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FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-37439
PROSPECTUS
2,200,000 Shares of
5 1/2% Convertible Preferred Stock

[LOGO OF AASTROM BIOSCIENCES INC]

Aastrom Biosciences, Inc. (the "Company") is hereby offering 2,200,000
shares of 5 1/2% Convertible Preferred Stock (the "Preferred Stock").
Dividends on the Preferred Stock are cumulative and accrue and are payable on
a quarterly basis at an annual rate of $0.275 per share. The payment of such
dividends shall be senior in priority to dividends on the Common Stock and
shall be on at least a pari passu basis with any other series of preferred
stock of the Company. At the Company's option, the Company may pay dividends
in either cash or shares of Common Stock, valued on the basis of the then
current market price of such shares. The Preferred Stock is convertible into
Common Stock at the option of the holder, and each share of Preferred Stock
will automatically convert into Common Stock following the second anniversary
of the initial sale date of the Preferred Stock in the event that the closing
bid price of the Common Stock exceeds $10.00 per share for twenty consecutive
trading days. The Preferred Stock will also automatically convert into Common
Stock in the event that, at any time following the original issuance of the
Preferred Stock, less than 500,000 shares of Preferred Stock remain
outstanding or upon a merger in which the Company or its shareholders receive
consideration of at least $10.00 per share and either the Company is not the
surviving entity or the holders of the Company's voting securities before the
transaction own less than 50% of the voting securities of the combined entity.
Each share of Preferred Stock is convertible into one share of Common Stock,
subject to adjustment upon the occurrence of certain events. The holders of
the Preferred Stock are entitled to a liquidation preference of $5.00 per
share, plus accrued but unpaid dividends. The payment of such liquidation
preference shall be senior in priority to any payment with respect to the
Common Stock and shall be on at least a pari passu basis with any other series
of preferred stock of the Company. The Preferred Stock will be voted together
with the Common Stock at any annual or special meeting of the shareholders of
the Company, and each share of Preferred Stock shall have voting rights equal
to the voting rights of that number of shares of Common Stock into which such
share of Preferred Stock would then be convertible. Except as required by law
or in connection with any amendment to the liquidation preference or other
rights of the Preferred Stock, the shares of Preferred Stock shall not vote as
a separate class on any matter submitted for shareholder approval.

The Common Stock is traded on the Nasdaq National Market under the symbol
"ASTM." The Preferred Stock will not be listed on any market or exchange, but
the shares of Common Stock issuable upon conversion of the Preferred Stock
will be approved for listing on the Nasdaq National Market upon conversion and
delivery of the Preferred Stock. On November 24, 1997, the last reported sale
price of the Common Stock on the Nasdaq National Market was $7.00 per share.
See "Price Range of Common Stock."
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 7 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.

- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Proceeds to
Price to Public Commissions(1) Company(2)(3)
- ----------------------------------------------------------------------------------------------

Per Share........................ $5.00 $0.30 $4.70
Total............................ $11,000,000 $660,000 $10,340,000
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------

(1) The shares of Preferred Stock offered hereby are being offered, on an all
or none basis, directly by the Company principally to selected
institutional investors. Cowen & Company (the "Placement Agent") has been
retained to act, on a best efforts basis, on behalf of the Company in
connection with the arrangement of this transaction. The Company has
agreed (i) to pay the Placement Agent a fee in connection with the
arrangement of this financing, and (ii) to indemnify the Placement Agent
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Plan of Distribution."
(2) The termination date of this offering is December 2, 1997, subject to
extension by mutual agreement of the Company and the Placement Agent.
Prior to the closing of this offering, all investor funds will be placed
in escrow with The Chase Manhattan Bank, as escrow agent (the "Escrow
Agent"), in an escrow account established for the benefit of the
investors. Upon receipt of notice from the Escrow Agent that investors
have deposited the requisite funds in the escrow account for the purchase
of the shares of Preferred Stock offered hereby, the Company will deliver
the certificates representing such shares to the Placement Agent for
delivery to the investors and will collect the investor funds from the
Escrow Agent. In the event that investor funds are not received in the
full amount necessary to satisfy the requirements of this offering, all
funds deposited in the escrow account will be returned promptly to the
investors. See "Plan of Distribution."
(3) Before deducting expenses payable by the Company, estimated to be
$350,000.

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

COWEN & COMPANY
November 26, 1997

[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 clinical trials
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.

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 selected emerging therapies such as immunotherapy, solid tissue repair and
ex vivo 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 single-use cassettes and reagents for use in the rapidly growing
cell therapy market. The Company is currently conducting pre-pivotal trials at
multiple sites in the United States and Europe of the Aastrom CPS for use in
stem cell therapy in preparation for pivotal trials in the United States and
potential marketing in Europe. The Company believes that the Aastrom CPS method
will be a cost-effective, less invasive and less time consuming alternative to
currently available stem cell collection methods and may enhance the clinical
utility of umbilical cord blood ("UCB") transplants by expanding the number of
cells available for transplant. For stem cell therapy, the Company has entered
into a strategic collaboration for the marketing, distribution and customer
service of the Aastrom CPS with Cobe BCT, Inc., a subsidiary of Gambro AB and a
leading provider of blood cell processing products.

The Aastrom CPS is designed as a platform product which implements the
Company's pioneering stem cell replication technology. The Company also
believes that the Aastrom CPS can be modified to produce a wide variety of
other cell types for selected emerging therapies being developed by other
companies and institutions. The Company intends to develop additional strategic
collaborations for the development of the Aastrom CPS in certain of these other
cell therapy market segments. In ex vivo gene therapy, the Company is also
developing the Aastrom Gene Loader, which is being designed to address the
production of gene-modified 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. According to an industry source, approximately 32,000 stem
cell therapy procedures were completed worldwide in 1995, and, according to
another industry source, the number of such procedures utilizing donor-derived
and patient-derived cells has been growing annually by approximately 15% and
20%, respectively. Other novel applications of stem cell therapy are under
development by third parties, which include the treatment of autoimmune
diseases and augmenting recipient acceptance of organ transplants. Current stem
cell collection 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. 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, which the Company
believes may ultimately be addressed by the Aastrom CPS.

