free of any liens,
encumbrances or, except as set forth in the immediately following sentence,
restrictions.  The Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.  The voting rights, designations,
preferences, limitations and special rights of the Shares (including the
Conversion Shares), when issued, shall be as fully set forth in the Articles and
Exhibit D attached hereto.  The Company has reserved a sufficient number of
shares of its Common Stock (as hereinafter defined) for issuance upon conversion
of any Preferred Stock issued and sold hereunder and such shares of Common
Stock, when issued in accordance with the terms of such Preferred Stock, will be
duly authorized, validly issued, fully paid, non-assessable and free and clear
of all encumbrances, liens or restrictions, except for restrictions on transfer
imposed by applicable securities laws.

          9.6  Financial Statements.  The Company has delivered to the Purchaser
               --------------------                                   
(a) its audited balance sheet as at June 30, 1995, together with audited

                                       13

<PAGE>
 
statements of income, shareholders' equity, and cash flows for the fiscal year
then ended, and (b) its unaudited balance sheet as of July 31, 1995 and its
unaudited income statement for the one (1) month then ended (collectively, the
"Financial Statements").  The Financial Statements, together with the notes
thereto, are complete and correct in all material respects, have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated, except as disclosed therein,
and present fairly the financial condition and position of the Company at the
dates shown and the results of operations of the Company for the periods therein
specified; provided, however, that the unaudited financial statements are
subject to normal year-end adjustments, which are not expected to be material,
and do not contain footnotes required under generally accepted accounting
principles.

          9.7  Material Contracts and Agreements.  As used herein, the term
               ---------------------------------                           
"material" shall mean an obligation which will cause the Company to incur
expenses greater than, or which has a value greater than, $50,000.  Except as
set forth in the Memorandum and the Schedule of Exceptions, the Company does not
have any material contract, agreement, lease, or other commitment, written or
oral, absolute or contingent.  All material contracts, agreements, leases and
other commitments to which the Company is a party are valid, binding, and in
full force and effect in all material respects and, to the best of the Company's
knowledge, without any material breach by any party thereto.

          9.8  Outstanding Indebtedness.  The Company does not have any
               ------------------------                                
indebtedness for borrowed money, or other liabilities (fixed or contingent),
which the Company has directly or indirectly created, incurred, assumed or
guaranteed, or with respect to which the Company has otherwise become directly
or indirectly liable, that is not disclosed in the Financial Statements, the
Memorandum, or the Exhibits attached to this Agreement, other than indebtedness
incurred in the ordinary course of business since July 31, 1995 which in the
aggregate does not exceed $50,000.

          9.9  Officers, Directors and Shareholders.  Set forth in the
               ------------------------------------                   
Memorandum is a list of officers, directors and major shareholders of the
Company as of the date of this Agreement, which list is full, complete and
correct.  The Company has also delivered to the Purchaser a complete list of the
Company's shareholders as of the date hereof.

          9.10  Changes.  Except as set forth in the Schedule of Exceptions
                -------                                                    
or the Memorandum, since July 31, 1995 until the date of this Agreement, to the
best of the Company's knowledge there has not been:

                (a) Any change in the assets, liabilities, financial condition,
or operations of the Company from that reflected in the Financial Statements,
other than changes in the ordinary course of business, none of which 

                                       14

<PAGE>
 
individually or in the aggregate has had a material adverse effect on such
assets, liabilities, financial condition or operations of the Company;

          (b) Any change, except in the ordinary course of business, in the
contingent obligations of the Company by way of guaranty, endorsement,
indemnity, warranty or otherwise;

          (c) Any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;

          (d) Any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;

          (e) Any direct or indirect loans made by the Company to any employee,
officer, director or shareholder of the Company, other than travel advances made
in the ordinary course of business;

          (f) Any increase in the compensation of any employee, officer or
director of the Company, other than for ordinary course of business annual
compensation review adjustments;

          (g) Any declaration or payment of any dividend or other distribution
of the assets of the Company;

          (h) Any material labor organization activity;

          (i) Any material debt, obligation or liability incurred, assumed or
guaranteed by the Company, except current liabilities incurred in the ordinary
course of business;

          (j) Any change in the outstanding securities of the Company, other
than the issuance of Common Stock upon exercise of outstanding stock options;

          (k) Any capital expenditure or commitment by the Company in excess of
$50,000 individually or $200,000 in the aggregate;

          (l) Any change in any method of accounting or accounting practice or
policy used by the Company, other than such changes required by GAAP;

          (m) Any failure by the Company to pay creditors aggregate amounts in
excess of $100,000 owed to such creditors when due;

                                       15

<PAGE>
 
          (n) Any disclosure of any secret or confidential intellectual property
(except by way of issuance of any patent) or any lapse or abandonment of 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;

          (o) Any agreement by or on behalf of the Company, whether in writing
or otherwise, to take any of the actions specified in this Section 9.10;

          (p) To the best of the Company's knowledge, any other event or
condition (or events or conditions) of any character which, either individually
or cumulatively, has materially and adversely affected the business, affairs,
prospects, conditions, operations, properties or assets of the Company.

    9.11  Title to Properties and Assets; Liens, etc..  The Company has
          -------------------------------------------                  
good and marketable title to its properties and assets, including the properties
and assets reflected in the Financial Statements, and good title to all its
leasehold estates, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (a) as reflected in the Financial Statements
or in the notes thereto, (b) liens resulting from taxes which have not yet
become delinquent, or (c) minor liens, encumbrances or defects of title which do
not, individually or in the aggregate, materially detract from the value of the
property subject thereto or materially impair the operations of the Company.
With respect to property it leases, to the best of the Company's knowledge, the
Company is in compliance with such leases in all material respects.

    9.12  Patents, Trademarks, etc..  The Company owns and possesses or
          -------------------------                                    
is licensed under all patents, patent applications, licenses, trademarks,
service marks, trade names, inventions, processes, formulae, trade secrets,
franchises, copyrights and other proprietary rights necessary for the operation
of its business as now conducted and as proposed to be conducted, with no known
infringement of or conflict with the rights of others.  To the best of the
Company's knowledge, such ownership, possession or license is exclusive and not
subject to termination without the Company's consent.  The Company is not aware
of any third party that is infringing or violating any of its patents, licenses,
trademarks, service marks, trade names, inventions, processes, formulae, trade
secrets, franchises, copyrights or other proprietary rights.

    9.13  Compliance with Other Instruments.  The Company is not in violation of
          ---------------------------------                        
any term of its Articles or Bylaws or, to the best of the Company's knowledge,
any material mortgage, indenture, contract, agreement, instrument, judgment,
decree, order, statute, rule or regulation applicable to the Company, except for
violations which, in the aggregate, are not material. The execution, delivery
and performance of and compliance with this Agreement and the other Implementing
Agreements, and the issuance and sale of the Shares pursuant

                                       16

<PAGE>
 
hereto, will not with or without the giving of notice or the passage of time, or
both, result in any such violation, or be in conflict with or constitute a
default under any such term, result in the creation of any mortgage, pledge,
lien, encumbrance or charge upon any of the properties or assets of the Company
or cause the Company to lose the benefit of any right or privilege it presently
enjoys.

          9.14  Litigation, etc..  There are no actions, suits, proceedings,
                ----------------                                            
orders, claims or investigations before any federal, state, municipal, foreign
or other governmental department, commission, board, bureau, agency or
instrumentality pending or, to the best of the Company's knowledge, threatened
against or affecting the Company or its assets or business (or any basis
therefor known to the Company), which question the validity of this Agreement or
the other Implementing Agreements or any action taken or to be taken in
connection with this Agreement or the other Implementing Agreements or which,
either individually or in the aggregate, might result in a material adverse
change in the business, prospects, conditions, affairs or operations of the
Company or in any of its properties or assets, or in any material impairment of
the right or ability of the Company to carry on its business as now conducted or
as proposed to be conducted, or in any material liability on the part of the
Company.  The foregoing includes, without limitation, actions pending or
threatened (or any basis therefor known to the Company) involving the prior
employment of any of the Company's employees or former employees (other than as
described in the Schedule of Exceptions), their use in connection with the
Company's business of any information or techniques allegedly proprietary to any
of their former employers, or their obligations under any agreements with prior
employers.

          9.15  Tax Returns and Payments.  The Company has accurately
                ------------------------                             
prepared and timely filed all tax returns (federal, state and local) required to
be filed by it.  All taxes shown to be due and payable on said returns, any
assessments, fees or charges and all other taxes due and payable by the Company
on or before the date hereof, have been paid or will be paid prior to the time
they become delinquent.  No deficiency assessment or proposed adjustment of the
Company's federal, state or local taxes is pending and the Company has no
knowledge of any proposed liability for any tax to be imposed upon its
properties or assets for which there is not an adequate reserve reflected in the
Financial Statements.

          9.16  Employees.  To the best of the Company's knowledge, no
                ---------                                             
employee of the Company is obligated under any contract (including licenses,
covenants, or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any Court or administrative agency that would
conflict with such employee's obligation to use his or her best efforts to
promote the interests of the Company or that would conflict with the Company's
business as conducted or as proposed to be conducted.  Except as set forth in
the Schedule of Exceptions, to the best of the Company's knowledge, no employee
of the Company is in violation of any term of any employment contract,
proprietary information and inventions agreement, non-competition agreement or
any other

                                       17

<PAGE>
 
contract or agreement relating to the relationship of any such employee with the
Company or any previous employer.  The Company has no collective bargaining
agreements with any of its employees and, to the best of the Company's
knowledge, there is no labor union organizing activity pending or threatened
with respect to the Company.  Except as set forth on the Schedule of Exceptions
or the Memorandum, there is no pension, health, profit sharing, bonus, stock
purchase, stock option, hospitalization, insurance, severance or any other
employee benefit or welfare benefit plan with respect to any officer or employee
of the Company.

          9.17  Insurance.  The Company maintains insurance coverage of the
                ---------                                                  
types and in the amounts which the Company reasonably believes is adequate for
its business as of the date of this Agreement.

          9.18  Registration Rights.  No person has any right to cause the
                -------------------                                       
Company to effect registration under the Act of any shares of Common Stock or
other securities of the Company, other than pursuant to the Amended and Restated
Investors' Rights Agreement.

          9.19  Governmental Consents.  All consents, approvals, orders or
                ---------------------                                     
authorizations of, or registrations, qualifications, designations, declarations
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement or the
other Implementing Agreements, the offer, sale or issuance of the Shares, or the
consummation of any other transaction contemplated by this Agreement, have been
obtained, or will be obtained prior to the applicable closing, excepting only
for routine blue sky law notices to be filed with certain state and federal
securities commissions after the applicable closing, which notices or filings
will be filed on a timely basis.

          9.20  Offering.  Assuming the accuracy of the representations and
                --------                                                   
warranties of the Purchaser contained in Section 10 hereof, the offer, issuance
and sale of the Shares (including any Conversion Shares) are and will be exempt
from the registration and prospectus delivery requirements of the Act and are
exempt from registration and qualification under the registration, permit or
qualification requirements of all applicable state securities laws.

          9.21  Operating Rights.  The Company has all operating authority,
                ----------------                                           
licenses, franchises, permits, certificates, consents, rights and privileges
(collectively "Licenses") as are necessary or appropriate to the operation of
its business as now conducted and as proposed to be conducted, except where the
failure to have such License would not have a material adverse effect on its
business as now conducted and as proposed to be conducted.  Such Licenses are in
full force and effect, no violations have been or are expected to have been
recorded in respect of any such Licenses, and no proceeding is pending or, to
the knowledge of the Company, threatened that could result in the revocation or

                                       18

<PAGE>
 
limitation of any of such Licenses.  The Company has conducted its business so
as to comply in all material respects with all such Licenses.

          9.22  Full Disclosure.  Neither this Agreement, the representations
                ---------------                                              
and warranties by the Company contained herein, the Exhibits hereto, the
Financial Statements, the Memorandum, nor any other written statement or
certificate delivered or to be furnished to the Purchaser (or the Purchaser's
counsel) in connection with this Agreement, when read together, contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading.

          9.23  Manufacturing Rights.  Excepting only as specified in the
                --------------------                                     
Memorandum or the Schedule of Exceptions, the Company has not granted rights or
licenses to manufacture, assemble or sell its products to any person,
corporation, partnership or other entity, is not bound by any agreement that
affects the Company's exclusive right to manufacture, assemble or sell its
products, and has not licensed or sold any of its technology or proprietary
information to any person, corporation, partnership or other entity.

          9.24  Proprietary Information.
                ----------------------- 

                (a) The Company has taken all reasonable security measures to
protect the secrecy, confidentiality and value of all trade secrets, know-how,
inventions, designs, processes and technical data required to conduct its
business.

                (b) Each officer, employee and consultant of the Company has
signed (and each future officer, employee and consultant will be required to
sign) a proprietary information agreement in the Company's standard form, each
of which agreements is in full force and effect as of the date hereof. Except as
set forth in the Schedule of Exceptions, to the best of the Company's knowledge,
none of the Company's current or former officers, employees or consultants is or
will be in violation thereof, and the Company will use its best efforts to
prevent any such violation.

          9.25  Environmental Matters.  Except as would not have a material
                ---------------------                                      
adverse effect on the business, operations, properties, assets, financial
condition or prospects of the Company, to the best of the Company's knowledge,
the Company (a) is not violating and has not in the past violated any
Environmental Laws or Environmental Permits, (b) is not exposed to any claims of
liability for any off-site disposal or contamination, (c) has not received any
claim or threatened claim relating to any Environmental Law, Environmental
Permit or otherwise relating to any Hazardous Substance, and (d) is not aware of
any circumstances likely to result in claims, liability, investigation,
monitoring or remediation under any Environmental Law.  With respect to the
Company's period of ownership, lease or

                                       19

<PAGE>
 
use of any property, to the best of the Company's knowledge, there has not been
any contamination, release or threat of release of any Hazardous Substance at
any currently or formerly owned, leased or used real property that would have a
material adverse effect on the business, operations, properties, assets,
financial condition or prospects of the Company.

          9.26  Employee Benefit Plan.
                --------------------- 

                (a) To the best of the Company's knowledge, with respect to each
Company Benefit Plan, no event has occurred, other than claims for benefits, and
there exists no condition or set of circumstances in connection with which (a)
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 or regulation which would, individually or in the aggregate, have
a material adverse effect on the business, operations, properties, assets,
financial condition or prospects of the Company. Except as set forth in the
Schedule of Exceptions, none of the Company Benefit Plans (a) promises or
provides retiree medical or life insurance benefits to any person, or (b) is
subject to Title IV or 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 of ERISA.

          9.27  Real Property Holding Company.  The Company acknowledges that
                -----------------------------                                
as a result of the investment contemplated hereunder, it may have a foreign
interest-holder within the meaning of Treasury Regulation ("Reg.") (P) 1.897-
2(h)(1)(i).  The Company represents and warrants that it is not a United States
real property holding corporation ("USRPHC") within the meaning of Internal
Revenue Code Section 897(c)(2) and the regulations thereunder, and agrees to use
reasonable efforts to avoid becoming a USRPHC.  The Company agrees to make
determinations as to its status as a USRPHC, and will file statements concerning
those determinations with the Internal Revenue Service, in the manner and at the
times required under Reg. (P) 1.897-2(h), or any supplementary or successor
provision thereto.  Within 30 days of a request from the Purchaser, the Company
will inform the Purchaser, in the manner set forth in Reg. (P) 1.897-2(h)(1)(iv)
or any supplementary or successor provision thereto, whether the Purchaser's
interest in the Company constitutes a United States real property interest
(within the meaning of Internal Revenue Code Section 897(c)(1) and the
regulations thereunder) and whether the Company has provided to the Internal
Revenue Service all required notices as to its USRPHC status.

          9.28  Activation Closing Date.  On the Activation Closing Date, the
                -----------------------                                      
Company shall deliver to the Purchaser a revised Schedule of Exceptions to the
representations and warranties contained herein.  The Company and the Purchaser
acknowledge that material changes may occur between the date hereof and the
Activation Closing Date and that the Purchaser's obligation to purchase the

                                       20

<PAGE>
 
Activation Shares is subject only to the continuing accuracy of the
representations and warranties contained in Sections 9.1, 9.4, 9.5, 9.13, 9.19
and 9.20, hereof.

          9.29  Termination Closing.  On the Termination Closing Date, the
                -------------------                                       
Company shall remake the representations and warranties contained in Sections
9.4, 9.5, 9.13, 9.19 and 9.20.

     10.  Representations and Warranties of the Purchaser.
          ----------------------------------------------- 

          The Purchaser hereby represents and warrants to the Company as
follows:

          10.1  Legal Power.  It has the requisite legal power to enter into
                -----------                                                 
this Agreement, to purchase the Shares hereunder and to carry out and perform
its obligations under the terms of this Agreement.

          10.2  Due Execution.  This Agreement has been duly authorized,
                -------------                                           
executed and delivered by the Purchaser and, upon due execution and delivery by
the Company, this Agreement will be a valid and legally binding agreement of the
Purchaser, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors.

          10.3  Investment Representations.
                -------------------------- 

                (a) The Purchaser will be acquiring the Shares for its own
account, not as nominee or agent, for investment and not with a view to, or for
resale in connection with, any distribution or public offering thereof within
the meaning of the Act.

                (b) The Purchaser understands that (i) the Shares (other than
the IPO Shares) have not been registered under the Act by reason of a specific
exemption therefrom, that they must be held by it indefinitely, and that it
must, therefore, bear the economic risk of such investment indefinitely, unless
a subsequent disposition thereof is registered under the Act or is exempt from
such registration; (ii) each certificate representing the Shares (other than the
IPO Shares) will be endorsed with the following legend:

          "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
          1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR OTHERWISE
          TRANSFERRED UNLESS (A) COVERED BY AN EFFECTIVE REGISTRATION STATEMENT
          UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) THE COMPANY HAS
          BEEN FURNISHED WITH AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY TO
          THE EFFECT THAT

                                       21

<PAGE>
 
          NO REGISTRATION IS LEGALLY REQUIRED FOR SUCH TRANSFER."

and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares (other than the IPO Shares) unless the conditions
specified in the foregoing legend are satisfied.

                (c) The Purchaser has been furnished with such materials and has
been given access to such information relating to the Company as the Purchaser
has requested, and it has been afforded the opportunity to ask questions
regarding the Company and the Shares, all as it has found necessary to make an
informed investment decision.

                (d) By reason of its business or financial experience, it has
the capacity to protect its own interests in connection with this transaction.

                (e) The Purchaser is a corporation, having assets in excess of
$5,000,000, it was not formed for the purpose of acquiring the Shares, and it is
an "accredited investor" as defined in Rule 501 promulgated under the Act.

          10.4  Activation Closing; Termination Closing and IPO Closing.  At
                -------------------------------------------------------     
and as of the dates of the Activation Closing and the Termination Closing, the
Purchaser shall reaffirm the continuing accuracy of the representations and
warranties of Sections 10.1 and 10.3.

     11.  Covenants of the Company.  From and after the Activation Closing (or
          ------------------------                                
in the case of the covenants contained in Sections 11.6, 11.7, 11.8 and 11.12,
the Termination Closing), the Company covenants and agrees with the Purchaser as
follows:

          11.1  Use of Proceeds.  The proceeds of the sale of the Shares have
                ---------------                                              
been and will be used for working capital and general corporate purposes.

          11.2  Access to Information.  Up until the date of the Company's
                ---------------------                                     
IPO, the Company shall, and shall cause its officers, directors, employees,
auditors and other agents to, provide the Purchaser such financial, operating
and other data and information with respect to the business and properties of
the Company as the Purchaser shall reasonably request from time to time to
monitor the investment made pursuant hereto and to exercise its rights
hereunder.

          11.3  Financial Statements and Other Reports.
                -------------------------------------- 

                11.3.1  Up until the date of the Company's IPO, the Company will
furnish to the Purchaser, as soon as practicable, and in any event

                                       22

<PAGE>
 
within 90 days after the end of each fiscal year of the Company, an annual
report of the Company, including a balance sheet as of the end of such fiscal
year and statements of operations, shareholders' equity and cash flows for such
fiscal year, together with the related notes thereto, setting forth in each case
in comparative form corresponding figures for the preceding fiscal year, all of
which will present fairly the financial position of the Company and the results
of its operations and changes in its financial position as of the time and for
the period then ended.  The financial statements shall be accompanied by an
unqualified report of independent public accountants of recognized national
standing to the effect that such financial statements have been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with prior years (except as otherwise specified in such report), and
present fairly the financial position of the Company and the results of its
operations and changes in its financial position as of the time and for the
period then ended.  The Company will conduct its business such that such report
of the independent public accounts will not contain any qualifications as to the
scope of the audit, the continuance of the Company, or with respect to the
Company's compliance with generally accepted accounting principles, except for
change in methods of accounting in which such accountants concur.

                11.3.2  Up until the date of the Company's IPO, the Company will
furnish to Purchaser as soon as practicable, and in any event within 45 days
after the end or each fiscal quarter of the Company, a report of the Company,
consisting of an unaudited balance sheet as of the end of such quarter, and
unaudited statements of operations, shareholders' equity and cash flows for such
quarter, and for the fiscal year-to-day, setting forth in each case in
comparative form the corresponding figures for the preceding year. All such
reports shall be certified by the Treasurer of the Company to present fairly the
financial position of the Company and the results of its operations and changes
in its financial position as of the time and for the period then ended and to
have been prepared in accordance GAAP, subject to normal year-end adjustments,
which shall not be material in nature or amount.

          11.4  Consents.  On or before the Activation Closing, the Company
                --------                                                   
shall obtain all consents and shareholder approvals needed to enable it to
perform all of its obligations under this Agreement and the other Implementing
Agreements and the transactions contemplated hereby and thereby.

          11.5  Restrictive Agreement.  Subsequent to the Activation Closing
                ---------------------                                       
or the Termination Closing, the Company will not be a party to any agreement or
instrument which by its terms would restrict the Company's performance of its
obligations pursuant to this Agreement or the Shares (including any redemption
or conversion thereof) or the other Implementing Agreements.

          11.6  Notification of Registration Under the Exchange Act.  The
                ---------------------------------------------------      
Company will give the holder of record of the Shares prompt written notice of
the effectiveness of any registration statement filed pursuant to the
requirements of

                                       23

<PAGE>
 
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or pursuant to any equivalent provision of any similar federal law then in
force (a "1934 Act Registration Statement") relating to the Common Stock, and
the number of shares of such class of equity securities outstanding at the time
such registration statement becomes effective.  If the Company has filed a 1934
Act Registration Statement or a registration statement on any form other than
Form S-8 (or any successor form serving the same general purpose) pursuant to
the requirements of the Act, the Company further covenants that it will file all
reports required to be filed by it under the Act or the Exchange Act and the
rules and regulations thereunder or, if the Company is not required to file such
reports, it will, upon the request of the holder of record of the Shares, make
publicly available such information as will enable it to sell the Shares without
a registration statement, and will take such further action as such holder may
request, all to the extent required from time to time to enable such holder to
sell the Shares, without registration within the limitations of the exemptions
provided by (i) Rule 144 and Rule 144A adopted by the Commission under the Act,
as such rules may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the Commission.