The Company believes that the Aastrom CPS will offer significant advantages
over traditional stem cell collection methods. The Aastrom CPS is intended to
be used to produce cells used for therapy from a small starting volume of bone
marrow cells. Compared with current methods of harvest and infusion, the
Aastrom CPS is expected to involve two patient care episodes rather than
approximately eight to 21 care episodes and less than three hours of patient
procedure time rather than approximately 16 to 39 hours of patient procedure
time. The Aastrom CPS may also permit higher and more frequent doses of
chemotherapy to be administered to cancer patients by enabling the production
of multiple doses of cells from patient samples taken at the initial
collection. Further, in an evaluation of seven tumor-contaminated bone marrow
samples that were expanded with the Aastrom CPS process, the presence of breast
cancer cells in each sample was either substantially reduced or was

no longer detectable. The Company believes that the 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.

Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial in patients with Stage II, III and IV breast cancer at four U.S. sites.
This clinical trial is designed to demonstrate that cells produced using the
Aastrom CPS can provide hematopoietic recovery in accordance with trial
endpoints in such patients who have received myeloablative chemotherapy.
Pending a positive 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. The Company has also initiated two clinical
sites in Europe. The Company may not market the Aastrom CPS in the United
States for stem cell therapy unless and until FDA and other necessary
regulatory approvals are received and in Europe until CE Mark Registration is
obtained.

For UCB transplants, the Aastrom CPS is intended to be used to enable
production of more effective therapeutic doses of cells, which would otherwise
not be available with the small volume of UCB typically available. The Company
has initiated, under an IDE received from the FDA, a multiple-site U.S.
clinical trial for UCB expansion and transplantation in adult and pediatric
patients.

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) establish multiple
strategic collaborations.

For stem cell therapy, Aastrom has entered into a strategic collaboration
with Cobe BCT to be the Company's exclusive worldwide marketing, distribution
and service provider for the Aastrom CPS. In 1993, the Company entered into a
series of agreements, pursuant to which Cobe BCT purchased an aggregate of
$20,000,000 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 and 58% to 62% of
all revenue generated by Cobe BCT's sale of the Aastrom CPS, subject to the
Company's obligation to make certain royalty payments. Aastrom also retains all
marketing and distribution rights to the Aastrom CPS for other cell types and
ex vivo gene therapy applications, including stem cells.

The Company has exclusive rights to 13 issued U.S. patents, including patents
relating to production methods and composition of matter for stem and
progenitor cells and the genetic modification of stem and other cell types, as
well as patents for cell culture devices for human cells.

THE OFFERING

Securities offered.................. 2,200,000 shares of 5 1/2% Convertible
Preferred Stock.

Preferred Stock..................... Dividends on the Preferred Stock are
cumulative and accrue and are payable on
a quarterly basis at an annual rate of
$.275 per share. The payment of such
dividends shall be senior in priority to
dividends on the Common Stock and shall
be on at least a pari passu basis with
any other series of preferred stock of
the Company. At the Company's option, the
Company may pay dividends in either cash
or shares of Common Stock, valued on the
basis of the then current market price of
such shares. The Preferred Stock is
convertible into Common Stock at the
option of the holder, and each share of
Preferred Stock will automatically
convert into Common Stock following the
second anniversary of the initial sale
date of the Preferred Stock in the event
that the closing bid price of the Common
Stock exceeds $10.00 per share for twenty
consecutive trading days. The Preferred
Stock will also automatically convert
into Common Stock in the event that, at
any time following the original issuance
of the Preferred Stock, less than 500,000
shares of Preferred Stock remain
outstanding or upon a merger in which the
Company or its shareholders receive
consideration of at least $10.00 per
share and either the Company is not the
surviving entity or the holders of the
Company's voting securities before the
transaction own less than 50% of the
voting securities of the combined entity.
Each share of Preferred Stock is
convertible into one share of Common
Stock, subject to adjustment upon the
occurrence of certain events. The holders
of the Preferred Stock are entitled to a
liquidation preference of $5.00 per
share, plus accrued but unpaid dividends.
The payment of such liquidation
preference shall be senior in priority to
any payment with respect to the Common
Stock and shall be on at least a pari
passu basis with any other series of
preferred stock of the Company.

Common Stock outstanding before
this offering...................... 13,266,926

Common Stock to be outstanding
after this offering................ 15,466,926(1)

Use of proceeds..................... For the development and manufacture of
the Aastrom CPS for use in clinical
trials, expanded clinical trials,
research and development of other product
candidates, working capital and other
general corporate purposes.

Nasdaq National Market symbol of
the Common Stock................... ASTM
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(1) Includes 2,200,000 shares of Common Stock issuable upon conversion of the
Preferred Stock and 2,000 shares of Common Stock that, to the Company's
knowledge, will be canceled in connection with the repayment of a
promissory note. Excludes (a) options and warrants outstanding as of
September 30, 1997 to purchase 1,175,892 shares of Common Stock at a
weighted average exercise price of $5.50 per share, (b) 6,789 shares of
Common Stock which were canceled in October 1997 in connection with the
repayment of a promissory note, and (c) warrants to purchase 200,000 shares
of Common Stock at an exercise price of $7.24 per share that were issued in
October 1997. See "Business--Strategic Relationships," "Management--Stock
Option and Employee Benefit Plans," "Certain Transactions" and Note 4 of
Notes to Financial Statements.

SUMMARY FINANCIAL DATA

THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
---------------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ------------ ----------- -----------

STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ 784,000 $ 872,000 $ 517,000 $ 1,609,000 $ 378,000 $ 224,000 $ 16,000
Costs and expenses:
Research and
development........... 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 3,160,000 3,243,000
General and
administrative........ 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 452,000 613,000
----------- ----------- ----------- ----------- ------------ ----------- -----------
Total costs and
expenses.............. 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 3,612,000 3,856,000
Other income, net....... 122,000 180,000 213,000 616,000 644,000 115,000 215,000
----------- ----------- ----------- ----------- ------------ ----------- -----------
Net loss................ $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000) $(3,273,000) $(3,625,000)
=========== =========== =========== =========== ============ =========== ===========
Net loss per share(1)... $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26) $ (.32) $ (.27)
=========== =========== =========== =========== ============ =========== ===========
Weighted average number
of shares
outstanding(1)......... 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000 10,107,000 13,279,000
=========== =========== =========== =========== ============ =========== ===========

SEPTEMBER 30, 1997
--------------------------
AS
ACTUAL ADJUSTED(2)
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BALANCE SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments.................. $ 13,631,000 $ 23,621,000
Working capital......... 12,113,000 22,103,000
Total assets............ 14,874,000 24,864,000
Deficit accumulated dur-
ing the development
stage.................. (44,938,000) (44,938,000)
Total shareholders' eq-
uity................... 13,006,000 22,996,000

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(1) See Note 1 of Notes to Financial Statements for information concerning the
computation of net loss per share and shares used in computing net loss per
share.
(2) Adjusted to reflect the sale by the Company of 2,200,000 shares of
Preferred Stock offered hereby at the public offering price of $5.00 per
share, after deduction of commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."

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 Preferred Stock offered hereby.
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 below.

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 U.S. 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. The Company is currently conducting pre-pivotal clinical trials to
demonstrate the safety and biological activity of patient-derived or UCB cells
produced in the Company's prototype of the Aastrom CPS in a limited number of
patients with breast cancer. If the results from these pre-pivotal trials are
successful, the Company intends to seek clearance from the FDA to commence
pivotal clinical trials. 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, reliability 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 study. The Company has experienced
delays in patient accrual in its current pre-pivotal clinical trials. Further
delays in patient accrual, in the Company's current pre-pivotal clinical
trials 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 trials are designed to demonstrate
specific biological safety and activity of cells produced in the Aastrom CPS,
but are not designed to demonstrate long-term sustained engraftment of such
cells. The patients enrolled in these pre-pivotal trials 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 current pre-
pivotal trials or future trials. For example, in the trials to date, a patient
who was in the transplant recovery process died from complications related to
the patient's clinical condition that, according to the physician involved,
were unrelated to the Aastrom CPS procedure. 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 manufacture of its product candidates and
their components, including certain cytokines, serum and media, with third
parties, and expects to continue to do so in the foreseeable future. The
Company has entered into collaborative product development and supply
agreements with SeaMED Corporation ("SeaMED"), Ethox Corporation ("Ethox") and
Anchor Advanced Products Inc., Mid-State Plastics Division ("MSP"), for the
collaborative development and manufacture of certain components of the Aastrom
CPS and is dependent upon those suppliers to manufacture its products. The
Company is also dependent upon Immunex Corporation ("Immunex"), Life
Technologies, Inc. and Biowhittaker for the supply of certain cytokines, serum
and media to be used in conjunction with 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, MSP 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. Additionally, there can be no
assurance that the Company will not require additional cytokines, components
and other materials to manufacture, use or market its product candidates, or
that necessary key components will be available for use on a sustained basis,
if at all, by the Company in the markets in which it intends to sell its
products. 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 becomes 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.

Certain of the compounds used by the Company in its current stem cell
expansion process involve the use of animal-derived products. The availability
of these compounds for clinical and commercial use may become limited by
suppliers or restricted by regulatory authorities, which may impose a
potential competitive disadvantage for the Company's products compared to
competing products and procedures. There can be no assurance that the Company
will not experience delays or disadvantages related to the future availability
of such materials. Any restriction on the use of such materials could have a
material adverse effect on the Company's business, financial condition and
results of operations, and there can be no assurance that the Company will be
able to develop or obtain alternative compounds.

Like SeaMED, Ethox and MSP, 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 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, 1997, the Company has incurred net operating
losses totaling approximately $44.9 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 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, or, if such relationships are
established, that they will be successful or sustained on a long-term basis.
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 the
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. 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 development of the Company's products for the
expansion of additional cell types will require the Company to raise
additional funds or to seek collaborative partners, or both, to finance
related research and development activities.

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 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 guidelines or 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.

("EU") member countries. In order for the Company to market its products in
Europe, it must obtain a CE Mark from a Notified Body to certify that the
Company and its operations comply with certain minimum quality standards and
compliance procedures, or, alternatively, that its manufactured products meet
a more limited set of requirements. There can be no assurance that the Company
and its suppliers will be able to meet these minimum requirements, or, if met,
that the Company and its suppliers will be able to maintain such compliance.
The result of such non-compliance would have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance, however, that the Aastrom CPS will be regulated in Europe as
a Class IIb medical device, and, if the Aastrom CPS is not so regulated, the
Company could be forced to obtain additional regulatory approvals and could be
subjected to additional regulatory requirements and uncertainty, which would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Government Regulation."

CONSEQUENCES OF COBE RELATIONSHIP

Cobe is the largest single shareholder of the Company, beneficially owning
approximately 20.8% of the outstanding Common Stock following the completion
of this offering (assuming the conversion of the 2,200,000 shares of Preferred
Stock offered hereby into Common Stock). In addition, Cobe has certain
preemptive rights to maintain its relative percentage ownership and voting
interest in the Company. Cobe also has an option, until February 2000, 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 agreements
establishing the Company's relationship with Cobe provide the Company with an
option (the "Put Option") to require Cobe to purchase the lesser of 20%, or
$5,000,000, in an initial public offering ("IPO") or a private offering
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. While the Put Option was not exercised by the Company in connection
with the IPO, Cobe voluntarily elected to purchase an additional 714,200
shares of Common Stock in the IPO, for an aggregate purchase price of
approximately $5,000,000. The Put Option does not apply to any public
offerings, including this offering. The Company and Cobe are evaluating
whether or not the Put Option remains in effect as to any future private
offerings of the Company's equity securities. 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."

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, suggests that cells expanded in the Aastrom CPS using
its current process will enable hematopoietic recovery within the time frames
currently achieved by bone marrow harvest, however, neutrophil and platelet
recovery times may be slower than with PBPC collection methods. The Company is
evaluating techniques and methods to optimize the cells produced in the
Aastrom CPS to reduce the recovery time of neutrophils and platelets in
patients. There can be no assurance that if such procedure optimization does
not lead to recovery times equal to or faster than those of PBPC collection
methods, such outcome would not have a material adverse effect on the
Company's business, financial condition and results of operations. 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, Novartis, A.G., 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.