          11.7  Reservation of Shares.  The Company shall at all times
                ---------------------                                 
reserve and keep available, free from preemptive rights, out of its authorized
and unissued Common Stock the number of shares of Common Stock issuable upon
conversion of the Preferred Shares.

          11.8  Repurchase, Redemption and Other Actions.  The Company will
                ----------------------------------------                   
give the Purchaser at least thirty calendar days notice of any action, whether
by repurchase or redemption of its securities or otherwise, which would cause
the percentage of outstanding voting securities of the Company owned by the
Purchaser to exceed 19.9% of the outstanding voting securities of the Company,
on a fully diluted, as converted basis.

          11.9  Listing of Common Stock.  From and after the closing of the
                -----------------------                                    
Company's IPO, the Company shall use its reasonable best efforts to cause the
Common Stock to be listed for trading at all times on either the Nasdaq National
Stock Market or the American Stock Exchange or the New York Stock Exchange.

          11.10  Michigan Business Corporation Act.  The Company will not
                 ---------------------------------                       
take any action to amend the Bylaws or Articles so as to make Chapter 7B of the
MBCA, or any successor provision thereto, applicable to any acquisition by
Purchaser of shares of Common Stock or other securities of the Company.  In the
event that the Articles are amended so as to make Chapter 7B of the MBCA, or any
successor provision thereto, applicable to any acquisition by the Purchaser of,
the Shares (including any Conversion Shares) or any other securities of the
Company, the Company shall take such actions as shall be necessary and permitted
by the MBCA so that (a) the securities that the Purchaser is entitled to acquire
will, upon such issuance, and (b) the Shares (including any Conversion

                                       24

<PAGE>
 
Shares) will, in accordance with their terms, be duly accorded full voting
rights.  The Company will use its reasonable best efforts, including the
solicitation of votes by proxy, to obtain such votes of stockholders of the
Company as shall be necessary to accord the Purchaser with such full voting
rights.

          11.11     Stockholders' Rights.  The Company shall not adopt a
                    --------------------                                
stockholder rights plan, enter into any agreement, arrangement or understanding
or grant any warrants, options, rights or other privileges which, upon
acquisition by the Purchaser of the Shares (including any Conversion Shares) or
pursuant to Section 11.8 hereof, would result in the Purchaser, in its capacity
as a holder of such securities, being subject to different rights and
obligations as all other holders of Common Stock or voting securities of the
Company, as a result of such acquisition.

          11.12     Removal of Restrictive Legend.  The Company shall remove the
                    -----------------------------                               
legend set forth in Section 10.3 from any stock certificate issued to the
Purchaser by delivery of substitute certificate(s) without such legend if the
Purchaser shall have delivered to the Company an opinion of counsel in form and
substance reasonably satisfactory to the Company to the effect that such legend
is not required for purposes of compliance with the Act.

          11.13     Board Observer.  Subject to the limitation provided below,
                    --------------                                            
from and after the Activation Closing Date, (i) the Purchaser shall be entitled
to have present, in a non-voting observer capacity at all meetings of the Board
of Directors of the Company (the "Board"), one person designated by the
Purchaser and reasonably acceptable to the Company (the "Purchaser Observer"),
and (ii) the Company (a) shall deliver notice of all meetings of the Board to
the Purchaser Observer simultaneously with, and in the same form as, notice to
the directors of the Company, and (b) shall deliver to the Purchaser copies of
all written materials furnished to the Board simultaneously with the delivery of
such written materials to the Board.  The Purchaser Observer shall enter into a
confidentiality agreement reasonably acceptable to the Company.  The Purchaser
Observer shall withdraw from any portion of a Board meeting at which time there
is a discussion of matters that present a conflict of interest to the Purchaser.
The Company may withhold from delivery to the Purchaser Observer written
materials concerning matters which present a conflict of interest to the
Purchaser.

     12.  Stock Registration and Information Rights.
          ----------------------------------------- 

          By its execution and delivery of this Agreement, the Purchaser shall
have the stock registration rights as have been granted by the Company pursuant
to Sections 2.4 through 2.15 of that certain Amended and Restated Investors'
Rights Agreement dated April 7, 1992 by and among the Company and certain
investors and shareholders of the Company, a copy of which has been delivered to
the Purchaser.

                                       25

<PAGE>
 
     13.  Activation Closing.  At the Activation Closing, the following shall
          ------------------
occur:

          13.1  Opinion of the Company's Counsel.  The Company shall deliver
                --------------------------------                            
to the Purchaser an opinion of counsel to the Company (which counsel shall be
reasonably acceptable to Purchaser), substantially in the form attached hereto
as Exhibit B, addressed to the Purchaser and dated the date of the Activation
Closing.  In rendering the opinion called for under this Section 13.1, counsel
may rely as to factual matters on certificates of public officials, officers of
the Company, and officers of the Purchaser.

          13.2  Receipt of Purchase Price.  At the Activation Closing, the
                -------------------------                                 
Purchaser shall deliver to the Company, by wire transfer, funds in the amount of
$9.0 million, in payment for the Activation Shares, and the Company shall credit
toward the purchase of the Activation Shares, the amounts of the First Option
Payment and the Second Option Payment.  The parties acknowledge that if the
Purchaser elects not to exercise the Third Option, the Purchaser shall receive
credits for the First Option Payment and the Second Option Payment, if
applicable, toward the purchase of the Termination Shares having an aggregate
value of $1.5 million or $3.5 million, as the case may be.

          13.3  Implementing Agreements.  The Purchaser and the Company shall
                -----------------------                                      
sign and deliver to each other copies of the other Implementing Agreements.

          13.4  Delivery of Stock Certificates and Other Documents.  The
                --------------------------------------------------      
Company shall deliver to Purchaser (i) a stock certificate representing the
Activation Shares, and (ii) a copy of the Articles, certified by the
Corporations and Securities Bureau of the Department of Commerce of the State of
Michigan, (iii) a copy of the Bylaws, certified by the Secretary of the Company,
and (iv) evidence reasonably satisfactory to the Purchaser of the adoption by
the Board of actions duly approving this Agreement and the other Implementing
Agreements and the transactions contemplated hereby and thereby.

     14.  Termination Closing.  The Termination Closing shall not be
          -------------------                                       
subject to any conditions other than as set forth in this Section 14, and the
Company shall have no obligation to make any representations or warranties as of
the date of, and in connection with, the Termination Closing, except as set
forth in Section 9.29.  At the Termination Closing, the following shall occur:

          14.1  Opinion of the Company's Counsel.  The Company shall deliver
                --------------------------------                            
to the Purchaser an opinion of counsel to the Company (which counsel shall be
reasonably acceptable to the Company), substantially in the form attached hereto
as Exhibit C, which opinion shall be addressed to the Purchaser and dated the
date of the Termination Closing.  In rendering the opinion called for under this

                                       26

<PAGE>
 
Section 14.1, counsel may rely as to factual matters on certificates of public
officials, officers of the Company, and officers of the Purchaser.

          14.2  Credit for Purchase Price.  At the Termination Closing, the
                -------------------------                                  
Company shall credit in full payment of the purchase price for the Termination
Shares, the amounts of the First Option Payment and the Second Option Payment.

          14.3  Delivery of Stock Certificates and Other Documents.  The
                --------------------------------------------------      
Company shall deliver to Purchaser (i) a stock certificate representing the
Termination Shares, and (ii) a copy of the Articles, certified by the
Corporations and Securities Bureau of the Department of Commerce of the State of
Michigan, (iii) a copy of the Bylaws, certified by the Secretary of the Company,
and (iv) evidence reasonably satisfactory to the Purchaser of the adoption by
the Board of actions duly approving this Agreement and the transactions
contemplated hereby.

     15.  IPO Closing.  At the IPO Closing, the following shall occur:
          -----------                                          

          15.1  Opinion of the Company's Counsel.  The Company shall deliver
                --------------------------------                            
to the Purchaser a copy of the opinion of counsel delivered to the underwriters
in the IPO and upon which the Purchasers shall be entitled to rely.

          15.2  Receipt of Purchase Price.  At the IPO Closing, the Purchaser
                -------------------------                                    
shall deliver to the Company, by wire transfer, funds in the amount of $5.0
million, in payment for the IPO Shares.

          15.3  Delivery of Stock Certificates and Other Documents.  The
                --------------------------------------------------      
Company shall deliver to Purchaser (i) a stock certificate representing the IPO
Shares, and (ii) a copy of the Articles, certified by the Corporations and
Securities Bureau of the Department of Commerce of the State of Michigan, (iii)
a copy of the Bylaws, certified by the Secretary of the Company, and (iv)
evidence reasonably satisfactory to the Purchaser of the adoption by the Board
of actions duly approving the issuance and sale to the Purchaser of the IPO
Shares.

     16.  Miscellaneous.
          ------------- 

          16.1  Governing Law.  This Agreement shall be governed by and
                -------------                                          
construed under the laws of the State of Michigan as applied to agreements among
Michigan residents, made and to be performed entirely within the State of
Michigan.

          16.2  Survival.  The representations, warranties, covenants and
                --------                                                 
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby.  All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto or in connection with the transactions
contemplated

                                       27

<PAGE>
 
hereby shall be deemed to be representations and warranties by the Company
hereunder as of the date of such certificate or instrument.

          16.3  Successors and Assigns.  Except as otherwise expressly
                ----------------------                                
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.

          16.4  Entire Agreement.  This Agreement, the Exhibits hereto, the
                ----------------                                           
Memorandum, the other Implementing Agreements, and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement among
the parties with regard to the subjects hereof and no party shall be liable or
bound to any other party in any manner by any representations, warranties,
covenants or agreements except as specifically set forth herein or therein.
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto and their respective successors and
assigns, any rights, remedies, obligations or liabilities under or by reason of
this Agreement, except as expressly provided herein.

          16.5  Separability.  In case any provision of this Agreement shall
                ------------                                                
be invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

          16.6  Amendment and Waiver.  Any term of this Agreement may be
                --------------------                                    
amended and the observance of any term of this Agreement may be waived (either
generally or, in a particular instance, either retroactively or prospectively,
and either for a specified period of time or indefinitely), with the written
consent of the Company and the Purchaser.  Any amendment or waiver effected in
accordance with this Section 16.6 shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities have been converted), each future holder
of all such securities, and the Company.  Upon the effectuation of each such
amendment or waiver, the Company shall promptly give written notice thereof to
the record holders of the Shares (including the Conversion Shares) who have not
previously consented thereto in writing.

          16.7  Delays or Omissions.  No delay or omission to exercise any
                -------------------                                       
right, power or remedy accruing to the Company or the Purchaser upon any breach,
default or noncompliance of the Purchaser or the Company under this Agreement
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring.  It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Purchaser's part of any breach, default or
noncompliance under

                                       28

<PAGE>
 
this Agreement, or any waiver on the Company's or the Purchaser's part 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, and that
all remedies, either under this Agreement, the Series D Documents, by law, or
otherwise afforded to the Company and the Purchaser, shall be cumulative and not
alternative.

          16.8  Notices.  All notices and other communications required or
                -------                                                   
permitted hereunder shall be in writing, shall specifically refer to this
Agreement, and shall be sent by (i) hand delivery, (ii) registered mail, return
receipt requested, (iii) overnight delivery services, or (iv) telefacsimile
transmission, and shall be sent or delivered to the respective addresses and
telefacsimile numbers set forth below, unless subsequently changed by written
notice to the other party:

               If to the
                Company, to:  AASTROM Biosciences, Inc.
                              P.O. Box 376
                              Ann Arbor, MI 48106
                              Attention:  President
                              Fax:  (313) 930-5546

             With a copy to:  T. Knox Bell, Esq.
                              Gray Cary Ware & Freidenrich
                              401 B Street, Suite 1700
                              San Diego, CA 92101
                              Fax:  (619) 236-1048

           If to the
              Purchaser, to:  RPR GENCELL
                              Cell and Gene Therapy Division
                              Rhone-Poulenc Rorer Inc.
                              500 Arcola Road
                              P.O. Box 1200
                              Collegeville, PA 19426-0107
                              Attention:  President and General Counsel
                              Fax:  (610) 454-8984 and 454-3808

    16.9  Finder's Fees.
          ------------- 

          (a) The Company (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement, and (ii) hereby agrees to indemnify and to hold the Purchaser
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its employees or representatives is responsible.

                                       29

<PAGE>
 
                (b) The Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement, and (ii) hereby agrees to indemnify and to hold the Company
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Purchaser or any of its employees or representatives are responsible.

          16.10  Fees and Expenses.  Each party shall bear all of its own
                 -----------------                                       
fees, costs and expenses relating to the negotiation and preparation of this
Agreement and the consummation of the transactions contemplated hereby.  If
legal action is brought by the Company or by the Purchaser to enforce or
interpret this Agreement, the prevailing party shall be entitled to recover its
attorneys' fees and legal costs in connection therewith.

          16.11  Information Confidential.  The Purchaser acknowledges and
                 ------------------------                                 
agrees that information received by it pursuant hereto and to be received by it
in connection with matters contemplated under the Implementing Agreements,
constitute confidential information to the extent identified as confidential by
the Company, which is and will be furnished by the Company to the Purchaser
solely for the Purchaser's use to evaluate Purchaser's investment in the Company
and as permitted by the Implementing Agreements, unless otherwise expressly
agreed to in writing by the Company.  Provisions of the Research and Development
Collaboration Agreement and the License Agreement contain limitations on the use
and dissemination of any such confidential information, and the terms and
conditions of such provisions are hereby incorporated by reference, as though
expressly set forth herein.  The Purchaser hereby agrees to refrain from using
or disseminating any such confidential information for any purpose other than as
may be permitted by the provisions of this Agreement and the other Implementing
Agreements.  Notwithstanding the foregoing, information shall not be deemed
confidential if it (i) is or becomes generally available to the public, (ii) was
known to the Purchaser prior to when it was received from the Company, or (iii)
is subsequently disclosed to the Purchaser in good faith by a third party who
the Company believes has a right to make such disclosure.

          16.12  Titles and Subtitles.  The titles of the paragraphs and
                 --------------------                                   
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.

          16.13  Counterparts. This Agreement may be executed in counterparts,
                 ------------                                    
including by facsimile, each of which shall be deemed an original, but all of
which together shall constitute one instrument.

          16.14  Arbitration.  Any controversy or claim arising out of or
                 -----------                                             
relating to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Arbitration Agreement.  If the parties cannot

                                       30

<PAGE>
 
timely execute the Arbitration Agreement, the dcispute shall be resolved in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA").

     IN WITNESS WHEREOF, this Agreement is hereby executed as of the date set
forth on page 1 of this Agreement.


The Company:                                 The Purchaser:

Aastrom BIOSCIENCES, INC.                    RHONE-POULENC RORER INC.
Domino's Farms, Lobby L                      500 Arcola Road
24 Frank Lloyd Wright Drive                  Collegeville, PA 19426-0107
Ann Arbor, MI 48106


By: /s/ R. DOUGLAS ARMSTRONG                 By: /s/ THIERRY SOURSAC
   ------------------------------------         -------------------------------
Title:  President and CEO                    Title: Senior Vice President
                                                   ----------------------------
Print Name:  R. Douglas Armstrong, Ph.D.     Print Name: Theirry Soursac

                                       31

<PAGE>
 
                                   EXHIBIT A

                             SCHEDULE OF EXCEPTIONS


<PAGE>
 
                                   EXHIBIT A

                             SCHEDULE OF EXCEPTIONS

                      Exceptions as of September 15, 1995


          The following are exceptions to the representations and warranties of
the Company set forth in Section 9 of the Stock Purchase Agreement (the
"Agreement") dated as of September 15, 1995, with reference to the paragraph
designations of the Agreement.  The reference to specific paragraphs should not
be construed as limiting the noted exceptions to that particular paragraph.  Any
exception noted below is deemed disclosed for purposes of all relevant
paragraphs whether or not cross-referenced.  Capitalized terms used herein shall
have the meanings ascribed to them in the Agreement and the Memorandum, unless
defined otherwise herein.

Section 9.2    Capitalization.
               -------------- 

                    The Company's authorized and issued capital stock and stock
                    options are summarized on Schedule 9.2 attached hereto.


Section 9.7    Material Contracts.
               ------------------ 

                    The Company entered into an equipment lease financing
                    agreement with Key Corp. for up to $240,000.

Section 9.8    Outstanding Indebtedness.
               ------------------------ 

                    None, other than as noted in preceding paragraph.

Section 9.9    Officers, Directors and Shareholders.
               ------------------------------------ 

                    Effective as of September 15, 1995, the Company's V.P. of
                    Development Research, Bernard Palsson, is resigning, and Dr.
                    Palsson will continue as a part-time consultant with the
                    Company through December 1995.  The Company is recruiting
                    for a replacement for Dr. Palsson.


                                       1


<PAGE>
 
Section 9.10  Changes Since July 31, 1995.
              --------------------------- 

               None.

Section 9.14  Litigation.
              ---------- 

                    The Company has written letters to a former employee,
                    Richard M. Schwartz, Ph.D. and Dr. Schwartz's new employer,
                    SyStemix, (i) reminding them of Dr. Schwartz's duty to
                    maintain strict confidentiality as to the Company's trade
                    secrets; and (ii) asking if there has been any breach of
                    this confidentiality obligation; and (iii) commenting that a
                    new invention by Systemix's appears to be derived from the
                    Company's trade secrets.  Systemix and Dr. Schwartz have
                    denied any use of the Company's trade secrets.  The Company
                    has reserved its rights in this matter, but does not
                    presently contemplate pursuing this potential claim in the
                    near future.

                                       2


<PAGE>
 
                                  SCHEDULE 9.2

                                 Capitalization

<TABLE>
<CAPTION>
====================================================================
         Security             Authorized   Liq. Pref.    Issued
- --------------------------------------------------------------------
<S>                           <C>          <C>          <C>
Preferred Stock
- --------------------------------------------------------------------
  Series A                     2,500,000         1.00   2,500,000
- --------------------------------------------------------------------
  Series B                     3,030,000         2.00   3,030,000
 -------------------------------------------------------------------
  Series C  *                     10,000     1,000.00      10,000
 -------------------------------------------------------------------
  Series D                     3,000,000         4.00   2,576,001
 -------------------------------------------------------------------
Common Stock                  17,000,000         0.00   2,609,861
- --------------------------------------------------------------------
Options for Common Stock                         0.00     539,500
====================================================================
</TABLE>


*  Series C shares are convertible into 2,500,000 common shares




<TABLE>
<S>                                                            <C> 
Outstanding Preferred Share (common stock equivalents :        10,530,001   
Outstanding Common Shares:                                      2,609,861
Outstanding Options:                                              539,500
                                                               ----------
 
     Fully Diluted Common Stock Equivalents:                   13,679,362
</TABLE>



<PAGE>
 
                                   EXHIBIT B

                           FORM OF OPINION OF COUNSEL

                               ACTIVATION CLOSING


<PAGE>
 
                        FORM OF OPINION TO BE DELIVERED
                    BY COUNSEL TO AASTROM BIOSCIENCES, INC.


          1.  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
corporate power 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 as it is currently conducted.  The Company is not qualified to do
business as a foreign corporation in any jurisdiction, and the Company has
represented to us that it has no assets or employees in any state other than
Michigan.

          2.  The Company has all requisite corporate power to sell the Shares,
and to carry out and perform its other obligations under the terms of the
Agreement and the other Implementing Agreements.  The Agreement and the other
Implementing Agreements have been duly authorized, executed and delivered, and
each is a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.

          3.  The authorized capital stock of the Company consists of _________
shares of common stock and ____________ shares of preferred stock (of which
_______ shares have been designated as Series A Preferred Stock, ________ shares
have been designated as Series B Preferred Stock, ________ shares have been
designated as Series C Preferred Stock, ________ shares have been designated as
Series D Preferred Stock and ________ shares have been designated as Series E
Preferred Stock.  The Company (i) has issued the shares of Common Stock and
shares of its preferred stock, and (ii) has granted the stock options and
warrants and (iii) has reserved for issuance the Common Stock and shares of its
preferred stock, all as represented by the Company in the Schedule attached
hereto.  All previously issued and outstanding shares have been duly authorized
and validly issued, and are fully paid and nonassessable.  To the best of our
knowledge, there are no outstanding rights, options, warrants, conversion rights
or agreements for the purchase or acquisition from the Company of any shares of
its capital stock, other than as referenced above.

          4.  The Shares, when issued, sold and delivered in compliance with the
provisions of the Agreement, will be duly authorized, validly issued, fully
paid, and nonassessable, and will be free of any liens or encumbrances, except
that the Shares are subject to restrictions on transfer under state and/or
federal securities laws.  The issuance of the Shares is not subject to any
preemptive rights or, to the best of our knowledge, rights of first refusal
which have not been waived.  The shares of Common Stock issuable upon conversion
of the Preferred Shares (i) have been duly and validly reserved, (ii) are not
subject to any preemptive rights or, to the best of our knowledge, rights of
first refusal, and (iii) upon conversion of the Preferred Shares in accordance
with the Articles and cancellation of the Preferred Shares, will be duly
authorized, validly issued, fully paid, and nonassessable.


                                       1


<PAGE>
 
          5.  Neither the performance of the Company's obligations under the
Agreement or the other Implementing Agreements, nor the issuance of the
Preferred Shares, nor the issuance of the Common Stock issuable upon conversion
of the Preferred Shares, will violate any term of the Articles or Bylaws; and
such transactions will not, in any material respect, violate or conflict with or
constitute a default under the provisions of any Material Contract.

          6.  Except as disclosed in the Memorandum or the Schedule of
Exceptions, to the best of our knowledge, no action, suit, proceeding or
investigation is pending or threatened against the Company or its properties or
that questions the validity of the Agreement or any action to be taken in
connection therewith.

          7.  All consents, approvals and authorizations of and filings with any
federal or state governmental authority required on the part of the Company, if
any, in connection with the consummation of the transactions contemplated by the
Agreement have been obtained or made, except for the filings which the Company
is making after the [Termination] [Activation] Closing as specified under the
Securities Act of 1933, as amended (the "Securities Act") and any state
securities laws.

          8.  Subject to the accuracy of the Purchaser's representations and
warranties set forth in Section 10 of the Agreement, the offer and sale of the
Shares in conformity with the terms of the Agreement are exempt from the
registration requirements of Section 5 of the Securities Act, as amended and in
compliance with applicable state securities laws.

[The forgoing opinion may be delivered at the Termination Closing and/or
Activation Closing by one or more law firms on behalf of AASTROM Biosciences,
Inc.]

                                       2


<PAGE>
 
                                   EXHIBIT C

                           FORM OF OPINION OF COUNSEL

                              TERMINATION CLOSING


<PAGE>
 
                        FORM OF OPINION TO BE DELIVERED
                    BY COUNSEL TO AASTROM BIOSCIENCES, INC.