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 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--Research and License Agreements." 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 depends on a number of factors, including
the payor's determination that use of the product 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.

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 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 up to
an 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 13,266,926
shares of Common Stock outstanding, based upon the number of shares
outstanding as of October 31, 1997, all of which are eligible for sale in the
public market, subject in some cases to certain volume restrictions and other
conditions imposed by Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). In addition, the 2,200,000 shares of Common Stock
issuable upon conversion of the Preferred Stock will also be freely tradeable.
However, 6,161,496 outstanding shares of Common Stock are subject to lock-up
agreements expiring 90 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. Certain existing shareholders, as well as the purchasers
of the Preferred Stock in this offering, have certain 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," "Shares Eligible for Future Sale" and "Plan of Distribution."

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 31.0% of the outstanding shares of Common Stock (assuming the
conversion of the shares of Preferred Stock offered hereby into Common Stock).
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."

POSSIBLE STOCK PRICE VOLATILITY

The price of the Company's Common Stock has experienced significant
volatility. 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 shortfalls in revenue or earnings as compared
with public market analysts' expectations, changes in such analysts'
recommendations or projections and fluctuations in the stock markets generally
may adversely affect the market price of the Common Stock. In addition, since
the Company's initial public offering in February 1997, the average daily
trading volume of the Common Stock on the Nasdaq National Market has generally
been relatively low. There can be no assurance that a more active trading
market will develop in the future.

ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND MICHIGAN LAW

The Company's Restated Articles of Incorporation authorize the Board of
Directors to issue, without shareholder approval, an additional 2,800,000
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. The Company's Restated Articles of Incorporation
eliminate the right of shareholders to act without a meeting, do not provide
for cumulative voting in the election of directors and provide that the
holders of at least two-thirds of the outstanding shares of Common Stock must
approve certain transactions resulting in a change of control of the Company.
In addition, certain provisions of Michigan law applicable to the Company,
including, but not limited to, provisions requiring class or series votes in
certain circumstances with respect to proposed business combinations, 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

Upon conversion of their shares of Preferred Stock to Common Stock,
purchasers of the Preferred Stock in this offering will experience immediate
and substantial book value dilution. Additional dilution is likely to occur
upon the exercise of outstanding options or warrants 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."

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, including, but not limited to, statements
regarding: uncertainties related to product development and marketability;
uncertainties related to clinical trials; manufacturing and supply
uncertainties and dependence on third parties; history of operating losses and
anticipation of future losses; limited sales and marketing capabilities and
dependence on collaborative relationships; future capital needs and
uncertainty of additional funding; uncertainty of regulatory approval and
extensive government regulation; consequences of Cobe relationship;
competition and technological change; uncertainty regarding patents and
proprietary rights; no assurance of third party reimbursement; hazardous
materials; and potential product liability and availability of insurance.
These statements are subject to risks and uncertainties, including those set
forth under this caption, and actual results could differ materially from
those expressed or implied in these statements. All forward-looking statements
included in this Prospectus are made as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement or reason
why actual results might differ.

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 2,200,000 shares of
Preferred Stock offered hereby are estimated to be $9,990,000 at the public
offering price of $5.00 per share and after deducting commissions and
estimated offering expenses payable by the Company.

The Company currently intends to use approximately $5,000,000 of the net
proceeds from the offering to fund product and clinical development activities
for the Aastrom CPS, including pre-pivotal and pivotal clinical trials, and
approximately $3,000,000 for other research activities, with the remaining
amount being used for working capital and other general corporate purposes,
including scheduled repayments of obligations under equipment leases. The
Company has $147,000 of outstanding equipment lease commitments as of
September 30, 1997, with final payments due between December 1997 and May 1999
that bear interest ranging from 9.7% to 12.1%.

Based on its current operating plan, 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
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. 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.

PRICE RANGE OF COMMON STOCK

The Company effected an initial public offering of its Common Stock during
February 1997 at a price of $7.00 per share. Commencing on February 4, 1997,
the Company's Common Stock has been quoted on the Nasdaq National Market under
the symbol "ASTM." The Preferred Stock will not be listed on any market or
exchange, but the shares of Common Stock issuable upon conversion of the
Preferred Stock will be approved for listing on the Nasdaq National Market
upon conversion and delivery of the Preferred Stock. The following table sets
forth, for the periods indicated, the high and low sale prices per share of
the Common Stock as reported on the Nasdaq National Market.

HIGH LOW
---- ----

YEAR ENDED JUNE 30, 1997
3rd Quarter (from February 4, 1997).................. $ 7 5/8 $ 5 3/4
4th Quarter.......................................... 8 1/2 3 1/2
YEAR ENDING JUNE 30, 1998
1st Quarter.......................................... 9 15/16 3 1/4
2nd Quarter (through November 24, 1997).............. 8 1/8 4 3/4

On November 24, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $7.00 per share. As of September 30, 1997,
there were approximately 125 shareholders of record of the Common Stock.

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. Dividends will be payable on the Preferred Stock in cash or in shares
of Common Stock, at the Company's option. The Company anticipates that such
dividends will be paid in shares of Common Stock. The Company currently
anticipates that it will retain all future earnings, if any, for use in the
development of its business.

DILUTION

The Company's net tangible book value at September 30, 1997 was
approximately $13,006,000, or $.98 per share. Net tangible book value per
share represents the amount of the Company's shareholders' equity, less
intangible assets, divided by 13,272,674, the number of shares of Common Stock
outstanding as of September 30, 1997.

After giving effect to the sale of 2,200,000 shares of Preferred Stock in
this offering at the public offering price of $5.00 per share and the
conversion of such shares into Common Stock, and after deducting commissions
and estimated offering expenses payable by the Company, the net tangible book
value of the Company as of September 30, 1997 would have been $22,996,000, or
$1.49 per share. This represents an immediate increase in net tangible book
value of $.51 per share to existing shareholders and an immediate dilution in
net tangible book value of $3.51 per share to purchasers of Preferred Stock in
this offering, as illustrated in the following table:

Public offering price per share................................. $5.00
Net tangible book value per share as of September 30, 1997.... $.98
Increase per share attributable to new investors.............. .51
----
Net tangible book value per share after this offering........... 1.49
-----
Dilution per share to new investors............................. $3.51
=====

The foregoing excludes (i) options and warrants outstanding as of September
30, 1997 to purchase 1,175,892 shares of Common Stock at a weighted average
exercise price of $5.50 per share, (ii) 1,041 shares of Common Stock that were
issued subsequent to September 30, 1997 upon the exercise of stock options,
and (iii) warrants to purchase 200,000 shares of Common Stock at an exercise
price of $7.24 per share that were issued subsequent to September 30, 1997.
The foregoing includes 6,789 shares of Common Stock that were canceled
subsequent to September 30, 1997 in connection with the repayment of a
promissory note and 2,000 shares of Common Stock that, to the Company's
knowledge, will be canceled in connection with the repayment of a promissory
note. See "Business--Strategic Relationships," "Management--Stock Option and
Employee Benefit Plans," "Certain Transactions" and Note 4 of Notes to
Financial Statements.

CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
September 30, 1997, and (ii) as adjusted to reflect the receipt of the
estimated net proceeds from the Company's sale of 2,200,000 shares of
Preferred Stock in this offering at the public offering price of $5.00 per
share. See "Use of Proceeds."

SEPTEMBER 30, 1997
--------------------------
ACTUAL AS ADJUSTED
------------- ------------

Long-term portion of capital lease obligations(1).. $ 48,000 $ 48,000
Shareholders' equity(2):
Preferred stock, no par value: 5,000,000 shares
authorized; no shares issued and outstanding,
actual, and 2,200,000 shares issued and
outstanding, as adjusted........................ -- 9,990,000
Common stock, no par value: 40,000,000 shares
authorized; 13,272,674 shares issued and
outstanding, actual and as adjusted; in each
case net of shareholder notes and other......... 57,944,000 57,944,000
Deficit accumulated during the development stage. (44,938,000) (44,938,000)
------------- ------------
Total shareholders' equity....................... 13,006,000 22,996,000
------------- ------------
Total capitalization............................. $ 13,054,000 $ 23,044,000
============= ============

- --------
(1)See Note 7 of Notes to Financial Statements.
(2) Excludes options and warrants outstanding as of September 30, 1997 to
purchase 1,175,892 shares of Common Stock at a weighted average exercise
price of $5.50 per share, (ii) 1,041 shares of Common Stock that were
issued subsequent to September 30, 1997 upon the exercise of stock
options, and (iii) warrants to purchase 200,000 shares of Common Stock at
an exercise price of $7.24 per share that were issued subsequent to
September 30, 1997. Includes 6,789 shares of Common Stock that were
canceled subsequent to September 30, 1997 in connection with the repayment
of a promissory note and 2,000 shares of Common Stock that, to the
Company's knowledge, will be canceled in connection with the repayment of
a promissory note. See "Business--Strategic Relationships," "Management--
Stock Option and Employee Benefit Plans," "Certain Transactions" and Note
4 of Notes to Financial Statements.

SELECTED FINANCIAL DATA

The statement of operations data for the fiscal years ended June 30, 1995,
1996 and 1997 and for the period from Inception to June 30, 1997 and the
balance sheet data at June 30, 1996 and 1997, 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, 1993 and 1994, and the balance sheet data at June 30,
1993, 1994 and 1995, are derived from audited financial statements not
included herein. The information presented below for the three-month periods
ended September 30, 1996 and 1997, for the period from Inception to September
30, 1997 and as of September 30, 1997 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, 1997 are not necessarily indicative of the results that
will be achieved for the entire year ended June 30, 1998. 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."

THREE MONTHS ENDED
YEAR ENDED JUNE 30, INCEPTION TO SEPTEMBER 30,
---------------------------------------------------------------- JUNE 30, ------------------------
1993 1994 1995 1996 1997 1997 1996 1997
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------

STATEMENT OF OP-
ERATIONS DATA:
Revenues:
Research and
development
agreements..... $ -- $ 49,000 $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000 $ 195,000 $ 3,000
Grants.......... 784,000 823,000 121,000 267,000 148,000 2,143,000 29,000 13,000
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
Total revenues.. 784,000 872,000 517,000 1,609,000 378,000 4,160,000 224,000 16,000
Costs and ex-
penses:
Research and de-
velopment...... 2,600,000 5,627,000 4,889,000 10,075,000 13,357,000 38,432,000 3,160,000 3,243,000
General and ad-
ministrative... 1,153,000 1,565,000 1,558,000 2,067,000 1,953,000 9,042,000 452,000 613,000
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
Total costs and
expenses....... 3,753,000 7,192,000 6,447,000 12,142,000 15,310,000 47,474,000 3,612,000 3,856,000
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
Loss from opera-
tions........... (2,969,000) (6,320,000) (5,930,000) (10,533,000) (14,932,000) (43,314,000) (3,388,000) (3,840,000)
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
Other income (ex-
pense):
Interest income. 148,000 245,000 279,000 678,000 676,000 2,252,000 126,000 220,000
Interest ex-
pense.......... (26,000) (65,000) (66,000) (62,000) (32,000) (251,000) (11,000) (5,000)
----------- ----------- ----------- ----------- ------------ ------------ ----------- -----------
Net loss......... $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(14,288,000) $(41,313,000) $(3,273,000) $(3,625,000)
=========== =========== =========== =========== ============ ============ =========== ===========
Net loss per
share(1)........ $ (.52) $ (.82) $ (.66) $ (.98) $ (1.26) $ (.32) $ (.27)
=========== =========== =========== =========== ============ =========== ===========
Weighted average
number of shares
outstanding(1).. 5,480,000 7,461,000 8,644,000 10,103,000 11,315,000 10,107,000 13,279,000
=========== =========== =========== =========== ============ =========== ===========

INCEPTION TO
SEPTEMBER 30,
1997
--------------

STATEMENT OF OP-
ERATIONS DATA:
Revenues:
Research and
development
agreements..... $ 2,020,000
Grants.......... 2,156,000
--------------
Total revenues.. 4,176,000
Costs and ex-
penses:
Research and de-
velopment...... 41,675,000
General and ad-
ministrative... 9,655,000
--------------
Total costs and
expenses....... 51,330,000
--------------
Loss from opera-
tions........... (47,154,000)
--------------
Other income (ex-
pense):
Interest income. 2,472,000
Interest ex-
pense.......... (256,000)
--------------
Net loss......... $(44,938,000)
==============
Net loss per
share(1)........
Weighted average
number of shares
outstanding(1)..