          1.  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
corporate power 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 as it is currently conducted.  The Company is not qualified to do
business as a foreign corporation in any jurisdiction, and the Company has
represented to us that it has no assets or employees in any state other than
Michigan.

          2.  The Company has all requisite corporate power to sell the Shares,
and to carry out and perform its other obligations under the terms of the
Agreement and the other Implementing Agreements.  The Agreement and the other
Implementing Agreements have been duly authorized, executed and delivered, and
each is a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.

          3.  The authorized capital stock of the Company consists of _________
shares of common stock and ____________ shares of preferred stock (of which
_______ shares have been designated as Series A Preferred Stock, ________ shares
have been designated as Series B Preferred Stock, ________ shares have been
designated as Series C Preferred Stock, ________ shares have been designated as
Series D Preferred Stock and ________ shares have been designated as Series E
Preferred Stock.  The Company (i) has issued the shares of Common Stock and
shares of its preferred stock, and (ii) has granted the stock options and
warrants and (iii) has reserved for issuance the Common Stock and shares of its
preferred stock, all as represented by the Company in the Schedule attached
hereto.  All previously issued and outstanding shares have been duly authorized
and validly issued, and are fully paid and nonassessable.  To the best of our
knowledge, there are no outstanding rights, options, warrants, conversion rights
or agreements for the purchase or acquisition from the Company of any shares of
its capital stock, other than as referenced above.

          4.  The Shares, when issued, sold and delivered in compliance with the
provisions of the Agreement, will be duly authorized, validly issued, fully
paid, and nonassessable, and will be free of any liens or encumbrances, except
that the Shares are subject to restrictions on transfer under state and/or
federal securities laws.  The issuance of the Shares is not subject to any
preemptive rights or, to the best of our knowledge, rights of first refusal
which have not been waived.  The shares of Common Stock issuable upon conversion
of the Preferred Shares (i) have been duly and validly reserved, (ii) are not
subject to any preemptive rights or, to the best of our knowledge, rights of
first refusal, and (iii) upon conversion of the Preferred Shares in accordance
with the Articles and cancellation of the Preferred Shares, will be duly
authorized, validly issued, fully paid, and nonassessable.

                                       1


<PAGE>
 
          5.  Neither the performance of the Company's obligations under the
Agreement or the other Implementing Agreements, nor the issuance of the
Preferred Shares, nor the issuance of the Common Stock issuable upon conversion
of the Preferred Shares, will violate any term of the Articles or Bylaws; and
such transactions will not, in any material respect, violate or conflict with or
constitute a default under the provisions of any Material Contract.

          6.  Except as disclosed in the Memorandum or the Schedule of
Exceptions, to the best of our knowledge, no action, suit, proceeding or
investigation is pending or threatened against the Company or its properties or
that questions the validity of the Agreement or any action to be taken in
connection therewith.

          7.  All consents, approvals and authorizations of and filings with any
federal or state governmental authority required on the part of the Company, if
any, in connection with the consummation of the transactions contemplated by the
Agreement have been obtained or made, except for the filings which the Company
is making after the [Termination] [Activation] Closing as specified under the
Securities Act of 1933, as amended (the "Securities Act") and any state
securities laws.

          8.  Subject to the accuracy of the Purchaser's representations and
warranties set forth in Section 10 of the Agreement, the offer and sale of the
Shares in conformity with the terms of the Agreement are exempt from the
registration requirements of Section 5 of the Securities Act, as amended and in
compliance with applicable state securities laws.

[The forgoing opinion may be delivered at the Termination Closing and/or
Activation Closing by one or more law firms on behalf of AASTROM Biosciences,
Inc.]

                                       2


<PAGE>
 
                                   EXHIBIT D

                      SUMMARY OF SERIES E PREFERRED STOCK


<PAGE>
 
                                   SUMMARY OF
                          SERIES E PREFERRED STOCK OF
                           AASTROM BIOSCIENCES, INC.



I.   TERMS OF PREFERRED STOCK
     ------------------------

     The terms of the Series E Preferred Stock will be substantially the same as
the terms of the Series D Preferred, except as noted herein.  The Series A, B,
C, D Preferred Stock together with the Series E Preferred Stock, when treated
jointly are referred to herein as the "Preferred."  The following are the
principal terms of the Series E Preferred Stock:


<TABLE>
 
<S>                                <C>
A.  Rights, Preferences,               1.  Dividend Provisions.  A holder of
    Privileges and                         -------------------
    Restrictions of Series         Series E Preferred Stock will be entitled to
    E Preferred Stock:             receive, pari passu, with holders of Series B, C
                                   and D Preferred Stock dividends at the rate of 8%
                                   per annum on the liquidation preference when and
                                   as declared by the Board, if funds are legally
                                   available.  The Series E Preferred Stock, together
                                   with the Series B, C and D Preferred Stock, will
                                   be entitled to receive dividends in preference to
                                   any dividend on Series A Preferred Stock.  If
                                   dividends are declared on the Common Stock, the
                                   holders of Preferred shall be entitled to receive
                                   concurrently a dividend of an equal amount per
                                   share.  Dividends on the Series E Preferred Stock
                                   will be noncumulative.  No dividends have been
                                   paid on the Preferred, and no dividends are likely
                                   to be paid in the next few years.
  
                                       2.  Liquidation Preference.  In the event
                                           ----------------------
                                   of any liquidation, dissolution or winding up of the
                                   Company, a holder of Series E Preferred Stock
                                   will be entitled to receive, on a parity with holders
                                   of the Series B, C and D Preferred Stock and in
                                   preference to the holders of shares of Series A
                                   Preferred Stock and Common Stock, an amount
                                   equal to the respective original purchase prices,
                                   plus any declared but unpaid dividends on the
                                   Series E Preferred Stock.

</TABLE>
 
                                       1


<PAGE>
 
                                       3.  Voluntary Conversion. A holder of
                                           --------------------
                                   Series E Preferred Stock will have the right
                                   to convert the Series E Preferred Stock, at
                                   the option of the holder, at any time, into
                                   shares of Common Stock. The total number of
                                   shares of Common Stock into which Series E
                                   Preferred Stock may be converted will be
                                   determined by dividing the original purchase
                                   price by the conversion price. The initial
                                   conversion price will be the original
                                   purchase price, resulting in a one-for-one
                                   conversion, unless and until there is a
                                   change in the conversion price .

                                       4.  Automatic Conversion.  Series E
                                           --------------------
                                   Preferred Stock will be converted
                                   automatically into Common Stock, at the then
                                   applicable conversion price, immediately upon
                                   the closing of a firm commitment underwritten
                                   public offering of shares of the Common Stock
                                   of the Company at a public offering price per
                                   share (prior to underwritings, commissions
                                   and offering expenses) equal to or exceeding
                                   $6.00 per share in an offering resulting in
                                   gross proceeds to the Company which exceed
                                   $10,000,000.

                                       5.  Voting Rights.  A holder of Series E
                                           -------------
                                   Preferred Stock will have the right to that
                                   number of votes equal to the number of shares
                                   of Common Stock issuable upon conversion of
                                   its Series E Preferred Stock at the then
                                   applicable conversion price. Until the number
                                   of shares of Common Stock issuable upon
                                   conversion of the Series E Preferred Stock
                                   has been definitively established pursuant to
                                   Section 5 of the Stock Purchase Agreement,
                                   each share of Series E Preferred Stock shall
                                   be deemed to have the number of votes equal
                                   to 1.5 shares of Common Stock. The Preferred
                                   shall vote with the Common Stock on all
                                   matters except as specifically provided
                                   herein or as otherwise required by law.

                                       2


<PAGE>
 
                                       6.  Protective Provisions.  Changes to
                                           ---------------------
                                   the rights, preferences or privileges of a
                                   series of Preferred Stock must be approved by
                                   the holders of at least 66-2/3% of the
                                   affected series of Preferred. Consent of the
                                   holders of at least 66-2/3% of each series of
                                   Preferred Stock is required to approve any
                                   amendment to the Company's articles of
                                   incorporation.

B.  Registration Rights:               1.  Demand Right.  Beginning one year
                                           ------------
                                   after the Company's initial public offering,
                                   holders of at least 50% of the Preferred (or
                                   Common Stock issued upon conversion of the
                                   Preferred or a combination of such Common and
                                   Preferred) may request registration by the
                                   Company of Common Stock covering at least 20%
                                   of their registrable securities, or a lesser
                                   percentage if the aggregate offering price
                                   would exceed $2,000,000. Prior to the
                                   Company's initial public offering, such
                                   holders may request such registration if the
                                   aggregate offering price would exceed
                                   $5,000,000. The Company shall not be
                                   obligated to effect registration under this
                                   demand right provision more than once.

                                       2.  Piggy-Back Registration.  At any time
                                           -----------------------
                                   after the Company's initial public offering,
                                   holders of Preferred shall be entitled to
                                   "piggy-back" registration rights at the time
                                   that the Company has a further registration;
                                   subject to the rights, however, of the
                                   Company and its underwriters to reduce the
                                   number of shares proposed to be registered in
                                   view of market conditions.

                                       3.  S-3 Rights.  Holders of Preferred
                                           ----------
                                   shall be entitled to an unlimited number of
                                   demand registrations on Form S-3 (if
                                   available to the Company) so long as each of
                                   such registered offerings is in excess of
                                   $500,000; provided, however, that the Company
                                   shall only be required to file one Form S-3
                                   Registration Statement on demand every twelve
                                   (12) months.
                                   
                                       3


<PAGE>
 
                                       4.  Expenses.  The Company shall bear
                                           --------
                                   all registration expenses (including the fees
                                   of one counsel for the selling shareholders,
                                   but excluding underwriting discounts and
                                   commissions) of one demand registration and
                                   two piggy-back registrations.

                                       5.  Assignability of Rights.  The
                                           -----------------------
                                   registration rights may be assigned to an
                                   assignee who agrees in writing to be bound by
                                   the terms and conditions of the Amended and
                                   Restated Investors' Rights Agreement and who
                                   (a) after such transfer owns at least 100,000
                                   shares of Preferred or Common Stock issued
                                   upon conversion thereof, (b) is an option
                                   holder, (c) is a holder of registrable
                                   securities of the Company or a family member
                                   of the transferor, or (d) is a trust for the
                                   benefit of an option holder or a family
                                   member, in a private transaction in which
                                   such transferee will own not less than 20,000
                                   shares of Preferred or Common Stock issued
                                   upon conversion thereof.

                                       6.  Termination of Registration Rights.
                                           ----------------------------------
                                   Registration rights shall terminate as to any
                                   particular shares of Preferred Stock when
                                   such shares may be lawfully sold by the
                                   holder pursuant to Rule 144 under the
                                   Securities Act of 1933.

                                       7.  Other Provisions.  The registration
                                           ----------------
                                   rights provisions of the Amended and Restated
                                   Investors' Rights Agreement contains other
                                   customary provisions with respect to
                                   registration rights, including cross-
                                   indemnification, the Company's ability to
                                   delay the filing of demand registrations for
                                   a period of at least 150 days, the period of
                                   time in which the Registration Statement
                                   shall be kept effective, underwriting
                                   arrangements and the like.

II.      ADDITIONAL INFORMATION                                   
         -----------------------

A.       Right of First Refusal:   None.
 
B.       Redemption Rights:        None.

                                       4




<PAGE>
 
                                                                   EXHIBIT 10.35

                               November 11, 1996


R. Douglas Armstrong, Ph.D.
President and Chief Executive Officer
Aastrom Biosciences, Inc.
P.O. Box 376
Ann Arbor, MI 48106

        Re: Aastrom Biosciences, Inc.
            Initial Public Offering

Dear Doug:

        We understand that Aastrom Biosciences, Inc. (the "Company") has filed a
Registration Statement on Form S-1 to register 3,250,000 shares of the Company's
Common Stock in connection with its initial public offering (the "IPO"). We
hereby acknowledge receipt of a copy of the Registration Statement, as filed
with the Securities and Exchange Commission on November 1, 1996.

        The purpose of this letter is to set forth the agreement of Cobe
Laboratories, Inc. ("Cobe") to purchase $5,000,000 of the Company's Common Stock
directly from the underwriters upon the closing of the IPO, at a purchase price
per share equal to the initial public offering price in the IPO. The foregoing
agreement to purchase such shares shall be deemed to fully satisfy Cobe's
preemptive rights under Section 5.04 of the Stock Purchase Agreement between
Cobe and the Company dated October 22, 1993, as amended (the "Agreement"), as to
the Common Stock being offered by the Company in the IPO.

        We also understand that the Company will not be exercising the
 Company
Option as set forth in Section 5.05 of the Agreement.


                                Sincerely,

                                COBE LABORATORIES, INC.

                                By:  /s/ Edward C. Wood, Jr.
                                    ----------------------------
                                     Edward C. Wood, Jr.
                                     President, COBE BCT
                                    ----------------------------
                                     Name and Title

Agreed to and accepted:

AASTROM BIOSCIENCES, INC.


By:  /s/ R. Douglas Armstrong, Ph.D.
    --------------------------------
     R. Douglas Armstrong, Ph.D.
     President and Chief Executive Officer

                                      -1-



<PAGE>
 
                                                                   EXHIBIT 10.36
                           AASTROM BIOSCIENCES, INC.

                             SUBSCRIPTION AGREEMENT



AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106
Attention: R. Douglas Armstrong, Ph.D.

Gentlemen:

              1.    Subscription.  The undersigned (the "undersigned" or the
                    ------------                                            
"Purchaser"), hereby agrees and subscribes to purchase from AASTROM Biosciences,
Inc., a Michigan corporation (the "Company"), ________ shares (the "Shares") of
the Series D Preferred Stock of the Company (the "Series D Stock") at a purchase
price of $4.00 per Share, for an aggregate purchase price of $________ (the
"Purchase Price").  This subscription is submitted to you in accordance with and
subject to the terms and conditions described in this Subscription Agreement and
the Memorandum (as defined in Section 5.c.) relating to the offering (the
"Offering") by the Company of up to 2,500,000 shares of Series D Stock.

              2.    Subscription and Payment.  The undersigned is returning to
                    ------------------------                                  
the Company two signed and completed copies of this Subscription Agreement,
together with payment of the Purchase Price.  Payment of the Purchase Price is
being made by delivery to the Company of a check payable to the order of the
Company, or by wire transfer of the Purchase Price to the Company.  At any time
on
 or after April 14, 1995, upon receipt by the Company of valid subscriptions
to purchase at least $2,000,000 of Series D Stock, the Company will schedule a
closing (the "Closing") for the purchase and sale of such shares.  As soon as
practicable after the Closing, the Company shall issue and deliver to the
undersigned a stock certificate or certificates, registered in the name of the
undersigned, representing the Shares being purchased.  After the Closing, the
Company may accept subscriptions for additional shares of Series D Stock as they
are received.

              3.    Acceptance of Subscription.  The undersigned understands and
                    --------------------------                                  
agrees that the Company in its sole discretion reserves the right to accept or
reject this subscription for the Shares.  The Company shall have no obligation
hereunder until the Company shall execute and deliver to the undersigned an
executed copy of this Subscription Agreement.  This Subscription Agreement shall
continue in full force and effect to the extent this subscription was accepted.

<PAGE>
 
              4.    Stock Registration Rights.  The undersigned shall have the
                    -------------------------                                 
stock registration rights as have been granted pursuant to Sections 2.4 through
2.14 of that certain Amended and Restated Investors' Rights Agreement dated
April 7, 1992 by and among the Company and certain investors and shareholders of
the Company, attached hereto as Exhibit A.

              5.    Representations and Warranties.  In order to induce the 
                    ------------------------------ 
Company to sell the Shares to the undersigned, the undersigned hereby
acknowledges, represents, warrants and agrees as follows:

                    a.   None of the Shares of Series D Stock are (and the
shares of common stock issuable upon conversion thereof ("Underlying Common
Stock") will not be) registered under the Securities Act of 1933 (as amended,
the "Securities Act") or any state securities laws.  The undersigned understands
that the sale of the Shares is intended to be exempt from registration under
Section 4(2) of the Securities Act and/or the provisions of Regulation D
promulgated thereunder, based, in part, upon the representations, warranties and
agreements contained in this Subscription Agreement;

                    b.   Neither the Securities and Exchange Commission nor any
state securities commission has approved any of the Shares or passed upon or
endorsed the merits of this transaction;

                    c.   Prior to its execution of this Subscription Agreement,
the undersigned has received from the Company (i) the Confidential Private
Placement Memorandum of the Company dated April 5, 1995 (together with any
exhibits thereto, the "Memorandum"), which supersedes in its entirety the draft
Memorandum previously delivered to the undersigned, (ii) a copy of the amendment
to the Restated Articles of Incorporation of the Company, for the purpose of
creating the Series D Stock, and (iii) the audited financial statements of the
Company for the years ended June 30, 1994, 1993 and 1992, the unaudited
financial statements of the Company for the month ended January 31, 1995, and
the unaudited balance sheet of the Company at February 28, 1995.

                    d.   The undersigned acknowledges that all documents,
records and books pertaining to the investment in the Shares, including the
Memorandum, have been made available for inspection by the undersigned, or by
its attorney, accountant, purchaser representative and/or tax advisor
(collectively, the "Advisors") and that the undersigned and/or its Advisors have
completed such review as they deem to be necessary to make the decision to
purchase the Shares;

                    e.   The undersigned has reviewed the merits and risks of an
investment in the Shares.  The undersigned and the Advisors have had a
reasonable opportunity to ask questions of and receive answers from members of
management of the Company concerning the offer and sale of the Shares and all
such questions have been answered to the full satisfaction of the undersigned;

                                      -2-

<PAGE>
 
                    f.   In evaluating the suitability of an investment in the
Company, the undersigned has not relied upon any representation or other
information (oral or written) other than as contained in documents or answers to
questions so furnished to the undersigned or its Advisors by the Company;

                    g.   No oral or written representations have been made or
oral or written information furnished to the undersigned or its Advisors in
connection with the Offering which were in any way inconsistent with the
information provided to the undersigned or its Advisors, including the
Memorandum.

                    h.   The undersigned, together with the Advisors, have such
knowledge and experience in financial, tax and business matters so as to enable
each of them to utilize the information made available to each of them in
connection with the purchase of the Shares to evaluate the merits and risks of
an investment in the Shares and to make an informed investment decision with
respect thereto;

                    i.   The undersigned is not relying on the Company with
respect to the tax and other economic considerations of an investment in the
Shares, and the undersigned has relied on the advice, or has consulted with,
only its own Advisors concerning tax matters;

                    j.   The undersigned is acquiring the Shares solely for its
own account, for investment, and not with a view to or for subdivision, resale
or distribution, in whole or in part, and no other person has or will have a
direct or indirect beneficial interest in the Shares, other than for any partner
or shareholder owners of the undersigned, if any;

                    k.   The undersigned must bear the economic risk of the
investment indefinitely because none of the Shares of Series D Stock (or shares
of the underlying Common Stock) may be sold, hypothecated or otherwise disposed
of unless (i) subsequently registered under the Securities Act and applicable
state securities laws, or (ii) an exemption from registration is available.
Legends shall be placed on the Shares (and the shares of Underlying Common
Stock) to the effect that they have not been registered under the Securities Act
or applicable state securities laws and appropriate notations thereon will be
made in the Company's stock books;

                    l.   The undersigned has adequate means of providing for the
undersigned's current financial needs and foreseeable contingencies and the
undersigned can accept the fact that an investment in the Shares will not be
liquid;

                    m.   The undersigned is aware that an investment in the
Shares involves a number of very significant risks and, in particular,
acknowledges that the Company is in the development stage.  The undersigned
understands that the risks associated with an investment in the Shares could
result in, and the undersigned can sustain, a complete loss of its investment;

                                      -3-

<PAGE>
 
                    n.   The undersigned is an "accredited investor" as such
term is defined in the regulations promulgated under the Securities Act, and has
completed and signed the Accredited Investor Certification attached as Exhibit B
hereto supporting this conclusion;

                    o.   The undersigned represents that it has full power and
authority to execute and deliver this Subscription Agreement and all other
related agreements and certificates and to carry out the provisions hereof and
thereof and to purchase and hold the Shares, and this Subscription Agreement is
a legal, valid and binding obligation of the undersigned. The execution and
delivery of this Subscription Agreement will not violate or be in conflict with
any order, judgment, injunction, agreement or controlling document to which the
undersigned is a party or by which it is bound;

                    p.   The undersigned represents to the Company that the
information contained herein is complete and accurate and may be relied upon by
the Company in determining the availability of an exemption from registration
under federal and state securities laws. The undersigned further represents and
warrants that it will notify the Company immediately upon the occurrence of any
material change to the information contained herein occurring prior to the
Company's issuance of the Shares;

                    q.   The undersigned is unaware of, and in no way relying
on, any form of general solicitation or general advertising in connection with
the offer and sale of the Shares.

              6.    Compliance with Regulation D and Applicable State Securities
                    ------------------------------------------------------------
Laws.  The undersigned understands and agrees that the following restrictions
- ----                                                                         
and limitations are applicable to its purchase of the Shares and any resales,
mortgages, pledges, hypothecations, or other transfers thereof, pursuant to
Regulation D under the Securities Act and applicable state securities laws:

                    a.   The undersigned agrees that the Shares may not be sold,
mortgaged, pledged, hypothecated or otherwise transferred unless the Shares are
registered under the Securities Act and applicable state securities laws or are
exempt from registration thereunder.

                    b.   A legend in substantially the following form will be
placed on the certificate(s) evidencing the Shares:

          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933.  THESE SECURITIES HAVE
          BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR
          RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED,

                                      -4-

<PAGE>
 
          HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE
          REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF
          1933, OR UNLESS AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
          AVAILABLE.

          c.     FOR CALIFORNIA RESIDENTS ONLY:  THE SALE OF THE SECURITIES THAT
                 -----------------------------                                  
IS THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH
SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM SUCH
QUALIFICATION IS AVAILABLE.  THE RIGHTS OF ALL PARTIES TO THIS SUBSCRIPTION
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN
EXEMPTION THEREFROM BEING AVAILABLE.

              7.    Board Observer Rights.  The holders of a majority of 
                    --------------------- 
shares of Series D Preferred Stock shall have the right from time to time to
designate one representative, who shall be entitled to attend all meetings of
the Board of Directors, in a nonvoting observer capacity only. The Company will
give such representative copies of all materials that it provides to its
directors; provided, however, that such representative shall be reasonably
acceptable to the Company and shall enter into a confidentiality agreement
acceptable to the Company.

              8.     Irrevocability; Binding Effect.  The undersigned hereby
                     ------------------------------                         
acknowledges and agrees that the subscription hereunder is irrevocable by the
undersigned, except as required by applicable law, and that this Subscription
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors, legal representatives, and permitted assigns.

              9.     Modification.  This Subscription Agreement shall not be
                     ------------                                           
modified or waived except by an instrument in writing signed by the party
against whom any such modification or waiver is sought.