JUNE 30,
------------------------------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
----------- ------------ ------------ ------------ ------------ -------------

BALANCE SHEET DATA:
Cash, cash equivalents
and short-term invest-
ments................. $ 3,085,000 $ 6,730,000 $ 11,068,000 $ 10,967,000 $ 17,007,000 $ 13,631,000
Working capital........ 2,744,000 6,187,000 10,319,000 9,851,000 15,600,000 12,113,000
Total assets........... 4,156,000 8,227,000 12,551,000 12,673,000 18,410,000 14,874,000
Long-term capital lease
obligations........... 311,000 425,000 412,000 189,000 65,000 48,000
Deficit accumulated
during the development
stage................. (5,251,000) (11,391,000) (17,108,000) (27,025,000) (41,313,000) (44,938,000)
Total shareholders' eq-
uity.................. 3,268,000 6,985,000 11,186,000 10,850,000 16,583,000 13,006,000

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Since its inception, the Company has been in the development stage and
engaged in research and product development, conducted principally on its own
behalf but also in connection with various collaborative research and
development agreements with other entities. The Company does not expect to
generate positive cash flows from operations for at least the next several
years and, until product sales commence, the Company expects that its revenue
sources will continue to be limited to grant revenue, research funding and
milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future cash payments and
revenues, if any, will be subject to significant fluctuations, based in part
on the success of the Company's research activities, the receipt of necessary
regulatory approvals, the timing of the achievement of certain other
milestones and the extent to which associated costs are reimbursed under grant
or other arrangements. Substantially all of the Company's revenues from
product sales, if any, will be subject to the Company's obligation to make
aggregate royalty payments of up to 5% to certain licensors of its technology.
Further, under the Company's Distribution Agreement with Cobe, Cobe will
perform marketing and distribution activities and in exchange will receive
approximately 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 three fiscal 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 and other factors, the Company's results of
operations have fluctuated 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 result of operations for any future
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, quality systems 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 or initiates product sales, the net loss will continue to
increase as well. The Company has never been profitable and does not
anticipate having net income for at least the next several years. Through
September 30, 1997, the Company had an accumulated deficit of $44,938,000.
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, 1997 AND 1996

Total revenues were $16,000 for three months ended September 30, 1997,
compared to $224,000 for the same period in 1996. Revenues in 1996 consist
primarily of research and development revenues under the Company's research
collaboration with RPR, which ended in September 1996.

Total costs and expenses were $3,856,000 for the three months ended
September 30, 1997, compared to $3,612,000 for the same period in 1996. The
increase in costs and expenses in 1997 is the result of an increase

in research and development expenses to $3,243,000 in 1997 from $3,160,000 in
1996 and in general and administrative expenses, which increased to $613,000
for the three months ended September 30, 1997 from $452,000 for the same
period in 1996.

Interest income was $220,000 for the three months ended September 30, 1997,
compared to $126,000 for the same period in 1996. This increase primarily
reflects an increase in the level of short-term investments throughout the
period in 1997.

The Company's net loss increased to $3,625,000 for the three months ended
September 30, 1997, from $3,273,000 for the same period in 1996.

YEARS ENDED JUNE 30, 1997, 1996 AND 1995

Total revenues were $378,000 in 1997, $1,609,000 in 1996 and $517,000 in
1995. Grant revenues decreased to $148,000 in 1997 from $267,000 in 1996 and
were $121,000 in 1995, reflecting the timing of grant awards and related
research activities, to the extent that such associated costs are reimbursed
under the grants. Grant revenues accounted for 39%, 17% and 23% of total
revenues for the years ended June 30, 1997, 1996 and 1995, respectively, and
are recorded on a cost-reimbursement basis. Revenues from research and
development agreements totaled $230,000 in 1997, $1,342,000 in 1996 and
$396,000 in 1995, reflecting research funding received by the Company under
its collaboration with RPR which commenced in September 1995 and ended in
September 1996. Revenues from RPR accounted for 52%, 83% and 48% of such
revenue in 1997, 1996 and 1995, respectively.

Total costs and expenses were $15,310,000 in 1997, $12,142,000 in 1996 and
$6,447,000 in 1995. The increases in costs and expenses in 1997 and 1996 are
primarily the result of increases in research and development expense to
$13,357,000 in 1997 from $10,075,000 in 1996 and $4,889,000 in 1995. Research
and development expense includes charges of $1,000,000 and $1,500,000 for the
years ended June 30, 1997 and 1996, respectively, representing license fee
payments pursuant to the Company's supply agreement with Immunex. The increase
in research and development expense reflects an increase in research, clinical
development and product development activities. General and administrative
expenses were $1,953,000 in 1997, $2,067,000 in 1996 and $1,558,000 in 1995.
General and administrative expenses, which decreased slightly in 1997 compared
to 1996, are expected to increase as a result of increasing finance, legal and
other administrative and marketing expenses in support of the Company's
increasing product development and research activities.

Interest income was $676,000 in 1997, $678,000 in 1996 and $279,000 in 1995.
The fluctuations in interest income are due primarily to corresponding changes
in the levels of cash, cash equivalents and short-term investments for such
periods. Interest expense was $32,000 in 1997, $62,000 in 1996 and $66,000 in
1995, reflecting decreasing amounts outstanding under capital leases during
these periods.

The Company's net loss was $14,288,000 in 1997, $9,917,000 in 1996 and
$5,717,000 in 1995. The Company expects to report substantial net losses for
at least the next several years.