              10.     Notices.  A notice or other communication required or
                      -------                                              
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail, return receipt requested, or delivered against receipt to the
party to whom it is to be given (a) if to the Company, at the address set forth
above, or (b) if to the undersigned, at the address set forth on the signature
page hereof (or, in either case, to such other address as the party shall have
furnished in writing in accordance with the provisions of this Section 10).  Any
notice or other communication shall be deemed given at the time it is received
at the party's address.

                                      -5-

<PAGE>
 
              11.     Assignability.  This Subscription Agreement and the 
                      -------------                    
rights,interests and obligations hereunder are not transferable or assignable by
the undersigned, except to an affiliate of the undersigned who qualifies as an
"accredited investor," and the undersigned further agrees that the transfer or
assignment of the Shares shall be made only in accordance with all applicable
laws.

              12.     Applicable Law.  This Subscription Agreement shall be 
                      --------------  
governed by and construed in accordance with the internal laws of the state of
Michigan without regard to its conflicts of laws principles.

              13.     Blue Sky Qualification.  The undersigned's right to 
                      ----------------------        
purchase Shares under this Subscription Agreement is expressly conditioned upon
the exemption from qualification of the offer and sale of the Shares from
applicable federal and state securities laws. The Company shall not be required
to qualify this transaction under the securities laws of any jurisdiction and,
should qualification be necessary, the Company shall be released from any and
all obligations to maintain its offer, and may rescind any sale contracted, in
the jurisdiction.

              14.     Confidentiality.  The undersigned acknowledges and 
                      ---------------    
agrees that any information or data it has acquired from or about the Company,
not otherwise properly in the public domain, was received in confidence. The
undersigned agrees not to divulge, communicate or disclose, except as may be
required by law or for the performance of this Subscription Agreement, or use to
the detriment of the Company or for the benefit of any other person or persons,
or misuse in any way, any confidential information of the Company, including any
scientific, technical, trade or business secrets of the Company and any
scientific, technical, trade or business materials that are treated by the
Company as confidential or proprietary, including, but not limited to, ideas,
discoveries, inventions, developments and improvements belonging to the Company
and confidential information obtained by or given to the Company about or
belonging to third parties.

              15.   Miscellaneous.
                    ------------- 

                    a.  This Subscription Agreement, together with the
attached stock registration rights, constitutes the entire agreement between the
undersigned and the Company with respect to the subject matter hereof and
supersedes all prior oral or written agreements and understandings, if any,
relating to the subject matter hereof. The terms and provisions of this
Subscription Agreement may be waived, or consent for the departure therefrom
granted, only by a written document executed by the party entitled to the
benefits of such terms or provisions.

                    b.   The undersigned's representations and warranties made
in this Subscription Agreement shall survive the execution and delivery hereof
and of the Shares.

                                      -6-

<PAGE>
 
                    c.   Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Subscription Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.

                    d.   All pronouns and any variations thereof used herein
shall be deemed to be to the masculine, feminine, neuter, singular or plural as
the identity of the person or persons referred to may require.

                    e.   This Subscription Agreement may be executed in one or
more counterparts each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument. Signatures may be
transmitted by facsimile.

                    f.   Each provision of this Subscription Agreement shall be
considered separable and if for any reason any provision or provisions hereof
are determined to be invalid or contrary to applicable law, such invalidity
shall not impair the operation of or affect the remaining portions of this
Subscription Agreement, so long as the material economic benefits remain
enforceable.

                    g.   Paragraph titles are for descriptive purposes only and
shall not control or alter the meaning of this Subscription Agreement as set
forth in the text.


If the purchaser is an INDIVIDUAL, and if purchased INDIVIDUALLY, as JOINT
TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY:


____________________________    __________________________
Print Name(s)                   Social Security Number(s)

____________________________    __________________________
Signature(s) of Purchaser(s)

____________________________    __________________________
Date                            Address
                                __________________________


                                      -7-

<PAGE>
 
If the purchaser is a PARTNERSHIP, CORPORATION, or TRUST:

____________________________    __________________________
Name of Partnership,            Federal Taxpayer
Corporation or Trust            Identification Number

____________________________
Date

By:_________________________    __________________________
                                State of Organization
Name:_______________________

Title: ______________________   ___________________________
                                Address
                                ___________________________



SUBSCRIPTION ACCEPTED AND AGREED
this __ day of __________, 1995


AASTROM BIOSCIENCES, INC.



By:  ___________________________
     R. Douglas Armstrong, Ph.D., President
     and Chief Executive Officer

                                      -8-

<PAGE>
 
                                                                       EXHIBIT B
                       Accredited Investor Certification
                       ---------------------------------
                        (Check the appropriate box(es))

    ___             i.     I am a natural person who had individual income of
               more than $200,000 in each of the most recent two years or joint
               income with my spouse in excess of $300,000 in each of the most
               recent two years and reasonably expect to reach that same income
               level for the current year;

    ___             ii.     I am a natural person whose individual net worth, or
               joint net worth with my spouse, will at the time of purchase of
               the Shares be in excess of $1,000,000;

    ___             iii.    The undersigned is an institutional investor
               satisfying the requirements of Section 501(a)(1), (2) or (3) of
               Regulation D promulgated under the Securities Act;
 
    ___             iv.     The undersigned is a trust, which trust has total
               assets in excess of $5,000,000, which is not formed for the
               specific purpose of acquiring the Shares offered hereby and whose
               purchase is directed by a sophisticated person as described in
               Rule 506(b)(2)(ii) of Regulation D and who has such knowledge and
               experience in financial and business matters that it is capable
               of evaluating the risks and merits of an investment in the
               Shares;
    ___             v.      The undersigned is an entity (other than a trust) in
               which all of the equity owners meet the requirements of at least
               one of the above subparagraphs.



                                            __________________________________
                                            By:_______________________________



<PAGE>
 
                                                                   EXHIBIT 10.37

                           AASTROM BIOSCIENCES, INC.

                            SUBSCRIPTION AGREEMENT

AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106

Attention: R. Douglas Armstrong, Ph.D.

Gentlemen:

        1. Subscription. The undersigned (the "undersigned" or the "Purchaser"),
           ------------     
hereby agrees and subscribes to purchase from AASTROM Biosciences, Inc., a
Michigan corporation (the "Company"), 62,500 shares (the "Shares") of the Series
D Preferred Stock of the Company (the "Series D Stock") at a purchase price of
$4.00 per Share, for an aggregate purchase price of $250,000 (the "Purchase
Price"). This subscription is submitted to you in accordance with and subject to
the terms and conditions described in this Subscription Agreement and the
Memorandum (as defined in Section 5.c.) relating to the offering (the
"Offering") by the Company of up to 2,500,000 shares of Series D Stock.

        2. Subscription and Payment. The undersigned is returning to the
           ------------------------ 
Company two signed and completed copies of this Subscription Agreement,
together with payment of the Purchase Price. Payment of the Purchase Price is
being made by delivery to the Company of a check payable to the order of the
Company, or by wire transfer of the Purchase Price to the Company.
 The Company
shall issue and deliver to the undersigned a stock certificate or certificates,
registered in the name of the undersigned, representing the Shares being
purchased.

        3. Acceptance of Subscription. The undersigned understands and agrees
           --------------------------     
that the Company in its sole discretion reserves the right to accept or reject
this subscription for the Shares. The Company shall have no obligation hereunder
until the Company shall execute and deliver to the undersigned an executed copy
of this Subscription Agreement. This Subscription Agreement shall continue in
full force and effect to the extent this subscription was accepted.

        4. Stock Registration Rights. The undersigned shall have the stock 
           -------------------------                               
registration rights as have been granted pursuant to Sections 2.4 through 2.14
of that certain Amended and Restated Investors' Rights Agreement dated April 7,
1992 by and among the Company and certain investors and shareholders of the
Company, attached hereto as Exhibit A.

<PAGE>
 
        5. Representations and Warranties of Purchaser. In order to induce the
           -------------------------------------------
Company to sell the Shares to the undersigned, the undersigned hereby
acknowledges, represents, warrants and agrees as follows:

                a. None of the Shares of Series D Stock are (and the shares of
common stock issuable upon conversion thereof ("Underlying Common Stock") will
not be) registered under the Securities Act of 1933 (as amended, the "Securities
Act") or any state securities laws. The undersigned understands that the sale of
the Shares is intended to be exempt from registration under Section 4(2) of the
Securities Act and/or the provisions of Regulation D promulgated thereunder,
based, in part, upon the representations, warranties and agreements contained in
this Subscription Agreement;

                b. Neither the Securities and Exchange Commission nor any state
securities commission has approved any of the Shares or passed upon or endorsed
the merits of this transaction;

                c. Prior to its execution of this Subscription Agreement, the
undersigned has received from the Company (i) the Confidential Private Placement
Memorandum of the Company dated April 5,1995 (together with any exhibits
thereto, the "Memorandum"), which supersedes in its entirety the draft
Memorandum previously delivered to the undersigned, (ii) a copy of the amendment
to the Restated Articles of Incorporation of the Company, for the purpose of
creating the Series D Stock, and (iii) the audited financial statements of the
Company for the years ended June 30, 1995, 1994, 1993 and 1992, the unaudited
financial statements of the Company for the month ended August 31, 1995, and
the unaudited balance sheet of the Company at August 31, 1995.

                d. The undersigned acknowledges that all documents, records and
books pertaining to the investment in the Shares, including the Memorandum, have
been made available for inspection by the undersigned, or by its attorney,
accountant, purchaser representative and/or tax advisor (collectively, the
"Advisors") and that the undersigned and/or its Advisors have completed such
review as they deem to be necessary to make the decision to purchase the Shares.
Notwithstanding the foregoing, the parties acknowledge and agree that the
Purchaser is relying solely on the representations and warranties set forth in
Section 6 hereof, which reference documents set forth in Section 5.c;

                e. The undersigned has reviewed the merits and risks of an
investment in the Shares. The undersigned and the Advisors have had a reasonable
opportunity to ask questions of and receive answers from members of management
of the Company concerning the offer and sale of the Shares and all such
questions have been answered to the full satisfaction of the undersigned;

                                      -2-

<PAGE>
 
                f. In evaluating the suitability of an investment in the
Company, the undersigned has not relied upon any representation or other
information (oral or written) other than as contained in documents or answers to
questions so furnished to the undersigned or its Advisors by the Company;

                g. No oral or written representations have been made or oral or
written information furnished to the undersigned or its Advisors in connection
with the Offering which were in any way inconsistent with the information
provided to the undersigned or its Advisors, including the Memorandum.

                h. The undersigned, together with the Advisors, have such
knowledge and experience in financial, tax and business matters so as to enable
each of them to utilize the information made available to each of them in
connection with the purchase of the Shares to evaluate the merits and risks of
an investment in the Shares and to make an informed investment decision with
respect thereto;

                i. The undersigned is not relying on the Company with respect to
the tax and other economic considerations of an investment in the Shares, and
the undersigned has relied on the advice, or has consulted with, only its own
Advisors concerning tax matters;

                j. The undersigned is acquiring the Shares solely for its own
account, for investment, and not with a view to or for subdivision, resale or
distribution, in whole or in part, and no other person has or will have a direct
or indirect beneficial interest in the Shares, other than for any partner or
shareholder owners of the undersigned, if any;

                k. The undersigned must bear the economic risk of the 
investment indefinitely because none of the Shares of Series D Stock (or shares
of the underlying Common stock) may be sold, hypothecated or otherwise disposed
of unless (i) subsequently registered under the Securities Act and applicable
state securities laws, or (ii) an exemption from registration is available.
Legends shall be placed on the Shares (and the shares of Underlying Common
Stock) to the effect that they have not been registered under the Securities Act
or applicable state securities laws and appropriate notations thereon will be
made in the Company's stock books;

                l. The undersigned has adequate means of providing for the
undersigned's current financial needs and foreseeable contingencies and the
undersigned can accept the fact that an investment in the Shares will not be
liquid;

                m. The undersigned is aware that an investment in the Shares
involves a number of very significant risks and, in particular, acknowledges
that the Company is in the development stage. The undersigned understands that
the risks associated

                                      -3-

<PAGE>
 
with an investment in the Shares could result in, and the undersigned can
sustain, a complete loss of its investment;

                n. The undersigned is an "accredited investor" as such term is
defined in the regulations promulgated under the Securities Act, and has
completed and signed the Accredited Investor Certification attached as Exhibit B
hereto supporting this conclusion;

                o. The undersigned represents that it has full power and
authority to execute and deliver this Subscription Agreement and all other
related agreements and certificates and to carry out the provisions hereof and
thereof and to purchase and hold the Shares, and this Subscription Agreement is
a legal, valid and binding obligation of the undersigned. The execution and
delivery of this Subscription Agreement will not violate or be in conflict with
any order, judgment, injunction, agreement or controlling document to which the
undersigned is a party or by which it is bound;

                p. The undersigned represents to the Company that the
information contained herein is complete and accurate and may be relied upon by
the Company in determining the availability of an exemption from registration
under federal and state securities laws. The undersigned further represents and
warrants that it will notify the Company immediately upon the occurrence of any
material change to the information contained herein occurring prior to the
Company's issuance of the Shares;

                q. The undersigned is unaware of, and in no way relying on, any
form of general solicitation or general advertising in connection with the 
offer and sale of the Shares.

        6. Representations and Warranties of the Company
           ---------------------------------------------

The Company represents and warrants to the Purchaser that

                6.0l Organization, Qualifications and Corporate Power.
                     ------------------------------------------------ 

        The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Michigan and is duly licensed or
qualified to transact business as a foreign corporation and is in good standing
in each other jurisdiction in which the nature of the business transacted by it
or the character of the properties owned or leased by it requires such licensing
or qualification. The Company has the corporate power and authority to own and
hold its properties and to carry on its business as now conducted and as
proposed to be conducted, to execute, deliver and perform this Subscription
Agreement, to issue, sell and deliver the Series D Stock, and to issue and
deliver the Conversion Shares as provided in the Articles.

                                      -4-

<PAGE>
 
     6.02   Authorization of Agreement.
            --------------------------

            (a)   The execution and delivery by the Company of this Subscription
Agreement, the performance by the Company of its obligations hereunder, the 
issuance, sale and delivery of the Series D Stock and the issuance and delivery 
of the Conversion Shares have been duly authorized by all requisite corporate 
action and will not violate any provision of law, any order of any court or 
other agency of government, the Articles or the Bylaws of the Company (the 
"Bylaws"), or any provision of any indenture, agreement or other instrument to 
which the Company or any of its properties or assets is bound, or conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) 
a default under any such indenture, agreement or other instrument, or result in 
the creation or imposition of any lien, charge, restriction, claim or
encumbrance of any nature whatsoever upon any of the properties or assets of the
Company.

            (b)   The Series D Stock has been duly authorized and, when issued 
in accordance with this Subscription Agreement, will be validly issued, fully 
paid and nonassessable shares of the Company with no personal liability 
attaching to the ownership thereof and will be free and clear of all liens, 
charges, restrictions, claims and encumbrances imposed by or through the Company
except as set forth herein.  The Conversion Shares have been duly reserved for 
issuance upon conversion of the Series D Stock and, when so issued, will be duly
authorized, validly issued, fully paid and nonassessable shares of Common Stock
with no personal liability attaching to the ownership thereof and so long as the
Series D Stock tendered for conversion is free and clear of liens or
encumbrances, will be free and clear of all liens, charges, restrictions, claims
and encumbrances imposed by or through the Company except as set forth herein.
Neither the issuance, sale or delivery of the Series D Stock nor the issuance or
delivery of the Conversion Shares is subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other right in
favor of any person which right has not been waived.

     6.03   Validity.
            --------

            This Subscription Agreement has been duly executed and delivered by 
the Company and constitutes the legal, valid and binding obligation of the 
Company, enforceable in accordance with its terms.

     6.04   Authorized Capital Stock.
            ------------------------

            (a)   The authorized capital stock of the Company consists of (1) 
8,540,000 shares of Preferred Stock, and (2) 17,000,000 shares of Common Stock. 
Immediately prior to the Closing, 2,674,953 shares of Common Stock and 8,040,001
shares of Preferred Stock will be validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to 

                                      -5-

<PAGE>
 
the ownership thereof. The stockholders of record and holders of subscriptions,
warrants, options, convertible securities, and other rights (contingent or
other), if any, to purchase or otherwise acquire equity securities of the
Company prior to the Closing Date (the "Original Shareholders") and the number
of shares of Common Stock and the number of such subscriptions, warrants,
options, convertible securities, and other such rights, if any, held by each,
are as set forth in the Memorandum. The designations, powers, preferences,
rights, qualifications, limitations and restrictions in respect of each class of
authorized capital stock of the Company are as set forth in the Articles, a copy
of which has previously been delivered to each Purchaser, and all such
designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth in the attached Schedule 6.04 or in the
Memorandum, (a) no person owns of record or is known to the Company to own
beneficially any share of Common Stock, (b) no subscription, warrant, option,
convertible security, or other right (contingent or other) to purchase or
otherwise acquire equity securities of the Company is authorized or outstanding
and (c) there is no commitment by the Company to issue shares, subscriptions,
warrants, options, convertible securities, or other such rights or to distribute
to holders of any of its equity securities any evidence of indebtedness or
asset. Except as provided for in the Articles or as set forth herein, the
Company has no obligation (contingent or other) to purchase, redeem or otherwise
acquire any of its equity securities or any interest therein or to pay any
dividend or make any other distribution in respect thereof. Except as set forth
herein or in the Memorandum, there are no voting trusts or agreements,
stockholders agreements, pledge agreements, buy-sell agreements, rights of first
refusal, preemptive rights or proxies relating to any securities of the Company
(whether or not the Company is a party thereto). All of the outstanding
securities of the Company were issued in compliance with all applicable Federal
and state securities laws.

                6.05 No Material Adverse Changes. The representations and
                     ---------------------------
warranties made by the Company in Sections 6.05 through 6.27 of the Aastrom
Biosciences, Inc. Subscription Agreement dated April 24, 1995 between Northwest
Ohio Venture Fund Limited Partnership and the Company are true and correct in
all material respects as if made on the date hereof.

        7. Compliance with Regulation D and Applicable State Securities Laws.
           -----------------------------------------------------------------
The undersigned understands and agrees that the following restrictions and
limitations are applicable to its purchase of the Shares and any resales,
mortgages, pledges, hypothecations, or other transfers thereof, pursuant to
Regulation D under the Securities Act and applicable state securities laws:

                                      -6-

<PAGE>
 
                a. The undersigned agrees that the Shares may not be sold,
mortgaged, pledged, hypothecated or otherwise transferred unless the Shares are
registered under the Securities Act and applicable state securities laws or are
exempt from registration thereunder.

                b. A legend in substantially the following form will be placed
on the certificate(s) evidencing the Shares;

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES
         HAVE BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO
         DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, MORTGAGED,
         PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
         EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER
         THE SECURITIES ACT OF 1933, OR UNLESS AN EXEMPTION FROM
         REGISTRATION UNDER SUCH ACT IS AVAILABLE.

                c. FOR CALIFORNIA RESIDENTS ONLY: THE SALE OF THE SECURITIES
                   -----------------------------
THAT IS THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT HAS NOT BEEN QUALIFIED WITH
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR
SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS AN EXEMPTION FROM
SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO THIS SUBSCRIPTION
AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN
EXEMPTION THEREFROM BEING AVAILABLE.

        8. Board Observer Rights. Purchasers of Series D Preferred Stock who
           ---------------------
were not previously holders of capital stock of the Company ("New Investors")
shall have the following rights: a majority in interest of New Investors shall
have the right from time to time to designate one representative, who shall be
entitled to attend all meetings of the Board of Directors, in a nonvoting
observer capacity only. The Company will include such representative in oral
reports given by the Board and give such representative copies of all materials
that it provides to its directors including but not limited to all materials
delivered to directors outside of meetings; provided, however, that such
representative shall be reasonably acceptable to the Company and shall enter
into a confidentiality agreement acceptable to the Company.

        Additionally, the New Investors shall have the rights to information and
inspection set forth in Sections 3.1 through 3.3 of the Amended and Restated
Investors Rights Agreement dated April 7, 1992 by and among the Company and
certain investors and shareholders of the Company.

                                      -7-

<PAGE>
 
        9. Additional Sales of Series D Preferred Stock. The Company hereby
           --------------------------------------------
agrees that following the completion of the Offering, it will not issue and sell
additional shares of Series D Stock at a purchase price per share of less than
the applicable conversion price then in effect with respect to the Series D
Stock.

        10. Irrevocability: Binding Effect. The undersigned hereby acknowledges
            ------------------------------
and agrees that the subscription hereunder is irrevocable by the undersigned,
except as required by applicable law, and that this Subscription Agreement shall
be binding upon and inure to the benefit of the parties and their respective
successors, legal representatives, and permitted assigns.

        11. Modification. This Subscription Agreement shall not be modified or
            ------------
waived except by an instrument in writing signed by the party against whom any
such modification or waiver is sought.

        12. Notices. A notice or other communication required or permitted to be
            -------
given hereunder shall be in writing and shall be mailed by certified mail,
return receipt requested, or delivered against receipt to the party to whom it
is to be given (a) if to the Company, at the address set forth above, or (b) if
to the undersigned, at the address set forth on the signature page hereof (or,
in either case, to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 10). Any notice or
other communication shall be deemed given at the time it is received at the
party's address.

        13. Assignability. This Subscription Agreement and the rights, interests
            -------------
and obligations hereunder are not transferable or assignable by the undersigned,
except to an affiliate of the undersigned who qualifies as an "accredited
investor," and the undersigned further agrees that the transfer or assignment of
the Shares shall be made only in accordance with all applicable laws.

        14. Applicable Law. This Subscription Agreement shall be governed by and
            --------------
construed in accordance with the internal laws of the state of Michigan without
regard to its conflicts of laws principles.

        15. The Blue Sky Qualification. The undersigned's right to purchase
            --------------------------
Shares under this Subscription Agreement is expressly conditioned upon the
exemption from qualification of the offer and sale of the Shares from applicable
federal and state securities laws. The Company shall not be required to qualify
this transaction under the securities laws of any jurisdiction and, should
qualification be necessary, the Company shall be released from any and all
obligations to maintain its offer, and may rescind any sale contracted, in the
jurisdiction.

                                      -8-

<PAGE>
 
        16. Confidentiality. The undersigned acknowledges and agrees that any
            ---------------                                                  
information or data it has acquired from or about the Company, not otherwise
properly in the public domain, was received in confidence. The undersigned
agrees not to divulge, communicate or disclose, except as may be required by law
or for the performance of this Subscription Agreement, or use to the detriment
of the Company or for the benefit of any other person or persons, or misuse in
any way, any confidential information of the Company, including any scientific,
technical, trade or business secrets of the Company and any scientific,
technical, trade or business materials that are treated by the Company as
confidential or proprietary, including, but not limited to, ideas, discoveries,
inventions, developments and improvements belonging to the Company and
confidential information obtained by or given to the Company about or belonging
to third parties.

        17. Miscellaneous.
            ------------- 

                a. This Subscription Agreement, together with the attached stock
registration rights, constitutes the entire agreement between the undersigned
and the Company with respect to the subject matter hereof and supersedes all
prior oral or written agreements and understandings, if any, relating to the
subject matter hereof. The terms and provisions of this Subscription Agreement
may be waived, or consent for the departure therefrom granted, only by a written
document executed by the party entitled to the benefits of such terms or
provisions.

                b. The undersigned's representations and warranties made in this
Subscription Agreement shall survive the execution and delivery hereof and of
the Shares.

                c. Each of the parties hereto shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Subscription Agreement and the
transactions contemplated hereby whether or not the transactions contemplated
hereby are consummated.

                d. All pronouns and any variations thereof used herein shall be
deemed to be to the masculine, feminine, neuter, singular or plural as the
identity of the person or persons referred to may require.

                e. This Subscription Agreement may be executed in one or more
counterparts each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument. Signatures may be transmitted
by facsimile.

                f. Each provision of this Subscription Agreement shall be
considered separable and if for any reason any provision or provisions hereof
are determined to be invalid or contrary to applicable law, such invalidity
shall not impair the operation of

                                      -9-

<PAGE>
 
or affect the remaining portions of this Subscription Agreement, so long as the
material economic benefits remain enforceable.

                g. Paragraph titles are for descriptive purposes only and shall
not control or alter the meaning of this Subscription Agreement as set forth in
the text.

                                      -10-

<PAGE>
 
If the purchaser is an INDIVIDUAL, and if purchased INDIVIDUALLY, as JOINT
TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY:


- -----------------------------              ----------------------------
Print Name(s)                              Social Security Number(s)

- -----------------------------              ----------------------------
Signature(s) of Purchaser(s)

- -----------------------------              ----------------------------
Date                                       Address

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

If the purchaser is a PARTNERSHIP, CORPORATION, or TRUST;


Northwest Ohio Venture
Fund Limited Partnership                         34-1696375
- ------------------------------             ---------------------------- 
Name of Partnership,                       Federal Taxpayer  
Corporation or Trust                       Identification Number


December 11, 1995
- ------------------------------
Date

By:  NOVF General
   ---------------------------
By: /s/ Barry P. Walsh                     Ohio
   ---------------------------             ----------------------------
Name: Barry P. Walsh
     -------------------------
Title: Managing Partner                    300 Madison Ave., Ste. 1525
      ------------------------             Toledo, OH 43604
                                           ----------------------------
                                           Address      


SUBSCRIPTION ACCEPTED AND AGREED 
this 11 day of December, 1995
     --        --------

AASTROM BIOSCIENCES, INC.

By: /s/ R. Douglas Armstrong
   ---------------------------
    R. Douglas Armstrong, PhD.,
    President and Chief Executive Officer

                                      -11-

<PAGE>
 
                                                                       EXHIBIT B

                      Accredited Investor Certification 
                      ---------------------------------            
                       (Check the appropriate box(es))

                   i. I am a natural person who had individual income of more
- ---      than $200,000 in each of the most recent two years or joint income with
         my spouse in excess of $300,000 in each of the most recent two years
         and reasonably expect to reach that same income level for the current
         year;

                   ii. I am a natural person whose individual net worth, or
- ---      joint net worth with my spouse, will at the time of purchase of the
         Shares be in excess of $1,000,000;

 X                 iii. The undersigned is an institutional investor satisfying
- ---      the requirements of Section 501(a)(1), (2) or (3) of Regulation D
         promulgated under the Securities Act;

                   iv. The undersigned is a trust, which trust has total assets
- ---      in excess of $5,000,000, which is not formed for the specific purpose
         of acquiring the Shares offered hereby and whose purchase is directed
         by a sophisticated person as described in Rule 506(b)(2)(ii) of
         Regulation D and who has such knowledge and experience in financial and
         business matters that it is capable of evaluating the risks and merits
         of an investment in the Shares;

                   v. The undersigned is an entity (other than a trust) in which
- ---      all of the equity owners meet the requirements of at least one of the
         above subparagraphs.

                                Northwest Ohio Venture Fund
                                By: NOVF General
 
                                -------------------------------
                                By: /s/ Barry P. Walsh
                                   ----------------------------
                                Its: Managing Partner

                                      -12-



<PAGE>
 
                                                                   EXHIBIT 10.38
                           AASTROM BIOSCIENCES, INC.

                             SUBSCRIPTION AGREEMENT


AASTROM Biosciences, Inc.
Domino's Farms, Lobby L
24 Frank Lloyd Wright Drive
P.O. Box 376
Ann Arbor, MI 48106
Attention: R. Douglas Armstrong, Ph.D.

Gentlemen:

          1.        Subscription.  The undersigned (the "undersigned" or the
                    ------------                                            
"Purchaser"), hereby agrees and subscribes to purchase from AASTROM Biosciences,
Inc., a Michigan corporation (the "Company"), 1,250,000 shares (the "Shares") of
the Series D Preferred Stock of the Company (the "Series D Stock") at a purchase
price of $4.00 per Share, for an aggregate purchase price of $5,000,000 (the
"Purchase Price").  This subscription is submitted to you in accordance with and
subject to the terms and conditions described in this Subscription Agreement,
the Memorandum (as defined in Section 5.c.) and the Articles (as defined in
Section 5.c.) relating to the offering (the "Offering") by the Company of up to
2,500,000 shares of Series D Stock.

          2.        Subscription and Payment.  The undersigned is returning to
                    ------------------------                                  
the Company two signed and completed copies of this Subscription Agreement,
together with payment of the Purchase Price.  Payment of the Purchase Price is
being made by delivery to the Company of a check payable to the order of the
Company, or by wire transfer
 of the Purchase Price to the Company.  Subject to
the satisfaction of the conditions in Section 8, a closing (the "Closing") for
the purchase and sale of shares of Series D Stock will be held on May 26, 1995.
As soon as practicable after the Closing, the Company shall issue and deliver to
the undersigned a stock certificate or certificates, registered in the name of
the undersigned, representing the Shares being purchased.

          3.        Acceptance of Subscription.  The undersigned understands and
                    --------------------------                                  
agrees that the Company in its sole discretion reserves the right to accept or
reject this subscription for the Shares.  The Company shall have no obligation
hereunder until the Company shall execute and deliver to the undersigned an
executed copy of this Subscription Agreement.  This Subscription Agreement shall
continue in full force and effect to the extent this subscription was accepted.

          4.        Stock Registration Rights.  The undersigned shall have the
                    -------------------------                                 
stock registration rights as have been granted pursuant to Sections 2.4 through
2.14 of that certain Amended and Restated Investors' Rights Agreement dated
April 7, 1992 by

<PAGE>
 
and among the Company and certain investors and shareholders of the Company,
attached hereto as Exhibit A.

          5.        Representations and Warranties of Purchaser.  In order to
                    -------------------------------------------              
induce the Company to sell the Shares to the undersigned, the undersigned hereby
acknowledges, represents, warrants and agrees as follows:

                    a.        None of the Shares of Series D Stock are (and the
shares of common stock, no par value ("Common Stock") issuable upon conversion
thereof ("Conversion Shares") will not be) registered under the Securities Act
of 1933 (as amended, the "Securities Act") or any state securities laws.  The
undersigned understands that the sale of the Shares is intended to be exempt
from registration under Section 4(2) of the Securities Act and/or the provisions
of Regulation D promulgated thereunder, based, in part, upon the
representations, warranties and agreements contained in this Subscription
Agreement;

                    b.        Neither the Securities and Exchange Commission nor
any state securities commission has approved any of the Shares or passed upon or
endorsed the merits of this transaction;

                    c.        Prior to its execution of this Subscription
Agreement, the undersigned has received from the Company (i) the Confidential
Private Placement Memorandum of the Company dated April 5, 1995 (together with
any exhibits thereto, the "Memorandum"), which supersedes in its entirety the
draft Memorandum previously delivered to the undersigned, (ii) a copy of the
amendment to the Restated Articles of Incorporation of the Company (the
"Articles"), for the purpose of creating the Series D Stock, and (iii) the
audited financial statements of the Company for the years ended June 30, 1994,
1993 and 1992, the unaudited financial statements of the Company for the month
ended January 31, 1995 (the "Most Recent Financial Statements"), and the
unaudited balance sheet of the Company at February 28, 1995 (collectively, the
"Financial Statements").

                    d.        The undersigned acknowledges that all documents,
records and books pertaining to the investment in the Shares, including the
Memorandum, have been made available for inspection by the undersigned, or by
its attorney, accountant, purchaser representative and/or tax advisor
(collectively, the "Advisors") and that the undersigned and/or its Advisors have
completed such review as they deem to be necessary to make the decision to
purchase the Shares.  Notwithstanding the foregoing, the parties acknowledge and
agree that the Purchaser is relying solely on the representations and warranties
set forth in Section 6 hereof, which reference the documents set forth in
Section 5.c;

                    e.        The undersigned has reviewed the merits and risks
of an investment in the Shares. The undersigned and the Advisors have had a
reasonable opportunity to ask questions of and receive answers from members of
management

                                      -2-

<PAGE>
 
of the Company concerning the offer and sale of the Shares and all such
questions have been answered to the full satisfaction of the undersigned;

                    f.        In evaluating the suitability of an investment in
the Company, the undersigned has not relied upon any representation or other
information (oral or written) other than as contained in documents or answers to
questions so furnished to the undersigned or its Advisors by the Company;

                    g.        No oral or written representations have been made
or oral or written information furnished to the undersigned or its Advisors in
connection with the Offering which were in any way inconsistent with the
information provided to the undersigned or its Advisors, including the
Memorandum.

                    h.        The undersigned, together with the Advisors, have
such knowledge and experience in financial, tax and business matters so as to
enable each of them to utilize the information made available to each of them in
connection with the purchase of the Shares to evaluate the merits and risks of
an investment in the Shares and to make an informed investment decision with
respect thereto;

                    i.        The undersigned is not relying on the Company with
respect to the tax and other economic considerations of an investment in the
Shares, and the undersigned has relied on the advice, or has consulted with,
only its own Advisors concerning tax matters;

                    j.        The undersigned is acquiring the Shares solely for
its own account, for investment, and not with a view to or for subdivision,
resale or distribution, in whole or in part, and no other person has or will
have a direct or indirect beneficial interest in the Shares, other than for any
partner or shareholder owners of the undersigned, if any;

                    k.        The undersigned must bear the economic risk of the
investment indefinitely because none of the Shares of Series D Stock (or
Conversion Shares) may be sold, hypothecated or otherwise disposed of unless (i)
subsequently registered under the Securities Act and applicable state securities
laws, or (ii) an exemption from registration is available.  Legends shall be
placed on the Shares (and the Conversion Shares) to the effect that they have
not been registered under the Securities Act or applicable state securities laws
and appropriate notations thereon will be made in the Company's stock books;

                    l.        The undersigned has adequate means of providing
for the undersigned's current financial needs and foreseeable contingencies and
the undersigned can accept the fact that an investment in the Shares will not be
liquid;

                    m.        The undersigned is aware that an investment in the
Shares involves a number of very significant risks and, in particular,
acknowledges that the Company is in the development stage.  The undersigned
understands that the risks

                                      -3-

<PAGE>
 
associated with an investment in the Shares could result in, and the undersigned
can sustain, a complete loss of its investment;

                    n.        The undersigned is an "accredited investor" as
such term is defined in the regulations promulgated under the Securities Act;

                    o.        The undersigned represents that it has full power
and authority to execute and deliver this Subscription Agreement and all other
related agreements and certificates and to carry out the provisions hereof and
thereof and to purchase and hold the Shares, and this Subscription Agreement is
a legal, valid and binding obligation of the undersigned. The execution and
delivery of this Subscription Agreement will not violate or be in conflict with
any order, judgment, injunction, agreement or controlling document to which the
undersigned is a party or by which it is bound;

                    p.        The undersigned represents to the Company that the
information contained herein may be relied upon by the Company in determining
the availability of an exemption from registration under federal and state
securities laws.  The undersigned further represents and warrants that it will
notify the Company immediately upon the occurrence of any material change to the
information contained herein occurring prior to the Company's issuance of the
Shares;

                    q.        The undersigned is unaware of, and in no way
relying on, any form of general solicitation or general advertising in
connection with the offer and sale of the Shares.

          6.        REPRESENTATIONS AND WARRANTIES OF THE COMPANY

                    The Company represents and warrants to the Purchaser that:

                    6.01   Organization, Qualifications and Corporate Power.
                           ------------------------------------------------ 

          The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Michigan and is duly licensed or
qualified to transact business as a foreign corporation and is in good standing
in each other jurisdiction in which the nature of the business transacted by it
or the character of the properties owned or leased by it requires such licensing
or qualification.  The Company has the corporate power and authority to own and
hold its properties and to carry on its business as now conducted and as
proposed to be conducted, to execute, deliver and perform this Subscription
Agreement, to issue, sell and deliver the Series D Stock, and to issue and
deliver the Conversion Shares as provided in the Articles.

                                      -4-

<PAGE>
 
                    6.02   Authorization of Agreement.
                           -------------------------- 

                           (a) The execution and delivery by the Company of this
Subscription Agreement, the performance by the Company of its obligations
hereunder, the issuance, sale and delivery of the Series D Stock and the
issuance and delivery of the Conversion Shares have been duly authorized by all
requisite corporate action and will not violate any provision of law, any order
of any court or other agency of government, the Articles or the Bylaws of the
Company (the "Bylaws"), or any provision of any indenture, agreement or other
instrument to which the Company or any of its properties or assets is bound, or
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any such indenture, agreement or other instrument,
or result in the creation or imposition of any lien, charge, restriction, claim
or encumbrance of any nature whatsoever upon any of the properties or assets of
the Company.

                           (b) The Series D Stock has been duly authorized and,
when issued in accordance with this Subscription Agreement, will be validly
issued, fully paid and nonassessable shares of the Company with no personal
liability attaching to the ownership thereof and will be free and clear of all
liens, charges, restrictions, claims and encumbrances imposed by or through the
Company except as set forth herein. The Conversion Shares have been duly
reserved for issuance upon conversion of the Series D Stock and, when so issued,
will be duly authorized, validly issued, fully paid and nonassessable shares of
Common Stock with no personal liability attaching to the ownership thereof and
so long as the Series D Stock tendered for conversion is free and clear of liens
or encumbrances, will be free and clear of all liens, charges, restrictions,
claims and encumbrances imposed by or through the Company except as set forth
herein. Neither the issuance, sale or delivery of the Series D Stock nor the
issuance or delivery of the Conversion Shares is subject to any preemptive right
of stockholders of the Company or to any right of first refusal or other right
in favor of any person which right has not been waived.

                    6.03   Validity.
                           -------- 

                           This Subscription Agreement has been duly executed
and delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms.

                    6.04   Authorized Capital Stock.
                           ------------------------ 

                           The authorized capital stock of the Company consists
of 8,540,000 shares of Preferred Stock, and 17,000,000 shares of Common Stock.
Immediately prior to the Closing, 2,592,610 shares of Common Stock and 6,790,001
shares of Preferred Stock will be validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof. The
stockholders of record and holders of subscriptions, warrants, options,
convertible securities, and other rights (contingent or other), if any, to
purchase or otherwise acquire equity

                                      -5-

<PAGE>
 
securities of the Company prior to the Closing Date (the "Original
Shareholders") and the number of shares of Common Stock and the number of such
subscriptions, warrants, options, convertible securities, and other such rights,
if any, held by each, are as set forth in the Memorandum.  The designations,
powers, preferences, rights, qualifications, limitations and restrictions in
respect of each class of authorized capital stock of the Company are as set
forth in the Articles, a copy of which has previously been delivered to each
Purchaser, and all such designations, powers, preferences, rights,
qualifications, limitations and restrictions are valid, binding and enforceable
and in accordance with all applicable laws.  Except as set forth in the attached
Schedule 6.04 or in the Memorandum, (a) no person owns of record or is known to
the Company to own beneficially any share of Common Stock, (b) no subscription,
warrant, option, convertible security, or other right (contingent or other) to
purchase or otherwise acquire equity securities of the Company is authorized or
outstanding and (c) there is no commitment by the Company to issue shares,
subscriptions, warrants, options, convertible securities, or other such rights
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset.  Except as provided for in the Articles or as set forth
herein, the Company has no obligation (contingent or other) to purchase, redeem
or otherwise acquire any of its equity securities or any interest therein or to
pay any dividend or make any other distribution in respect thereof.  Except as
set forth herein or in the Memorandum, there are no voting trusts or agreements,
stockholders agreements, pledge agreements, buy-sell agreements, rights of first
refusal, preemptive rights or proxies relating to any securities of the Company
(whether or not the Company is a party thereto).  All of the outstanding
securities of the Company were issued in compliance with all applicable Federal
and state securities laws.

                    6.05   Litigation.
                           ---------- 

                           (a) The Company is aware of a possible claim against
it by Software Publishers Association, relating to the alleged use of
unregistered software on the Company's PCs. The Company is in negotiations with
such association and believes the matter can be resolved without material
adverse consequence to the Company. Except for such action, there is no (a)
action, suit, claim, proceeding or investigation pending or, to the best of the
Company's knowledge, threatened against or affecting the Company or its
directors, officers, or management, at law or in equity, or before or by any
Federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (b) arbitration
proceeding relating to the Company pending under collective bargaining
agreements or otherwise or (c) governmental inquiry pending or, to the best of
the Company's knowledge, threatened against or affecting the Company (including
without limitation any inquiry as to the qualification of the Company to hold or
receive any license or permit), and, to the best knowledge of the Company, there
is no basis for any of the foregoing. Without waiving any applicable attorney-
client privilege, the Company has not received any opinion or memorandum or
legal advice from legal counsel to the effect that it is exposed, from a legal
standpoint, to any liability or disadvantage

                                      -6-

<PAGE>
 
which may be material to its business, prospects, financial condition,
operations, property or affairs.  To the best knowledge of the Company, the
Company is not in default with respect to any order, writ, injunction or decree
known to or served upon the Company of any court or of any Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign.

                           (b) The Company has written letters to a former
employee, Richard M. Schwartz, Ph.D. and Dr. Schwartz's new employer, SyStemix,
(i) reminding them of Dr. Schwartz's duty to maintain strict confidentiality as
to the Company's trade secrets; and (ii) asking if there has been any breach of
this confidentiality obligation; and (iii) commenting that a new invention by
Systemix's appears to be derived from the Company's trade secrets. Systemix and
Dr. Schwartz have denied any use of the Company's trade secrets. The Company has
reserved its rights in this matter, but does not presently contemplate pursuing
this potential claim in the near future.

                    6.06   Financial Statements.
                           -------------------- 

                           The Company has furnished to the Purchasers the
Financial Statements. The Financial Statements are true and correct in all
material respects and have been prepared in accordance with generally accepted
accounting principles. The balance sheets included in the respective Financial
Statements accurately reflects the financial condition and all assets and
liabilities of the Company at the times referred to therein. The statements of
income and cash flows accurately reflect the operations of the Company for the
periods referred to therein. There are no undisclosed liabilities in the
Financial Statements.

                    6.07   No Convictions.
                           -------------- 

                           During the past ten (10) years, none of the
directors, officers, or management of the Company have been arrested or
convicted of any material crime, including any felony (whether material or not),
have been indicted, have been bankrupt or an officer or director of a bankrupt
company (except for directors designated by venture capital investors), nor have
any of them been restricted in any way from bidding on contracts with the
government of the United States.

                    6.08   Brokers.
                           ------- 

                           Except for a fee payable to Key Investments, Inc., an
affiliate of Society Bank of Michigan, the Company has no knowledge of any
brokerage or finders fee due in conjunction with the transactions contemplated
by this Subscription Agreement.

                                      -7-

<PAGE>
 
                    6.09   Subsidiaries.
                           ------------ 

                           The Company has no subsidiaries. The Company does not
(i) own of record or beneficially, directly or indirectly: (A) any shares of
capital stock or securities convertible into capital stock of any corporation;
or (B) any participating interest in any partnership, joint venture or other 
non-corporate business enterprise; or (ii) control, directly or indirectly, any
other entity.

                    6.10   Directors and Officers.
                           ---------------------- 

                           The Memorandum sets forth the names of the directors
and officers of the Company, together with the title of each such person.

                    6.11   No Material Adverse Change.
                           -------------------------- 

                           Since the date of the Most Recent Financial
Statements, (a) there has been no change in the assets, liabilities or financial
condition of the Company from that reflected in the Most Recent Financial
Statements, except for changes in the ordinary course of business which in the
aggregate have not been materially adverse and (b) none of the business,
prospects, financial condition, operations, property or affairs of the Company
has been materially adversely affected by any occurrence or development,
individually or in the aggregate, whether or not insured against.

                    6.11   Taxes.
                           ----- 

                           The Company has filed all tax returns, Federal,
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable, including
without limitation all taxes which the Company is obligated to withhold from
amounts owing to employees, creditors and third parties. All such taxes with
respect to which the Company has become obligated pursuant to elections made by
the Company in accordance with generally accepted practice have been paid and
adequate reserves have been established for all taxes accrued but not yet
payable. The Federal income tax returns of the Company have never been audited
by the Internal Revenue Service. No deficiency assessment with respect to or
proposed adjustment of the Company's Federal, state, county or local taxes is
pending or, to the best of the Company's knowledge, threatened. There is no tax
lien, whether imposed by any Federal, state, county or local taxing authority,
outstanding against the assets, properties or business of the Company. Neither
the Company nor, to the Company's knowledge, any of its stockholders, has ever
filed consent pursuant to Section 341(f) of the Code, relating to collapsible
corporations.

                                      -8-

<PAGE>
 
                    6.13   Employee Benefit Plans.
                           ---------------------- 

                           To the knowledge of the Company, each of the
Company's employee benefit plans (and each related trust or insurance contract)
complies in form and in operation in all respects with the applicable
requirements of the Employee Retirement Income Security Act of 1974 and the
Internal Revenue Code of 1986, as amended. To the knowledge of the Company, all
required reports and descriptions have been filed or distributed appropriately
with respect to each employee benefit plan. There have been no prohibited
transactions with respect to any employee benefit plan. No fiduciary has any
liability for breach of fiduciary duty or any other failure to act or comply in
connection with the administration or investment of the assets of any employee
benefit plans. No charge, complaint, action, suit, proceeding, hearing,
investigation, claim, or demand with respect to the administration or the
investment of the assets of any employee benefit plan (other than routine claims
for benefits) is pending or, to the Company's knowledge, threatened. The Company
and its directors and officers (and employees with responsibility for employee
benefits matters) have no knowledge of any basis for any such charge, complaint,
action, suit, proceeding, hearing, investigation, claim, or demand.