The Company has not generated any profits to date and therefore has not paid
any federal income taxes since inception. At June 30, 1997, the Company's
federal tax net operating loss and tax credit carryforwards were $40,420,000
and $971,000, respectively, which will expire from 2004 through 2012, if not
utilized. The Company underwent an ownership change in October 1993, which has
resulted in a limitation under which the Company can utilize a portion of its
federal net operating loss carryforward amounting to $1,153,000 per year. As
of June 1997, the portion of the Company's net operating loss that remains
subject to this limitation is $2,490,000 and therefore is not expected to
ultimately effect the Company's ability to utilize this benefit. If certain
changes in ownership should occur again in the future, the Company's ability
to utilize its net operating loss and tax credit carryforwards may become
subject to further annual limitation.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily through
public and private sales of its equity securities, which, from inception
through September 30, 1997, have totaled approximately $57,942,000,

and, to a lesser degree, through grant funding, payments received under
research agreements and collaborations, interest 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. Under the
Company's primary equipment leasing agreement, the lessor is granted a
security interest in all of the Company's property and assets.

The Company's combined cash, cash equivalents and short-term investments
totaled $17,007,000 at June 30, 1997, an increase of $6,040,000 from June 30,
1996. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1997 included $13,214,000 to finance the
Company's operations and working capital requirements, $424,000 in capital
equipment additions and $223,000 in scheduled debt payments. On February 7,
1997, the Company completed an underwritten initial public offering of
3,000,000 shares of its Common Stock at an offering price of $7.00 per share.
On March 5, 1997, the underwriters elected to purchase an additional 250,000
shares of Common Stock pursuant to the underwriters' over-allotment option at
a price of $7.00 per share. Proceeds from the offering, net of underwriters'
commissions and expenses, were $19,885,000.

The Company's combined cash, cash equivalents and short-term investments
totaled $13,631,000 at September 30, 1997, a decrease of $3,376,000 from June
30, 1997. The primary uses of cash, cash equivalents and short-term
investments during the three months ended September 30, 1997, included
$3,331,000 to finance the Company's operations and working capital
requirements, $44,000 in capital equipment additions and $42,000 in scheduled
debt payments. The Company plans to continue its policy of investing excess
funds in short-term, investment-grade, interest-bearing instruments.

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 at least the next
several years due to the expected increase in spending for research and
development programs and the expected cost of commercializing its product
candidates. The Company intends to seek additional funding through research
and development agreements with suitable corporate collaborators, grants 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 the
development and manufacture of the Aastrom CPS for use in clinical trials,
expanded clinical trials, other research and development and working capital
and other corporate requirements until late 1998. 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 debt or equity securities. There can be no assurance that
such collaborative arrangements, or any public or private financing, will be
available on acceptable terms, if at all, or can be sustained. Several factors
will affect the Company's ability to raise additional funding, including, but
not limited to, market volatility of the Company's Common Stock and economic
conditions affecting the public markets generally or some portion or all of
the technology sector. 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 "Risks Factors--Future Capital Needs; Uncertainty
of Additional Funding" and Notes to Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENT

During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"),
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15"). SFAS 128, which will be adopted by the Company for the period
ending December 31, 1997, will not have a material effect on the computation
of the Company's historical net loss per share amounts.

BUSINESS

OVERVIEW

Aastrom is developing proprietary process technologies and devices for a
range of cell therapy applications, including stem cell therapies and selected
emerging therapies such as immunotherapy, solid tissue repair and ex vivo 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 single-use cassettes and reagents for use in the rapidly growing
cell therapy market. The Company is currently conducting "pre-pivotal" trials
at multiple sites in the United States and Europe of the Aastrom CPS for use
in stem cell therapy in preparation for pivotal trials in the United States
and potential marketing in Europe. The Company believes that the Aastrom CPS
procedure will be a cost-effective, less invasive and less time consuming
alternative to currently available stem cell collection methods and may
enhance the clinical utility of umbilical cord blood ("UCB") transplants by
expanding the number of cells available for transplant. For stem cell therapy,
the Company has entered into a strategic collaboration for the marketing,
distribution and customer service of the Aastrom CPS with Cobe BCT, Inc., a
subsidiary of Gambro AB and a leading provider of blood cell processing
products.

The Aastrom CPS is designed as a platform product which implements the
Company's pioneering stem cell replication technology. The Company believes
that the Aastrom CPS can be modified to produce a wide variety of other cell
types for selected emerging therapies being developed by other companies and
institutions. The Company intends to develop additional strategic
collaborations for the development of the Aastrom CPS in certain of these
other cell therapy market segments. In ex vivo gene therapy, the Company is
also developing the Aastrom Gene Loader, which is being designed to address
the production of gene-modified cells.

CELL THERAPY

Cell therapy or ex vivo gene therapy involves 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 and UCB 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 types of cancer.
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 current good manufacturing practices ("cGMP"), 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.

In ex vivo gene therapy, 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
cGMP 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 the 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 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 significant
new development in stem cell therapy, but is currently limited by difficulties
in obtaining sufficient quantities of these cells and by prolonged engraftment
times for the cells once transplanted into the patient.

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.

According to an industry source, approximately 32,000 stem cell therapy
procedures were completed worldwide in 1995, and, according to another
industry source, the number of such procedures utilizing donor-derived and
patient-derived cells has been growing annually by approximately 15% and 20%,
respectively. 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 the number of 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 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 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 five consecutive days, however, procedure time has
decreased and is expected to continue to decrease as the procedure is further
optimized. 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.

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. 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

UCB, which is collected directly from the umbilical cord of newborn infants,
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 UCB banking institutions have been established to date, and
the group is growing in both number and size. The establishment of these UCB
banking institutions is an initial step which may lead to a coordinated UCB
banking system.