                    6.14   Title to Properties.
                           ------------------- 

                           The Company has good and marketable title to its
properties and assets reflected in the Financial Statements or acquired by its
since the date of the Financial Statements (other than properties and assets
disposed of in the ordinary course of business since the date of the Financial
Statements), and all such properties and assets are free and clear of mortgages,
pledges, security interests, liens, charges, claims, restrictions and other
encumbrances, except for liens to secure payment of obligations reflected in the
Financial Statements and for current taxes not yet due and payable and minor
imperfections of title, if any, not material in nature or amount and not
materially detracting from the value or impairing the use of the property
subject thereto or impairing the operations or proposed operations of the
Company.

                    6.15   Leasehold Interests.
                           ------------------- 

                           Each lease or agreement to which the Company is a
party under which it is a lessee of any property, real or personal is a valid
and enforceable agreement without any material default of the Company thereunder
and, to the best of the Company's knowledge, without any default by the Company
of any material term thereunder; the Company has not been notified of any
default and has no reason to believe that it is in default of any term
thereunder. To the best of the Company's knowledge, no other party to any such
lease or agreement is in default of a material term thereunder. No event has
occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's

                                      -9-

<PAGE>
 
knowledge, by any other party thereto.  The Company's possession of such
property has not been disturbed and, to the best of the Company's knowledge, no
claim has been asserted against the Company adverse to its rights in such
leasehold interests.

                    6.16   Insurance.
                           --------- 

                           The Company maintains as to its properties and
business, with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies similarly situated.

                    6.17   Other Agreements.
                           ---------------- 

                           With respect to each material contract to which the
Company is a party, the Company and, to the best of the Company's knowledge,
each other party thereto, have in all material respects performed all the
obligations required to be performed by them to date, have received no notice of
default and are not in default (with due notice or lapse of time or both) under
any material lease, agreement or contract now in effect to which the Company is
a party or by which it or its property may be bound. The Company has no present
expectation or intention of not fully performing all its obligations under each
such material lease, contract or other agreement and the Company has no
knowledge of any breach or anticipated breach by the other party to any contract
or commitment to which the Company is a party.

                    6.18   Patents, Trademarks, Etc.
                           ------------------------ 

                           (a) Schedule 6.18, attached hereto, accurately sets
forth all material patents, patent rights, patent applications, trademarks,
trademark applications, service marks, service mark applications, trade names
and copyrights, and all material applications for such which are in the process
of being prepared, owned by or registered in the name of the Company, or of
which the Company is a licensor or licensee or in which the Company has any
right, and in each case a brief description of the nature of such right. The
Memorandum contains an accurate and complete description of all material
licenses. The Company is in compliance in all material respects with each of
such licenses. The Company owns or possesses adequate licenses or other rights
to use all patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, trade names, copyrights, manufacturing
processes, formulae, trade secrets and know how (collectively, "Intellectual
Property") necessary to the conduct of its business as conducted, and no claim
is pending or, to the best of the Company's knowledge, threatened to the effect
that the operations of the Company infringe upon or conflict with the asserted
rights of any other person under any Intellectual Property, and, to the best
knowledge of the Company, there is no basis for any such claim (whether or not
pending or threatened). No claim is pending or threatened to the effect that any
such Intellectual Property owned or licensed by the Company, or which the

                                      -10-

<PAGE>
 
Company otherwise has the right to use, is invalid or unenforceable by the
Company, or that the Company is not in compliance with any term or condition of
a license, and there is no basis for any such claim (whether or not pending or
threatened).   The Company has not granted or assigned to any other person or
entity any right to manufacture, have manufactured, assemble or sell the
products or proposed products or to provide the services or proposed services of
the Company except as set forth in the Memorandum and Schedule 6.18.

                           (b) The Company has taken reasonable security
measures to protect the secrecy, confidentiality, and value of the Company's
trade secrets; any of their employees and any other persons who, either alone or
in concert with others, developed, invented, discovered, derived, programmed, or
designed these secrets, or who have knowledge of or access to information
relating to them, have entered into agreements protecting the confidentiality
thereof.

                    6.19   Proprietary Information of Third Parties.
                           ---------------------------------------- 

                           Except as set forth herein and in Section 6.05, to
the best of the Company's knowledge, no third party has claimed or has reason to
claim that any person employed by or affiliated with the Company has (a)
violated or may be violating any of the terms or conditions of his employment,
non-competition or nondisclosure agreement with such third party, (b) disclosed
or may be disclosing or utilized or may be utilizing any trade secret or
proprietary information or documentation of such third party or (c) interfered
or may be interfering in the employment relationship between such third party
and any of its present or former employees. No third party has requested
information from the Company which suggests that such a claim might be
contemplated. To the best of the Company's knowledge, no person employed by or
affiliated with the Company has employed or proposes to employ any trade secret
or any information or documentation proprietary to any former employer, and to
the best of the Company's knowledge, no person employed by or affiliated with
the Company has violated any confidential relationship which such person may
have had with any third party, in connection with the development, manufacture
or sale of any product or proposed product or the development or sale of any
service or proposed service of the Company, and the Company has no reason to
believe there will be any such employment or violation. To the best of the
Company's knowledge, none of the execution or delivery of this Subscription
Agreement, or the carrying on of the business of the Company as officers,
employees or agents by any officer, director or key employee of the Company, or
the conduct or proposed conduct of the business of the Company, will conflict
with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
such person is obligated.

                                      -11-

<PAGE>
 
                    6.20   Compliance With Law.
                           ------------------- 

                           The Company has complied with all laws, rules,
regulations and orders applicable to its business, operations, properties,
assets, products and services, the violation of which would have a material
adverse effect upon the Company, and the Company has all necessary permits,
licenses and other authorizations required to conduct its business as it is now
conducted. There is no existing law, rule, regulation or order, and the Company
after due inquiry is not aware of any proposed law, rule, regulation or order,
whether Federal or state, which would prohibit or restrict the Company from, or
otherwise materially adversely affect the Company in, conducting its business,
in which it is now conducting business or in which it proposes to conduct
business, other than the customary governmental approvals required for medical
products. Without limiting the foregoing in any manner, the Company has complied
in all material respects with all applicable laws relating to the employment of
labor, including provisions relating to wages, hours, equal opportunity,
collective bargaining and the payment of Social Security and other taxes, with
the Employee Retirement Income Security Act of 1974, as amended, with the
Occupational Health and Safety Act, and with the Americans With Disabilities
Act. The Company is in full compliance with the Immigration Reform and Control
Act of 1986, as amended, and, to the best of the Company's knowledge, all key
employees who are not United States citizens are currently authorized under
United States immigration laws to hold United States employment and will
continue to have such employment authorization throughout the term of the Series
D Stock investment, and are otherwise in compliance with United States
immigration laws.

                    6.21   Loans and Advances.
                           ------------------ 

                           The Company does not have any outstanding loans or
advances to any person and is not obligated to make any such loans or advances,
except as reflected on the Financial Statements, and except, in each case, for
advances to employees of the Company in respect of reimbursable business
expenses anticipated to be incurred by them in connection with their performance
of services for the Company.

                    6.22   Assumptions, Guaranties, Etc. of Indebtedness of
                           ------------------------------------------------
Other Persons.
- -------------

                           Except as disclosed in the Financial Statements, the
Company has not assumed, guaranteed, endorsed or otherwise become directly or
contingently liable on any indebtedness of any other person (including, without
limitation, liability by way of agreement, contingent or otherwise, to purchase,
to provide funds for payment, to supply funds to or otherwise invest in the
debtor, or otherwise to assure the creditor against loss), except for guaranties
by endorsement of negotiable instruments for deposit or collection in the
ordinary course of business.

                                      -12-

<PAGE>
 
                    6.23  Governmental Approvals.
                          ---------------------- 

                          Subject to the accuracy of the representations and
warranties of the Purchaser set forth in Section 5, no registration or filing
with, or consent or approval of or other action by, any Federal, state or other
governmental agency or instrumentality is or will be necessary for the valid
execution, delivery and performance by the Company of this Agreement, the
issuance, sale and delivery of the Series D Stock or, upon conversion of the
Series D Stock, the issuance and delivery of the Conversion Shares, other than
(a) filings pursuant to state securities laws (all of which filings have been or
will be made by the Company) in connection with the sale of the Series D Stock
and (b) with respect to the Registration Rights as set forth in Exhibit A, the
registration of the shares covered thereby with the Commission and filings
pursuant to state securities laws.

                    6.24   Disclosure.
                           ---------- 

                           The Company's Private Placement Memorandum dated
April 5, 1995 with respect to the Series D Stock (the "Memorandum"), contains
only true and accurate facts and representations, and does not contain any
untrue information and does not omit any material fact necessary to make the
statements contained therein not misleading. Neither this Subscription
Agreement, nor any Schedule or Exhibit to this Agreement, contains an untrue
statement of a material fact or omits a material fact necessary to make the
statements contained herein or therein not misleading. None of the statements,
documents, certificates or other items prepared or supplied by the Company with
respect to the transactions contemplated hereby contains an untrue statement of
a material fact or omits a material fact necessary to make the statements
contained therein not misleading. As of the date hereof, no facts have come to
the attention of the Company which would, in its opinion, require the Company to
revise or amplify the Memorandum.

                    6.25   Offering of Shares.
                           ------------------ 

                           The Offering is being made by the Company pursuant to
an exemption from the registration requirements of the Securities Act.

                    6.26   Transactions With Affiliates.
                           ---------------------------- 

                           Except as set forth in the Memorandum, no director,
officer, employee or stockholder of the Company, or member of the family of any
such person, or any corporation, partnership, trust or other entity in which any
such person, or any member of the family of any such person, has a substantial
interest in or is an officer, director, trustee, partner or holder of more than
5% of the outstanding capital stock thereof, is a party to any transaction with
the Company, including any contract, agreement or other arrangement providing
for the employment of, furnishing of services by, rental of real or personal
property from or otherwise requiring payments to any such person or firm.

                                      -13-

<PAGE>
 
                    6.27  Obsolescence.
                          ------------ 

                          To the best of the Company's knowledge, there are no
new products, inventions, procedures, or methods of manufacturing or processing
that any competitors or other third parties have developed and which reasonably
could be expected to supersede or make obsolete any of the Company's products or
processes.

          7.     Compliance with Regulation D and Applicable State Securities
                 ------------------------------------------------------------
Laws.  The undersigned understands and agrees that the following restrictions
- ----                                                                         
and limitations are applicable to its purchase of the Shares and any resales,
mortgages, pledges, hypothecations, or other transfers thereof, pursuant to
Regulation D under the Securities Act and applicable state securities laws:

                    a.        The undersigned agrees that the Shares may not be
sold, mortgaged, pledged, hypothecated or otherwise transferred unless the
Shares are registered under the Securities Act and applicable state securities
laws or are exempt from registration thereunder.

                    b.        A legend in substantially the following form will
be placed on the certificate(s) evidencing the Shares:

          THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
          REGISTERED UNDER THE SECURITIES ACT OF 1933.  THESE SECURITIES HAVE
          BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR
          RESALE, AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR
          OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR
          SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, OR UNLESS AN
          EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.

                    c.        FOR CALIFORNIA RESIDENTS ONLY:  THE SALE 
                              -----------------------------              
OF THE SECURITIES THAT IS THE SUBJECT OF THIS SUBSCRIPTION AGREEMENT HAS NOT
BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA
AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS
AN EXEMPTION FROM SUCH QUALIFICATION IS AVAILABLE. THE RIGHTS OF ALL PARTIES TO
THIS SUBSCRIPTION AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION
BEING OBTAINED OR AN EXEMPTION THEREFROM BEING AVAILABLE.

                                      -14-

<PAGE>
 
          8.        Conditions to Obligations of the Purchasers.  The
                    -------------------------------------------      
following conditions have been satisfied:

                    a.        The Restated Articles of Incorporation of the
Company, in the form previously delivered to each Purchaser, have been filed
with the Secretary of State of the State of Michigan;

                    b.        The Company has received from other Purchasers
$5,000,004 for the purchase of Series D Shares;

                    c.        The Company has delivered to the Purchaser the
opinion of counsel attached hereto as Exhibit B.

          9.        Board Observer Rights.   Purchasers of Series D Preferred 
                    ---------------------                                       
Stock who were not previously holders of capital stock of the Company ("New
Investors") shall have the following rights:  a majority in interest of New
Investors shall have the right from time to time to designate one
representative, who shall be entitled to attend all meetings of the Board of
Directors, in a nonvoting observer capacity only.  The Company will include such
representative in oral reports given by the Board and give such representative
copies of all materials that it provides to its directors including but not
limited to all materials delivered to directors outside of meetings; provided,
however, that such representative shall be reasonably acceptable to the Company
and shall enter into a confidentiality agreement acceptable to the Company.

                    Additionally, the New Investors shall have the rights to
information and inspection set forth in Sections 3.1 through 3.3 of the Amended
and Restated Investors Rights Agreement dated April 7, 1992 by and among the
Company and certain investors and shareholders of the Company.

          10.       Additional Sales of Series D Preferred Stock.  The Company
                    --------------------------------------------              
hereby agrees that following the completion of the Offering, it will not issue
and sell additional shares of Series D Stock at a purchase price per share of
less than the applicable conversion price then in effect with respect to the
Series D Stock.

          11.       Irrevocability; Binding Effect.  The undersigned hereby
                    ------------------------------                         
acknowledges and agrees that the subscription hereunder is irrevocable by the
undersigned, except as required by applicable law, and that this Subscription
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors, legal representatives, and permitted assigns.

          12.       Modification.  This Subscription Agreement shall not be
                    ------------                                           
modified or waived except by an instrument in writing signed by the party
against whom any such modification or waiver is sought.

          13.       Notices.  A notice or other communication required or
                    -------                                              
permitted to be given hereunder shall be in writing and shall be mailed by
certified mail,

                                      -15-

<PAGE>
 
return receipt requested, or delivered against receipt to the party to whom it
is to be given (a) if to the Company, at the address set forth above, or (b) if
to the undersigned, at the address set forth on the signature page hereof (or,
in either case, to such other address as the party shall have furnished in
writing in accordance with the provisions of this Section 13).  Any notice or
other communication shall be deemed given at the time it is received at the
party's address.

          14.       Assignability.  This Subscription Agreement and the rights,
                    -------------                                              
interests and obligations hereunder are not transferable or assignable by the
undersigned, except to an affiliate of the undersigned who qualifies as an
"accredited investor," and the undersigned further agrees that the transfer or
assignment of the Shares shall be made only in accordance with all applicable
laws.

          15.       Applicable Law.  This Subscription Agreement shall be 
                    --------------                                              
governed by and construed in accordance with the internal laws of the state of
Michigan without regard to its conflicts of laws principles.

          16.       Blue Sky Qualification.  The undersigned's right to purchase
                    ----------------------                                      
Shares under this Subscription Agreement is expressly conditioned upon the
exemption from qualification of the offer and sale of the Shares from applicable
federal and state securities laws.  The Company shall not be required to qualify
this transaction under the securities laws of any jurisdiction and, should
qualification be necessary, the Company shall be released from any and all
obligations to maintain its offer, and may rescind any sale contracted, in the
jurisdiction.

          17.       Confidentiality.  The undersigned acknowledges and agrees 
                    ---------------                                             
that any information or data it has acquired from or about the Company, not
otherwise properly in the public domain, was received in confidence. The
undersigned agrees not to divulge, communicate or disclose, except as may be
required by law or for the performance of this Subscription Agreement, or use to
the detriment of the Company or for the benefit of any other person or persons,
or misuse in any way, any confidential information of the Company, including any
scientific, technical, trade or business secrets of the Company and any
scientific, technical, trade or business materials that are treated by the
Company as confidential or proprietary, including, but not limited to, ideas,
discoveries, inventions, developments and improvements belonging to the Company
and confidential information obtained by or given to the Company about or
belonging to third parties.

          18.       Miscellaneous.
                    ------------- 

                    a.        This Subscription Agreement, together with the
Supplemental Agreement dated March 29, 1995, and the Articles and the attached
stock registration rights, constitutes the entire agreement between the
undersigned and the Company with respect to the purchase and sale of the Series
D Shares, and supersedes all prior oral or written agreements and
understandings, if any, relating thereto.  The terms and provisions of this
Subscription agreement may be waived, or

                                      -16-

<PAGE>
 
consent for the departure therefrom granted, only by a written document executed
by the party entitled to the benefits of such terms or provisions.

                    b.        The undersigned's representations and warranties
made in this Subscription Agreement shall survive the execution and delivery
hereof and of the Shares.

                    c.        Each of the parties hereto shall pay its own fees
and expenses (including the fees of any attorneys, accountants, appraisers or
others engaged by such party) in connection with this Subscription Agreement and
the transactions contemplated hereby whether or not the transactions
contemplated hereby are consummated.

                    d.        All pronouns and any variations thereof used
herein shall be deemed to be to the masculine, feminine, neuter, singular or
plural as the identity of the person or persons referred to may require.

                    e.        This Subscription Agreement may be executed in one
or more counterparts each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument. Signatures may be
transmitted by facsimile.

                    f.        Each provision of this Subscription Agreement
shall be considered separable and if for any reason any provision or provisions
hereof are determined to be invalid or contrary to applicable law, such
invalidity shall not impair the operation of or affect the remaining portions of
this Subscription Agreement, so long as the material economic benefits remain
enforceable.

                    g.        Paragraph titles are for descriptive purposes only
and shall not control or alter the meaning of this Subscription Agreement as set
forth in the text.

          IN WITNESS WHEREOF, the parties have executed and delivered this
Subscription Agreement.


 
                                  COBE Laboratories, Inc.,
                                  a Colorado Corporation
                                        1185 Oak Street
                                        Lakewood, CO 80215
                                  Fed. Taxpayer Identification No:  952403584
                                                                    ---------
Dated: May 26, 1995               By:  /s/ Ed Wood
      __________________             __________________________

 
                                  Name:  Ed Wood
                                       ________________________

                                  Title:  President, COBE BCT
                                        _______________________
 

                                      -17-

<PAGE>
 
SUBSCRIPTION ACCEPTED AND AGREED
this 30 day of May, 1995
     __        ___


AASTROM BIOSCIENCES, INC.


By:  /s/ R. Douglas Armstrong
   _________________________________________
     R. Douglas Armstrong, Ph.D.,
     President and Chief Executive Officer

                                      -18-



<PAGE>
 
                                                                   EXHIBIT 10.39


                             TERMINATION AGREEMENT


     This Agreement is entered into as of November 14, 1996, by and between
Aastrom Biosciences, Inc., a Michigan corporation ("ABI"), and Rhone-Poulenc
Rorer Inc., a Pennsylvania corporation ("RPR"), with respect to the following
facts:

     A.  As of September 15, 1995, RPR and ABI entered into that certain
Governance Agreement, License Agreement, Supply Agreement, and Stock Purchase
Agreement, each dated as of September 15, 1995.

     B.  Pursuant to the terms of the Governance Agreement, RPR and ABI also
contemplated entered into, at future dates, a Research and Development
Collaboration Agreement, and an Arbitration Agreement.  The parties never signed
or entered into these additional agreements.

     C.  Pursuant to the terms of the Governance Agreement, RPR had the right to
elect to proceed or not proceed with the "Third Option Events", as specified in
the Governance Agreement, and if RPR elected not to proceed with said Third
Option Events, then the Governance Agreement, License Agreement and Supply
Agreement were to terminate, and the $3.5 million previously paid by RPR to ABI
were to be credited to the purchase of ABI's preferred stock at $17.00 per
share.

     D.  By letter dated September 6, 1996, RPR notified
 ABI of RPR's election
to not proceed with the Third Option Events, and to thereby terminate the
applicable agreements.  The purpose of this Termination Agreement is to set
forth the implementing details for said termination.

     WHEREFORE, the parties hereto, intending to be bound, mutually agree as
follows:

          1.  Definitions.  The defined terms in the above-referenced 
              -----------
agreements shall have the same meaning in this Agreement.

          2.  Termination.  Except as expressly set forth in this Termination
              -----------                                                    
Agreement and in a new Stock Purchase Agreement of even date, the parties
acknowledge and mutually agree that the following agreements are terminated,
with neither party having any further rights or obligations thereunder:

                  Governance Agreement, dated September 15, 1995
                  License Agreement, dated September 15, 1995
                  Stock Purchase Agreement, dated September 15, 1995
                  Supply Agreement, dated September 15, 1995

                                       1

<PAGE>
 
          3.  Stock Purchase.  Pursuant to the terms of the new Stock Purchase
              --------------                                                  
Agreement of even date, RPR is purchasing, and ABI is selling, 205,882 shares of
ABI's Series E preferred stock, at $17 per share, for an aggregate purchase
price of $3.5 million, cash payment of which has already been paid by RPR to ABI
in the form of the First Option Payment ($1.5 million) and the Second Option
Payment ($2.0 million).

          4.  Confidentiality.  The rights and obligations of the parties
              ---------------                                            
pursuant to the previously agreed to confidentiality provisions shall survive
and remain in full force and effect for all disclosures made up through the date
hereof, notwithstanding the termination of the other agreements.  Without
limiting the generality of the foregoing, the following confidentiality
provisions shall remain in full force and effect:

          a.  Mutual Confidentiality Agreement dated originally January 9 and
13, 1995, between RPR, ABI, Rhone-Poulenc Rorer Pharmaceuticals, Inc., and
Applied Immune Sciences ("AIS");

          b.  Modification of Mutual Confidentiality Agreement, which
modification was dated February 8 and 9, 1995.

          c.  Letter related to the Mutual Confidentiality Agreement, which
letter was dated October 18 and 20, 1995;

          d.  The confidentiality provisions set forth in Section 16 of the
License Agreement.

          e.  The confidentiality provisions set forth in Section 13 of the
Governance Agreement.

Any information disclosed after the date hereof shall not be covered by said
confidentiality provisions, unless the parties otherwise expressly agree in
writing.

          5.  Indemnity.  The indemnity provisions set forth in Section 12 of
              ---------                                                      
the License Agreement shall remain in full force and effect.

          6.  Return of CPS and Other Matters.
              ------------------------------- 

          a.  By the date hereof, RPR shall return to ABI all units and
components of the ABI Cell Production System ("CPS"), together with all related
materials, samples, parts, documents, manuals, instructions and other materials
concerning the CPS.  By the date hereof, ABI shall come to RPR's facility in
Santa Clara, California (the Gencell AIS facility) where the CPS units are
located, and ABI shall package the CPS units for shipment to ABI.  The cost for
such packaging and shipment shall be borne by RPR.

                                       2

<PAGE>
 
          b.  By the date hereof, RPR shall return to ABI all copies of all 
ABI confidential information in the possession of RPR.

          c.  By the date hereof, ABI shall return to RPR all copies of RPR's
confidential information in the possession of ABI, including RPR's Standard
Operating Procedures ("SOPs").

          d.  With respect to the written materials which are returned to each
party, the receiving party agrees to maintain custody of said written materials
for at least five years.  If the party returning the written materials has a
reasonable need to review the returned materials, the receiving party shall
allow such review, subject to the reviewing party complying with its
confidentiality obligations.

          e.  Notwithstanding any other provision of this Section 6 to the
contrary, RPR shall be entitled to retain, in files marked "Confidential", one
copy of the documents listed in Exhibit A attached hereto. For the avoidance of
doubt, the information contained in such documents shall remain subject to
confidentiality provisions of Section 4 hereof.

          7.  Research Reports.
              ---------------- 

          ABI and RPR shall each prepare its respective final reports on its
research activities which have been conducted pursuant to the parties' prior
relationship, and each party shall furnish to the other party such final
research reports.

          8.  Intellectual Property Rights.  As specified in Section 3.7(iv) of
              ----------------------------                                     
the Governance Agreement, all technology and other intellectual property rights
conceived and/or developed solely by ABI shall remain the sole property of ABI,
with RPR having no rights therein.  As specified in Section 18.6 of the License
Agreement, RPR shall have no right to develop, manufacture or market Licensed
Product.  The above-referenced Sections shall remain in full force and effect.

          9.  Cost Budget Reconciliation.  Prior to the date hereof, ABI has
              --------------------------                                    
furnished to RPR a report and reconciliation as to the costs incurred by ABI and
funded by RPR for activities pursuant to the Second Option Period R&D Budget, as
contemplated by Section 3.7 of the Governance Agreement.  It is agreed that RPR
shall have no further obligation to ABI relating to the First Option Period R&D
Budget or the Second Option Period R&D Budget.  Within thirty (30) days after
execution hereof, ABI shall refund to RPR the sum of $52,000, representing all
of the surplus funds which were advanced to ABI under the Letter of Intent.

          10.  Patent Costs.  It is agreed the aggregate sum of the patent costs
               ------------                                                     
which RPR is responsible for reimbursing ABI pursuant to Section 9 of the
License Agreement is $16,093.  ABI shall deduct such amount from the sum payable
to RPR pursuant to the last sentence of Section 9 of this Agreement.

                                       3

<PAGE>
 
          11.  Gencell Membership.  In order to continue to maintain good lines
               ------------------                                              
of communication between ABI and RPR, in hopes of furthering some renewed
collaboration, ABI shall continue as a participant at the Gencell membership
meetings, so long as both parties find such continued participation to be
mutually beneficial.

          12.  Arbitration.  Any controversy or claim arising out of or relating
               -----------                                                      
to this Agreement or any of the other referenced agreements, or the breach
thereof, shall be settled by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"),
with the forum for the arbitration proceedings to be held in Detroit, Michigan
if RPR commences the arbitration, and with the forum for the arbitration
proceedings to be held in Philadelphia, Pennsylvania if ABI commences the
arbitration.

          13.  Public Announcement.  The provisions of Section 9 of the 
               -------------------
Governance Agreement shall remain in full force and effect.

          14.  General Provisions.  All of the general provisions from Section
               ------------------                                             
14 of the Governance Agreement shall be applicable to this Agreement.

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

                           ABI:

                                 Aastrom Biosciences, Inc.,
                                 a Michigan corporation


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

                            RPR:

                                 Rhone-Poulenc Rorer Inc.,
                                 a Delaware corporation


                                 By: /s/ K. R. PINA
                                     -----------------------------
                                     K. R. Pina

                                       4



<PAGE>
 
                                                                   EXHIBIT 10.40

                            STOCK PURCHASE AGREEMENT
                              (Series E Preferred)

                                    Between

                           AASTROM BIOSCIENCES, INC.

                                      and

                            RHONE-POULENC RORER INC.

<PAGE>
 
                            STOCK PURCHASE AGREEMENT

                               TABLE OF CONTENTS
                               -----------------


<TABLE> 
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C> 

1.  Definitions                                                               1

2.  [omitted]                                                                 3

3.  [omitted]                                                                 3

4.  Purchase of Termination Shares                                            3

5.  [omitted]                                                                 3

6.  Closing Dates; Delivery                                                   3

7.  [omitted]                                                                 3

8.  [omitted]                                                                 3

9.  Representations and Warranties of the Company                             3
     9.1 to 9.3  [omitted]                                                    3
     9.4  Authorization                                                       3
     9.5  Validity of the Shares                                              4
     9.6 to 9.12  [omitted]................................................   4
     9.13  Compliance with Other Instruments...............................   4
     9.14 to 9.18  [omitted]...............................................   4
     9.19  Governmental Consents...........................................   4
     9.20  Offering........................................................   5
     9.21 [omitted]........................................................   5

10. Representations and Warranties of the Purchaser........................   5
     10.1  Legal Power.....................................................   5
     10.2  [omitted].......................................................   5
     10.3  Investment Representations......................................   5
     10.4  [omitted].......................................................   6

11. Covenants of the Company...............................................   6
     11.1 to 11.5  [omitted]...............................................   6
     11.6  Notification of Registration Under the Exchange Act.............   6
     11.7  Reservation of Shares...........................................   7
     11.8  Repurchase, Redemption and Other Actions........................   7
     11.9 to 11.11  [omitted]..............................................   7
 </TABLE>


                                      -i-

<PAGE>
 

<TABLE>
<CAPTION> 
                                                                            Page
                                                                            ----
<S>                                                                         <C>
       11.12  Removal of Restrictive Legend................................   7

12.  Stock Registration Rights; Market Stand-off Restrictions; Information
      Rights...............................................................   7

13.  [omitted].............................................................   7

14.  Termination Closing...................................................   7
       14.1  Opinion of the Company's Counsel..............................   7
       14.2  Credit for Purchase Price.....................................   8
       14.3  Delivery of Stock Certificates
 and Other Documents............   8

15.  [omitted].............................................................   8

16.  Miscellaneous.........................................................   8
       16.1  Governing Law.................................................   8
       16.2  Survival......................................................   8
       16.3  Successors and Assigns........................................   8
       16.4  Entire Agreement..............................................   8
       16.5  Separability..................................................   9
       16.6  Amendment and Waiver..........................................   9
       16.7  Delays or Omissions...........................................   9
       16.8  Notices.......................................................   9
       16.9  Finder's Fees.................................................  10
       16.10  Fees and Expenses............................................  10
       16.11  Information Confidential.....................................  11
       16.12  Titles and Subtitles.........................................  11
       16.13  Counterparts.................................................  11
       16.14  Arbitration..................................................  11
</TABLE>


EXHIBITS:

A    Form of Opinion of Counsel, Termination Closing

B    Summary of Series E Preferred Stock

                                     -ii-

<PAGE>
 
                            STOCK PURCHASE AGREEMENT


     This Stock Purchase Agreement (this "Agreement") is made as of November
14, 1996, by and between AASTROM Biosciences, Inc., a Michigan corporation (the
"Company"), and Rhone-Poulenc Rorer Inc., a Delaware corporation (the
"Purchaser"), with respect to the factual recitals set forth below.

     Certain terms used in this Agreement are defined in Section 1 of this
Agreement.

                                    RECITALS
                                    --------

     A.     The Company and the Purchaser have entered into a Governance
Agreement dated as of September 15, 1995 (the "Governance Agreement"), setting
forth, among other things, the terms and conditions of a preliminary research
collaboration between the parties concerning the development and sale of the CPS
for Lymphoid Cell Applications.

     B.     As specified in the Governance Agreement, certain option payments
paid by the Purchaser to the Company in connection with the parties'
collaboration shall be applied toward the purchase by the Purchaser of shares of
the capital stock of the Company.

     C.     As specified in the Governance Agreement, if the Purchaser elects
not to exercise the Third Option, then the Purchaser is obligated to purchase
$3.5 million of the preferred stock of the Company, at $17.00 per share, for a
total of 205,882 shares.

     D.     The Company has previously furnished to the Purchaser (i) a copy of
the Memorandum, (ii) a copy of the Articles, and (iii) a copy of the Bylaws
(collectively, the "Series D Documents").  The Company has also furnished to the
Purchaser a copy of the Form S-1 Registration Statement filed by the Company on
November 1, 1996 with the Securities and Exchange Commission.


     1.  Definitions.
         ----------- 

         "Act" means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.

         "Articles" means the Company's Amended and Restated Articles of
Incorporation, as amended to the date hereof, including the Company's Amended
and Restated Articles of Incorporation filed on November 1, 1996, with the State
of Michigan Corporation and Securities Bureau.

                                      -1-

<PAGE>
 
         "Bylaws" means the Company's Amended and Restated Bylaws, as amended to
the date hereof.

         "Commission" means the United States Securities and Exchange
Commission.

         "Common Stock" means shares of Common Stock of the Company, no par
value per share.

         "Conversion Shares" means the shares of Common Stock or other
securities which are issuable upon conversion of any Preferred Stock which may
be purchased hereunder.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "First Option Payment" has the meaning provided in the Governance
Agreement.

          "Governance Agreement" means the Governance Agreement, dated as of
September 15, 1995, setting forth, among other things, the terms and conditions
of a preliminary research collaboration between the parties.

          "Memorandum" means the Company's Private Placement Memorandum, dated
April 5, 1995, relating to an offering of the Company's Series D Preferred
Stock, which sets forth relevant information concerning the Company.

         "Preferred Stock" means shares of Series E Preferred Stock of the
Company, no par value per share, having the rights, privileges and preferences
set forth on Exhibit B to this Agreement.

         "Second Option Payment" has the meaning provided in the Governance
Agreement.

         "Series D Documents" means the Memorandum, the Articles and the Bylaws.

         "Shares" means the shares of the Company's Series E Preferred Stock to
be purchased by Purchaser hereunder.

         "Termination Closing" means the closing for the purchase and sale of
the Termination Shares, as contemplated by Section 6.2 hereof.

                                      -2-

<PAGE>
 
         "Termination Shares" means the shares of the Company's Series E
Preferred Stock to be purchased by Purchaser pursuant to Section 4 hereof.

         "Third Option" has the meaning provided in the Governance Agreement.

         "1934 Act Registration Statement" means a registration statement filed
pursuant to the requirements of Section 12 of the Exchange Act or pursuant to
any equivalent provision of any similar federal law then in effect.

     2.  [omitted]

     3.  [omitted]

     4.  Purchase of Termination Shares.  Since the Purchaser has elected not to
         ------------------------------                                         
exercise the Third Option, the Company shall, at the Termination Closing, issue
and sell to the Purchaser 205,882 Shares of Series E Preferred Stock having an
aggregate value of $3.5 million, at a purchase price per Share of $17.00.  The
shares purchased pursuant to this Section 4 are referred to herein as the
"Termination Shares."

     5.  [omitted]

     6.  Closing Dates; Delivery.  The closing for the purchase and sale of the
         -----------------------                                               
Termination Shares (the "Termination Closing") shall occur on November 14, 1996.
At the Termination Closing, the parties shall deliver the documents, instruments
and certificates specified in Section 14 hereof.

     7.  [omitted]

     8.  [omitted]

     9.  Representations and Warranties of the Company.  The Company hereby
         ---------------------------------------------                     
represents and warrants to the Purchaser as of the date hereof, the following:

         9.1 to 9.3  [omitted]

         9.4 Authorization. All corporate action on the part of the Company, its
             ------------- 
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement, and the performance of the Company's obligations
under this Agreement, has been taken. At or prior to the Termination Closing,
all corporate action on the part of the Company, its officers, directors and
shareholders necessary for the authorization, issuance, sale and delivery of the
Shares (and the Conversion Shares) will have been taken. This Agreement, when

                                      -3-

<PAGE>
 
executed and delivered by the Company and the Purchaser, shall constitute the
valid and legally binding obligation of the Company, enforceable in accordance
with its terms, subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors.

         9.5  Validity of the Shares.  The sale of the Shares (including any
              ----------------------                                        
Conversion Shares) is not and will not be subject to any preemptive rights or
rights of first refusal that have not been waived.  When issued, sold and
delivered in compliance with the provisions of this Agreement, the Shares will
be validly issued, fully paid and nonassessable, and will be free of any liens,
encumbrances or, except as set forth in the immediately following sentence,
restrictions.  The Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.  The voting rights, designations,
preferences, limitations and special rights of the Shares (including the
Conversion Shares), when issued, shall be as fully set forth in the Articles and
Exhibit B attached hereto.  The Company has reserved a sufficient number of
shares of its Common Stock for issuance upon conversion of any Preferred Stock
issued and sold hereunder and such shares of Common Stock, when issued in
accordance with the terms of such Preferred Stock, will be duly authorized,
validly issued, fully paid, non-assessable and free and clear of all
encumbrances, liens or restrictions, except for restrictions on transfer imposed
by applicable securities laws.

         9.6 to 9.12  [omitted]

         9.13 Compliance with Other Instruments. The Company is not in violation
              ---------------------------------
of any term of its Articles or Bylaws or, to the best of the Company's
knowledge, any material mortgage, indenture, contract, agreement, instrument,
judgment, decree, order, statute, rule or regulation applicable to the Company,
except for violations which, in the aggregate, are not material. The execution,
delivery and performance of and compliance with this Agreement, and the issuance
and sale of the Shares pursuant hereto, will not with or without the giving of
notice or the passage of time, or both, result in any such violation, or be in
conflict with or constitute a default under any such term, result in the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company or cause the Company to lose the benefit of
any right or privilege it presently enjoys.

         9.14 to 9.18  [omitted]

         9.19  Governmental Consents.  All consents, approvals, orders or
               ---------------------                                     
authorizations of, or registrations, qualifications, designations, declarations
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement, the
offer, sale or issuance of the Shares, or the consummation of any other
transaction contemplated by this Agreement, have been obtained, or will be
obtained prior to

                                      -4-

<PAGE>
 
the applicable closing, excepting only for routine blue sky law notices to be
filed with certain state and federal securities commissions after the applicable
closing, which notices or filings will be filed on a timely basis.

          9.20 Offering.  Assuming the accuracy of the representations and
               --------                                                   
warranties of the Purchaser contained in Section 10 hereof, the offer, issuance
and sale of the Shares (including any Conversion Shares) are and will be exempt
from the registration and prospectus delivery requirements of the Act and are
exempt from registration and qualification under the registration, permit or
qualification requirements of all applicable state securities laws.

          9.21 [omitted]

     10.  Representations and Warranties of the Purchaser.
          ----------------------------------------------- 

          The Purchaser hereby represents and warrants to the Company as
follows:

          10.1 Legal Power. It has the requisite legal power to enter into this
               -----------
Agreement, to purchase the Shares hereunder and to carry out and perform its
obligations under the terms of this Agreement.

          10.2 [omitted]

          10.3 Investment Representations.
               -------------------------- 

                (a) The Purchaser will be acquiring the Shares for its own
account, not as nominee or agent, for investment and not with a view to, or for
resale in connection with, any distribution or public offering thereof within
the meaning of the Act.

                (b) The Purchaser understands that (i) the Shares have not been
registered under the Act by reason of a specific exemption therefrom, that they
must be held by it indefinitely, and that it must, therefore, bear the economic
risk of such investment indefinitely, unless a subsequent disposition thereof is
registered under the Act or is exempt from such registration; (ii) each
certificate representing the Shares will be endorsed with the following legend:

     "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE 
     SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, 
     PLEDGED, OR OTHERWISE TRANSFERRED UNLESS (A) COVERED BY 
     AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES 
     ACT OF 1933, AS AMENDED, OR (B) THE COMPANY HAS BEEN 
     FURNISHED WITH AN OPINION OF COUNSEL ACCEPTABLE TO THE 
     COMPANY TO THE EFFECT THAT NO REGISTRATION IS LEGALLY 
     REQUIRED FOR SUCH TRANSFER."

                                      -5-

<PAGE>
 
and (iii) the Company will instruct any transfer agent not to register the
transfer of any of the Shares unless the conditions specified in the foregoing
legend are satisfied.

                (c) The Purchaser has been furnished with such materials and has
been given access to such information relating to the Company as the Purchaser
has requested, and it has been afforded the opportunity to ask questions
regarding the Company and the Shares, all as it has found necessary to make an
informed investment decision.

                (d) By reason of its business or financial experience, it has
the capacity to protect its own interests in connection with this transaction.

                (e) The Purchaser is a corporation, having assets in excess of
$5,000,000, it was not formed for the purpose of acquiring the Shares, and it is
an "accredited investor" as defined in Rule 501 promulgated under the Act.

          10.4  [omitted]

     11.  Covenants of the Company.  From and after the Termination Closing, the
          ------------------------                                              
Company covenants and agrees with the Purchaser as follows:

          11.1 to 11.5  [omitted]

          11.6 Notification of Registration Under the Exchange Act. The Company
               ---------------------------------------------------
will give the holder of record of the Shares prompt written notice of the
effectiveness of any registration statement filed pursuant to the requirements
of Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") or pursuant to any equivalent provision of any similar federal law then in
force (a "1934 Act Registration Statement") relating to the Common Stock, and
the number of shares of such class of equity securities outstanding at the time
such registration statement becomes effective. If the Company has filed a 1934
Act Registration Statement or a registration statement on any form other than
Form S-8 (or any successor form serving the same general purpose) pursuant to
the requirements of the Act, the Company further covenants that it will file all
reports required to be filed by it under the Act or the Exchange Act and the
rules and regulations thereunder or, if the Company is not required to file such
reports, it will, upon the request of the holder of record of the Shares, make
publicly available such information as will enable it to sell the Shares without
a registration statement, and will take such further action as such holder may
request, all to the extent required from time to time to enable such holder to
sell the Shares, without registration within the limitations of the exemptions
provided by (i) Rule 144 and Rule 144A adopted by the Commission under the Act,
as such rules may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the Commission.

                                      -6-

<PAGE>
 
         11.7 Reservation of Shares. The Company shall at all times reserve and
              ---------------------
keep available, free from preemptive rights, out of its authorized and unissued
Common Stock the number of shares of Common Stock issuable upon conversion of
the Preferred Shares.

         11.8 Repurchase, Redemption and Other Actions. The Company will give
              ----------------------------------------
the Purchaser at least thirty calendar days notice of any action, whether by
repurchase or redemption of its securities or otherwise, which would cause the
percentage of outstanding voting securities of the Company owned by the
Purchaser to exceed 19.9% of the outstanding voting securities of the Company,
on a fully diluted, as converted basis.

         11.9 to 11.11  [omitted]

         11.12 Removal of Restrictive Legend. The Company shall remove the
               -----------------------------
legend set forth in Section 10.3 from any stock certificate issued to the
Purchaser by delivery of substitute certificate(s) without such legend if the
Purchaser shall have delivered to the Company an opinion of counsel in form and
substance reasonably satisfactory to the Company to the effect that such legend
is not required for purposes of compliance with the Act.

     12.  Stock Registration Rights; Market Stand-off Restrictions; Information
          ---------------------------------------------------------------------
Rights.
- ------ 

          By its execution and delivery of this Agreement, the Purchaser shall
have the stock registration rights as have been granted by the Company pursuant
to Sections 2.4 through 2.15 of that certain Amended and Restated Investors'
Rights Agreement dated April 7, 1992 by and among the Company and certain
investors and shareholders of the Company, a copy of which has been delivered to
the Purchaser. The Purchaser shall abide by a 180-day "market stand-off"
restriction on the sale of the Shares following the Company's public stock
offering, as applicable to all other holders of the Company's preferred stock,
and/or as required by Section 2.12 of said Investors' Rights Agreement.

     13.  [omitted]

     14.  Termination Closing.  The Termination Closing shall not be subject to
          -------------------                                                  
any conditions other than as set forth in this Section 14, and the Company shall
have no obligation to make any representations or warranties as of the date of,
and in connection with, the Termination Closing, except as set forth in Section
9.  At the Termination Closing, the following shall occur:

          14.1 Opinion of the Company's Counsel. The Company shall deliver to
               -------------------------------- 
the Purchaser an opinion of counsel to the Company (which counsel shall be
reasonably acceptable to the Purchaser), substantially in the form attached
hereto as Exhibit A, which opinion shall be addressed to the Purchaser and dated

                                      -7-

<PAGE>
 
the date of the Termination Closing.  In rendering the opinion called for under
this Section 14.1, counsel may rely as to factual matters on certificates of
public officials, officers of the Company, and officers of the Purchaser.

          14.2 Credit for Purchase Price. At the Termination Closing, the
               -------------------------
Company shall credit in full payment of the purchase price for the Termination
Shares, the amounts of the First Option Payment ($1.5 million) and the Second
Option Payment ($2.0 million).

          14.3  Delivery of Stock Certificates and Other Documents.  The Company
                --------------------------------------------------              
shall deliver to Purchaser (i) a stock certificate representing the Termination
Shares, and (ii) a copy of the Articles, certified by the Corporations and
Securities Bureau of the Department of Commerce of the State of Michigan, (iii)
a copy of the Bylaws, certified by the Secretary of the Company, and (iv)
evidence reasonably satisfactory to the Purchaser of the adoption by the Board
of actions duly approving this Agreement and the transactions contemplated
hereby.

     15.  [omitted]

     16.  Miscellaneous.
          ------------- 

          16.1 Governing Law. This Agreement shall be governed by and construed
               -------------
under the laws of the State of Michigan as applied to agreements among Michigan
residents, made and to be performed entirely within the State of Michigan.

          16.2 Survival. The representations, warranties, covenants and
               -------- 
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or other instrument delivered by or
on behalf of the Company pursuant hereto or in connection with the transactions
contemplated hereby shall be deemed to be representations and warranties by the
Company hereunder as of the date of such certificate or instrument.

          16.3 Successors and Assigns.  Except as otherwise expressly 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.

          16.4 Entire Agreement.  This Agreement, the Exhibits hereto, the
               ----------------                                           
Memorandum, and the other documents delivered pursuant hereto constitute the
full and entire understanding and agreement among the parties with regard to the
subjects hereof and no party shall be liable or bound to any other party in any
manner by any representations, warranties, covenants or agreements except as
specifically set forth herein or therein.  Nothing in this Agreement, express or

                                      -8-

<PAGE>
 
implied, is intended to confer upon any party, other than the parties hereto and
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.

          16.5  Separability.  In case any provision of this Agreement shall be
                ------------                                                   
invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable and to retain as nearly
as practicable the intent of the parties, and the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

          16.6 Amendment and Waiver. Any term of this Agreement may be amended
               --------------------
and the observance of any term of this Agreement may be waived (either generally
or, in a particular instance, either retroactively or prospectively, and either
for a specified period of time or indefinitely), with the written consent of the
Company and the Purchaser. Any amendment or waiver effected in accordance with
this Section 16.6 shall be binding upon each holder of any securities purchased
under this Agreement at the time outstanding (including securities into which
such securities have been converted), each future holder of all such securities,
and the Company. Upon the effectuation of each such amendment or waiver, the
Company shall promptly give written notice thereof to the record holders of the
Shares (including the Conversion Shares) who have not previously consented
thereto in writing.

          16.7 Delays or Omissions. No delay or omission to exercise any right,
               -------------------
power or remedy accruing to the Company or the Purchaser upon any breach,
default or noncompliance of the Purchaser or the Company under this Agreement
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Purchaser's part of any breach, default or
noncompliance under this Agreement, or any waiver on the Company's or the
Purchaser's part 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, and that all remedies, either under this Agreement, the Series D
Documents, by law, or otherwise afforded to the Company and the Purchaser, shall
be cumulative and not alternative.

          16.8 Notices. All notices and other communications required or
               -------
permitted hereunder shall be in writing, shall specifically refer to this
Agreement, and shall be sent by (i) hand delivery, (ii) registered mail, return
receipt requested, (iii) overnight delivery services, or (iv) telefacsimile
transmission, and shall be sent or delivered to the respective addresses and
telefacsimile numbers set forth below, unless subsequently changed by written
notice to the other party:

                                      -9-

<PAGE>
 
          If to the
           Company, to:    AASTROM Biosciences, Inc.
                           P.O. Box 376
                           Ann Arbor, MI 48106
                           Attention:  President
                           Fax:  (313) 930-5546

          With a copy to:  T. Knox Bell, Esq.
                           Gray Cary Ware & Freidenrich
                           4365 Executive Drive, Ste. 1600
                           San Diego, CA 92121
                           Fax:  (619) 677-1477

          If to the
           Purchaser, to:  RPR GENCELL
                           Cell and Gene Therapy Division
                           Rhone-Poulenc Rorer Inc.
                           500 Arcola Road
                           P.O. Box 5093
                           Collegeville, PA 19426-0107
                           Attention:  President and General Counsel
                           Fax:  (610) 454-8984 and 454-3808

          16.9  Finder's Fees.
                ------------- 

                (a) The Company (i) represents and warrants that it has retained
no finder or broker in connection with the transactions contemplated by this
Agreement, and (ii) hereby agrees to indemnify and to hold the Purchaser
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Company or any of its employees or representatives is responsible.

                (b) The Purchaser (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement, and (ii) hereby agrees to indemnify and to hold the Company
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which the Purchaser or any of its employees or representatives are responsible.

          16.10 Fees and Expenses. Each party shall bear all of its own fees,
                -----------------
costs and expenses relating to the negotiation and preparation of this Agreement
and the consummation of the transactions contemplated hereby. If legal action is
brought by the Company or by the Purchaser to enforce or interpret

                                     -10-

<PAGE>
 
this Agreement, the prevailing party shall be entitled to recover its attorneys'
fees and legal costs in connection therewith.

          16.11 Information Confidential. The parties shall continue to abide by
                ------------------------ 
all confidentiality agreements and provisions which were previously agreed to
between the parties.

          16.12 Titles and Subtitles.  The titles of the paragraphs and
                --------------------                                   
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.

          16.13 Counterparts.  This Agreement may be executed in counterparts,
                ------------                                                  
including by facsimile, each of which shall be deemed an original, but all of
which together shall constitute one instrument.

          16.14 Arbitration. Any controversy or claim arising out of or relating
                -----------
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, with the forum for the arbitration proceedings to be
held in Detroit, Michigan if RPR commences the arbitration, and with the forum
for the arbitration proceedings to be held in Philadelphia, Pennsylvania if the
Company commences the arbitration.

     17.  Termination of Existing Stock Purchase Agreement.  The parties agree
          ------------------------------------------------                    
that the Stock Purchase Agreement entered into by the parties as of  September
15, 1995 is hereby terminated, with the exception that the representations and
warranties set forth in Sections 9 and 10 thereof shall remain in full force and
effect as of the date thereof.

      IN WITNESS WHEREOF, this Agreement is hereby executed as of the date set
forth on page 1 of this Agreement.

The Company:                         The Purchaser:

AASTROM BIOSCIENCES, INC.            RHONE-POULENC RORER INC.
Domino's Farms, Lobby L              500 Arcola Road
24 Frank Lloyd Wright Drive          Collegeville, PA 19426-0107
Ann Arbor, MI 48105


By: /s/ R. DOUGLAS ARMSTRONG         By: /s/ K.R. PINA
    -----------------------------        -----------------------------------
Title:  President                    Title: Vice President
Name: R. Douglas Armstrong, Ph.D.    Print Name: K.R. Pina

                                     -11-

<PAGE>
 
                                   EXHIBIT A


                           FORM OF OPINION OF COUNSEL
                              TERMINATION CLOSING

<PAGE>
 
                  [LETTERHEAD OF GRAY CARY WARE FREIDENRICH]


                               November ___, 1996



Rhone-Poulenc Rorer Inc.
Attn:  Robert Werner, Esq.
500 Arcola Road
P. O. Box 5093
Collegeville, PA 19421-0107


Ladies and Gentlemen:

     We have acted as counsel for Aastrom Biosciences, Inc., a Michigan
corporation (the "Company"), in connection with the issuance and sale of shares
of its Series E Preferred Stock pursuant to the Stock Purchase Agreement (Series
E Preferred) dated November ___, 1996 (the "Agreement") by and between the
Company and Rhone-Poulenc Rorer Inc., a Pennsylvania corporation (the
"Purchaser").  This opinion is being rendered to the Purchaser pursuant to
Section 14.1 of the Agreement in connection with the closing of the sale of
shares of the Company's Series E Preferred Stock (the "Shares") thereunder.
Capitalized terms not otherwise defined in this opinion have the meaning given
them in the Agreement.

     In connection with the opinions expressed herein, we have made such
examination of matters of law and of fact as we considered appropriate or
advisable for purposes hereof.  As to factual matters, subject to the further
limitations on the scope of our review and inquiry set forth below, we have
relied solely upon certificates of public officials (as to which we have assumed
the accuracy, completeness and genuineness) and of officers of the Company,
written representations made by the Company, written and oral representations
made to us by officers of the Company, an inquiry of all attorneys within our
firm who regularly perform services for the Company, and an examination of our
files regarding the Company and of documents made available to us by the
Company. We have not undertaken to independently verify the accuracy of the
facts set forth

<PAGE>
 
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]

Rhone-Poulenc Rorer Inc.
November __, 1996
Page 2

in such certificates and representations; nothing, however, has come to our
attention which would lead us to believe that such certificates or
representations are inaccurate.

     With respect to our opinion in Paragraph 1 as to the qualification of the
Company to do business and good standing, we have relied upon certificates of
public officials of the State of Michigan and upon written representations made
to us by officers of the Company as to the jurisdictions in which the Company's
ownership or lease of the property or conduct of its business requires such
qualification, except for those jurisdictions in which the failure to qualify
the Company to do business would not have a material adverse effect on the
Company.

     With respect to our opinion in Paragraph 3 that all issued and outstanding
shares of capital stock of the Company are fully paid, we have relied upon the
representation concerning receipt by the Company of consideration for such
shares made to us in a certificate executed by officers of the Company.

     In rendering our opinion in Paragraph 5, to the extent that such opinion
relates to laws, rules and regulations, we have not conducted any special
investigation of laws, rules or regulations and our opinion with respect thereto
is limited to such United States and California laws, rules and regulations as
in our experience are normally applicable to transactions of the type
contemplated by the Agreement.  We have assumed, for purposes of this letter and
our opinions set forth herein, that the substantive laws of the State of
Michigan are the same as the substantive laws of the State of California.

     With respect to our opinion in Paragraph 6 concerning pending legal or
governmental proceedings, we have relied upon written representations made to us
by officers of the Company, an inquiry of attorneys within our firm who
regularly perform legal services for the Company, and an examination of our
files regarding the Company and of documents made available to us by the
Company; we have not, however, made any examination of public records
(including, without limitation, the plaintiff or defendant indices of any state
or federal courts).

     In providing our opinion in Paragraph 8 hereof, we have relied upon
representations in a certificate executed by officers of the Company with
respect 

<PAGE>
 
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]

Rhone-Poulenc Rorer Inc.
November __, 1996
Page 3


to certain factual information relating to the suitability of offerees
of the Shares.  In addition, with respect to our opinion in Paragraph 8, as such
opinion relates to the securities laws of the Commonwealth of Pennsylvania, we
have based our opinion solely upon our examination of such laws of the
Commonwealth of Pennsylvania and the rules and regulations of the authorities
administering such laws, all as reported in unofficial compilations.

     Where we render our opinion "to our knowledge" or concerning an item "known
to us" or our opinion otherwise refers to our knowledge, it is based solely upon
certificates of public officials (as to which we have assumed the accuracy,
completeness and genuineness) and of officers of the Company, written and oral
representations made to us by officers of the Company, an inquiry of all
attorneys within our firm who regularly perform services for the Company, and an
examination of our files regarding the Company.  Except as set forth herein, we
have not undertaken any independent investigation to determine the existence or
absence of any fact and no inference as to our knowledge of the existence or
absence of any such fact should be drawn merely from our general representation
of the Company with respect to other matters or the rendering of the opinions
set forth below.  Subject to the foregoing, nothing has come to our attention
which would lead us to believe that such representations of officers of the
Company or certificates of public officials are inaccurate.

     In addition, we have assumed that the representations and warranties as to
factual matters made by the Company and the Purchaser in the Agreement are true
and correct.

     We have assumed (i) the genuineness and authenticity of all documents
submitted to us as originals, (ii) the conformity to genuine, authentic
originals of all documents submitted to us as copies, (iii) the competence of
all individuals executing documents, (iv) the due execution and delivery of the
Agreement by the Purchaser when due execution and delivery are a prerequisite to
the effectiveness thereof, and (v) that the Agreement is a binding obligation of
the Purchaser.

     We are admitted to practice law only in the State of California, and,
except with respect to our opinion in Paragraph 8, we express no opinion
concerning any law other than the law of the State of California and the federal
law of the United States. We have not examined the question of what law would
govern the interpretation or enforcement of the Agreement and our 

<PAGE>
 
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]

Rhone-Poulenc Rorer Inc.
November __, 1996
Page 4

opinion is based on the assumption that the internal laws of the State of
California and federal law would govern the provisions of the Agreement and the
transactions contemplated thereby. We express no opinion with respect to any
questions of choice of law, choice of venue or conflict of laws.

     We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance of any of the provisions of the
Agreement, (ii) the enforceability of any indemnification and contribution
provisions, (iii) the effect of bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally, (iv) the
compliance or noncompliance with the antifraud provisions of state and federal
laws, rules and regulations concerning the issuance of securities, or (v) the
enforceability of any choice of law provisions.

     Based upon our examination of the foregoing, in reliance thereon and
subject thereto, and except as set forth in the Agreement, the Memorandum and
the Company's Form S-1 Registration Statement dated November 1, 1996, we are of
the opinion that:

          1. 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
corporate power 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 as it is currently conducted. The Company is not qualified to do
business as a foreign corporation in any jurisdiction, and the Company has
represented to us that it has no assets or employees in any state other than
Michigan.

          2. The Company has all requisite corporate power to sell the Shares,
and to carry out and perform its other obligations under the terms of the
Agreement. The Agreement has been duly authorized, executed and delivered, and
is a valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.

          3.  The authorized capital stock of the Company consists of 21,500,000
shares of common stock and 12,200,000 shares of preferred stock (of which
2,500,000 shares have been designated as Series A Preferred Stock, 3,030,000
shares have been designated as Series B Preferred Stock,

<PAGE>
 
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]

Rhone-Poulenc Rorer Inc.
November __, 1996
Page 5

10,000 shares have been designated as Series C Preferred Stock, 3,000,000 shares
have been designated as Series D Preferred Stock, and 1,617,647 shares have been
designated as Series E Preferred Stock. The Company (i) has issued the shares of
Common Stock and shares of its preferred stock, and (ii) has granted the stock
options and warrants and (iii) has reserved for issuance the Common Stock and
shares of its preferred stock, all as represented by the Company in the Schedule
attached hereto. All previously issued and outstanding shares have been duly
authorized and validly issued, and are fully paid and nonassessable. To the best
of our knowledge, there are no outstanding rights, options, warrants, conversion
rights or agreements for the purchase or acquisition from the Company of any
shares of its capital stock, other than as referenced above.

          4.  The Shares, when issued, sold and delivered in compliance with the
provisions of the Agreement, will be duly authorized, validly issued, fully
paid, and nonassessable, and will be free of any liens or encumbrances, except
that the Shares are subject to restrictions on transfer under state and/or
federal securities laws.  The issuance of the Shares is not subject to any
preemptive rights or, to the best of our knowledge, rights of first refusal
which have not been waived.  The shares of Common Stock issuable upon conversion
of the Preferred Shares (i) have been duly and validly reserved, (ii) are not
subject to any preemptive rights or, to the best of our knowledge, rights of
first refusal, and (iii) upon conversion of the Preferred Shares in accordance
with the Articles and cancellation of the Preferred Shares, will be duly
authorized, validly issued, fully paid, and nonassessable.

          5.  Neither the performance of the Company's obligations under the
Agreement, nor the issuance of the Preferred Shares, nor the issuance of the
Common Stock issuable upon conversion of the Preferred Shares, will violate any
term of the Articles or Bylaws; and such transactions will not, in any material
respect, violate or conflict with or constitute a default under the provisions
of any material contract to our knowledge.

          6.  Except as disclosed in the Memorandum or the Form S-1 Registration
Statement, to the best of our knowledge, no action, suit, proceeding or
investigation is pending or threatened against the Company or its properties or
questions the validity of the Agreement or any action to be taken in connection
therewith.

<PAGE>
 
[LETTERHEAD OF GRAY CARY WARE & FREIDENRICH]

Rhone-Poulenc Rorer Inc.
November __, 1996
Page 6

          7.  All consents, approvals and authorizations of and filings with any
federal or state governmental authority required on the part of the Company, if
any, in connection with the consummation of the transactions contemplated by the
Agreement have been obtained or made, except for the filings which the Company
is making after the Termination Closing as specified under the Securities Act of
1933, as amended (the "Securities Act") and any state securities laws.

          8.  Subject to the accuracy of the Purchaser's representations and
warranties set forth in Section 10 of the Agreement, the offer and sale of the
Shares in conformity with the terms of the Agreement are exempt from the
registration requirements of Section 5 of the Securities Act, as amended and in
compliance with applicable state securities laws.

     This opinion is furnished solely to the Purchaser for its benefit in
connection with the purchase of the Shares, and may not be relied upon by, nor
copies delivered to, any other person or for any other purpose without our prior
written consent.

                                  Very truly yours,

                                  GRAY CARY WARE & FREIDENRICH
                                  A Professional Corporation



TKB/cf
6009466

<PAGE>
 
                                   EXHIBIT B


                      SUMMARY OF SERIES E PREFERRED STOCK

<PAGE>
 
                                   SUMMARY OF
                          SERIES E PREFERRED STOCK OF
                           AASTROM BIOSCIENCES, INC.



I.  TERMS OF PREFERRED STOCK
    ------------------------

     The terms of the Series E Preferred Stock will be substantially the same as
the terms of the Series D Preferred, except as noted herein.  The Series A, B,
C, and D Preferred Stock together with the Series E Preferred Stock, when
treated jointly are referred to herein as the "Preferred."  The following are
the principal terms of the Series E Preferred Stock:

<TABLE>
<CAPTION>
 
<S>                           <C>
A.  Rights, Preferences,           1.  Dividend Provisions.  A holder of
                                       -------------------
    Privileges and            Series E Preferred Stock will be entitled to 
    Restrictions of           receive preference to Series A, B, C, and D 
    Series E Preferred        Preferred Stock and to Common Stock, dividends 
    Stock:                    at the rate of 8% per annum on the liquidation
                              preference amount when and as declared by the
                              Board, if funds are legally available. If
                              dividends are declared on the Common Stock, the
                              holders of Preferred shall be entitled to receive
                              concurrently a dividend of an equal amount per
                              share. Dividends on the Series E Preferred Stock
                              will be noncumulative. No dividends have been paid
                              on the Preferred, and no dividends are likely to
                              be paid in the next few years.

                                   2.  Liquidation Preference.  In the event
                                       ----------------------
                              of any liquidation, dissolution or winding up of
                              the Company, a holder of Series E Preferred Stock
                              will be entitled to receive, in preference to the
                              holders of the Series A, B, C, and D Preferred
                              Stock and Common Stock, an amount equal to $4.25
                              per share, plus any declared but unpaid dividends
                              on the Series E Preferred Stock.

</TABLE>
 
                                      -1-

<PAGE>
 
                                   3. Voluntary Conversion. A holder of Series E
                                      -------------------- 
                              Preferred Stock will have the right to convert the
                              Series E Preferred Stock, at the option of the
                              holder, at any time, into shares of Common Stock.
                              The total number of shares of Common Stock into
                              which Series E Preferred Stock may be converted
                              will be determined by dividing the liquidation
                              preference ($4.25) by the conversion price. The
                              initial conversion price will be $4.25, resulting
                              in a one-for-one conversion, unless and until
                              there is a change in the conversion price.

                                   4. Automatic Conversion. Series E Preferred
                                      --------------------
                              Stock will be converted automatically into Common
                              Stock, at the then applicable conversion price,
                              immediately upon the closing of a firm commitment
                              underwritten public offering of shares of the
                              Common Stock of the Company at a public offering
                              price per share (prior to underwritings,
                              commissions and offering expenses) equal to or
                              exceeding $6.50 per share in an offering resulting
                              in gross proceeds to the Company which exceed
                              $12,500,000.

                                   5. Anti-Dilution. Series E Preferred Stock
                                      -------------
                              has weighted average antidilution rights if the
                              Company sells additional stock in the future for
                              less than $4.25 per share, subject to certain
                              exceptions.

                                   6. Voting Rights.  A holder of Series E
                                      -------------  
                              Preferred Stock will have the right to that number
                              of votes equal to the number of shares of Common
                              Stock issuable upon conversion of its Series E
                              Preferred Stock at the then applicable conversion
                              price. The Preferred shall vote with the Common
                              Stock on all matters except as specifically
                              provided herein or as otherwise required by law.

                                      -2-

<PAGE>
 

<TABLE> 
<S>                           <C> 
                                    7. Protective Provisions. Changes to the
                                       ---------------------
                              rights, preferences or privileges of a series of
                              Preferred Stock must be approved by the holders of
                              at least 66-2/3% of the affected series of
                              Preferred. Consent of the holders of at least 66-
                              2/3% of each series of Preferred Stock is required
                              to approve any amendment to the Company's articles
                              of incorporation. Additionally, consent of 51% of
                              the Series E Preferred Stock is required for stock
                              redemptions, sale or merger, liquidation,
                              amendment to Articles, and alter rights of
                              Preferred Stock.

B.  Registration Rights:            1. Demand Right. Beginning one year after 
                                       ------------         
                              the Company's initial public offering, holders of
                              at least 50% of the Preferred (or Common Stock
                              issued upon conversion of the Preferred or a
                              combination of such Common and Preferred) may
                              request registration by the Company of Common
                              Stock covering at least 20% of their registrable
                              securities, or a lesser percentage if the
                              aggregate offering price would exceed $2,000,000.
                              Prior to the Company's initial public offering,
                              such holders may request such registration if the
                              aggregate offering price would exceed $5,000,000.
                              The Company shall not be obligated to effect
                              registration under this demand right provision
                              more than once.

                                    2. Piggy-Back Registration.  At any time
                                       -----------------------
                              after the Company's initial public offering,
                              holders of Preferred shall be entitled to "piggy-
                              back" registration rights at the time that the
                              Company has a further registration; subject to the
                              rights, however, of the Company and its
                              underwriters to reduce the number of shares
                              proposed to be registered in view of market
                              conditions.
</TABLE>
 
                                      -3-

<PAGE>
 
                                     3.  S-3 Rights.  Holders of Preferred
                                         ----------
                              shall be entitled to an unlimited number of demand
                              registrations on Form S-3 (if available to the
                              Company) so long as each of such registered
                              offerings is in excess of $500,000; provided,
                              however, that the Company shall only be required
                              to file one Form S-3 Registration Statement on
                              demand every twelve (12) months.

                                     4.  Expenses.  The Company shall bear
                                         -------- 
                              all registration expenses (including the fees of
                              one counsel for the selling shareholders, but
                              excluding underwriting discounts and commissions)
                              of one demand registration and two piggy-back
                              registrations.
 
                                     5.  Assignability of Rights.  The
                                         -----------------------
                              registration rights may be assigned to an assignee
                              who agrees in writing to be bound by the terms and
                              conditions of the Amended and Restated Investors'
                              Rights Agreement and who (a) after such transfer
                              owns at least 100,000 shares of Preferred or
                              Common Stock issued upon conversion thereof, (b)
                              is an option holder, (c) is a holder of
                              registrable securities of the Company or a family
                              member of the transferor, or (d) is a trust for
                              the benefit of an option holder or a family
                              member, in a private transaction in which such
                              transferee will own not less than 20,000 shares of
                              Preferred or Common Stock issued upon conversion
                              thereof.

                                     6.  Termination of Registration Rights.
                                         ----------------------------------
                              Registration rights shall terminate as to any
                              particular shares of Preferred Stock when such
                              shares may be lawfully sold by the holder pursuant
                              to Rule 144 under the Securities Act of 1933.

                                      -4-

<PAGE>
 
                                     7.  Other Provisions.  The registration
                                         ----------------
                               rights provisions of the Amended and Restated
                               Investors' Rights Agreement contains other
                               customary provisions with respect to registration
                               rights, including cross-indemnification, the
                               Company's ability to delay the filing of demand
                               registrations for a period of at least 150 days,
                               the period of time in which the Registration
                               Statement shall be kept effective, underwriting
                               arrangements and the like.

 
II.  ADDITIONAL INFORMATION
     ----------------------
 
A.   Right of First Refusal:   None.
 
B.   Redemption Rights:        None.

                                      -5-



<PAGE>
 
                                                                    EXHIBIT 23.1
                                                                    


 
                      CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 (File No.
333-15415) of our report dated October 31, 1996, on our audits of the financial 
statements of Aastrom Biosciences, Inc.  We also consent to the reference to our
firm under the caption "Experts."


/s/ COOPERS & LYBRAND L.L.P.

Detroit, Michigan
November 14, 1996





<PAGE>
 
                                                                    EXHIBIT 23.3

                                  CONSENT OF
                   OBLON SPIVAK MCCLELLAND MAIER & NEUSTADT
                                PATENT COUNSEL

        We consent to the reference of our firm under the caption "Experts" 
regarding patents and pending patent applications either owned by or licensed to
Aastrom Biosciences, Inc. ("Aastrom") relating to aspects of Aastrom's product 
and process technology as set forth in the Registration Statement on Form S-1 
and related Prospectus of Aastrom, and any amendments thereto, which we have 
reviewed and approved under the captions "Risk Factors-Uncertainty Regarding 
Patents and Proprietary Rights" and "Business-Patents and Proprietary Rights", 
and the other references therein concerning such patents and patent 
applications.


                                             
                                           /s/  OBLON SPIVAK MCCLELLAND
                                                MAIER & NEUSTADT
                                           ----------------------------
                                                OBLON SPIVAK MCCLELLAND
                                                MAIER & NEUSTADT

Arlington, Virginia
November 13, 1996