Current disadvantages of UCB include the relatively low number of available
cells which may contribute to prolonged engraftment times for the cells once
transplanted into the patient. 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 may 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 bone marrow harvest and PBPC mobilization methods and to
enhance the clinical utility of UCB cells. The Company believes that the
Aastrom CPS may be used for other cell production processes, such as
immunotherapy and solid tissue repair, 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 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 rights
to several issued U.S. patents that cover these processes and cell
compositions. 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 allows 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 and dendritic
cells used for immunotherapies, chondrocytes for cartilage replacement, and
mesenchymal tissues for bone and cartilage replacement. The Company holds
exclusive rights to issued 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 may
enable increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or
gene loading technology is being pursued by the Company for application in
most cell and tissue types and most vector technologies. The Company intends
to develop products based upon its gene loading technology. Development of
additional products, however, will require the Company to raise additional
funds or to seek collaborative partners, or both, to finance related research
and development activities, as to which there can be no assurance of success.
Furthermore, due to the uncertainties involved, the Company is unable to
estimate the length of time such development may take. If successfully
developed into products, the Company believes that such products would
facilitate the advancement of numerous gene therapy protocols into the clinic
and ultimately the market. The Company has exclusive rights to three issued
U.S. patents, 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. While
potentially applicable to multiple cell therapy applications such as
immunotherapy, solid tissue repair and ex vivo gene therapy, the Aastrom CPS
is being developed initially by the Company for 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 healthcare 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
Cell Cassettes and reagents and microprocessor-controlled instruments, which
are at various stages of development. The Cell Cassette is a single-use
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 clinical trials 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 CPS
process is a blood-bag container with the cell product. The control and
documentation features of the Aastrom CPS have been designed to meet cGMP
requirements for the therapeutic production of cells.

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. 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 taken from the patient at the initial visit. 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. Cells derived from UCB may also serve as a tumor-free
source of stem and progenitor cells for expansion in the Aastrom CPS.

Potential Advantages of Aastrom CPS

The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, may provide certain improvements
and efficiencies over traditional cell collection and infusion processes. The
following table, which sets forth estimates based on a 1996 survey conducted
by the Company of 11 stem cell transplant physicians at different transplant
institutions throughout the United States, compares estimated patient care
episodes and procedure time for currently established cell collection and
infusion techniques with the Aastrom CPS method of cell procurement:

PROCEDURE TIME
CELL SOURCE CARE EPISODES(1) (HOURS)(1)
----------- ---------------- --------------

Bone Marrow Harvest (2)................... 8 16
PBPC Mobilization and Collection (3)...... 21 39
Aastrom CPS (4)........................... 2 1-3

--------
(1) Includes all outpatient, inpatient, and home care episodes.
(2) Includes operating room procedure and all preparatory and recovery
procedures.
(3) Based on an average of three rounds of apheresis following cell
mobilization injections.
(4) Projections, based on data accumulated during the Company's
research and clinical trials.

The Company believes that the Aastrom CPS may provide the following benefits
when compared to current cell collection and infusion methods:

Cost-Effectiveness. The Company believes the Aastrom CPS has the potential
to cost-effectively replace the 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 or 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.

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 such transplant might
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells present in their marrow or PBPC transplant, which could
re-establish cancer in the patient following transplant. The Company's initial
clinical results, as well as studies conducted by third-party investigators,
have shown that some primary human tumor cells die or do not grow during
hematopoietic cell culture. 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. Further, in an
evaluation of seven tumor-contaminated bone marrow samples that were expanded
with the Aastrom CPS process, the presence of breast cancer cells in each
sample was either substantially reduced or was no longer detectable. The
Company believes that 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 clinical 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 UCB transplantation, 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 registration, the
Company will be required to complete clinical trials under an IDE. See "--
Government Regulation--Devices."

Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial at four U.S. sites. This clinical trial is designed to demonstrate that
cells produced using the Aastrom CPS can alone provide hematopoietic recovery
in accordance with trial endpoints in breast cancer patients who have received
myeloablative

chemotherapy. Bone marrow or mobilized PBPC obtained from the patients by
traditional methods will be available for precautionary reasons at defined
clinical stages.

Initial patient data from one trial site have been presented and demonstrate
that cells produced in the Aastrom CPS can lead to engraftment of stem cells
in patients within a recovery time frame that is comparable with that of
conventional bone marrow transplantation following ablative chemotherapy.
These patients started to recover their white blood cell counts within a
median time of approximately seven days post-transplant and reached safe
levels of neutrophils at approximately 16 days and platelets at approximately
23 days. Prior to implementing the trial protocol used for these patients, the
Company had evaluated the cells produced in the Aastrom CPS in Stage IV breast
cancer patients who had received significant prior cytotoxic therapy for their
advanced cancer.

The Company has also initiated clinical trials at one site for adult
patients and at another site for pediatric patients to evaluate the use of the
Aastrom CPS to expand cells obtained from UCB for use in patients who have
received myeloablative radiation or chemotherapy.

The objective of the current and anticipated future trials is to establish
the protocols for pivotal trials of the Aastrom CPS in stem cell therapy.
Provided that these pre-pivotal trials provide further evidence of the
feasibility and safety of cells produced in the Aastrom CPS, the Company
anticipates initiating pivotal clinical trials at multiple sites no earlier
than late 1997, with patient enrollment to support a PMA filing, although this
schedule is subject to numerous risks and uncertainties.

Aastrom, in partnership with Cobe, has initiated two clinical sites in
Europe to evaluate the use of Aastrom CPS cells to promote hematopoietic
recovery in breast cancer patients undergoing aggressive myelosuppressive or
myelotoxic chemotherapy. Assuming the successful completion of these and other
clinical trials, 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 ongoing trials were preceded by earlier studies designed to evaluate
safety and process feasibility. Aastrom completed the first feasibility trial
of its cell production system technology at the M.D. 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 standard
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. With this study completed, a five-patient study was then
conducted to begin to evaluate the use of cells obtained from the Company's
cell production process alone in the transplant setting.

The results from these patients 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. Four of these five patients
received the delayed administration of the precautionary bone marrow pursuant
to the trial protocol. Following further review by the FDA, the IDE was
amended to expand the trail to the four additional sites where the clinical
trail is now ongoing. The amended IDE provided for the enrollment of Stage II,
III and IV patients, and a delayed use of the precautionary bone marrow.

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.

The preliminary results of the Company's pre-pivotal trials may not be
predictive of results that will be obtained from subsequent patients in the
trials or from more extensive trials. Further, there can be no assurance

that the Company's pre-pivotal or pivotal trials will be successful, or that
PMA registration or required foreign regulatory approvals for the Aastrom CPS
will be obtained in a timely fashion, or at all. Due to severe illness, the
effects of chemotherapy and other factors, it is possible that one or more of
the patients enrolled in the Company's current pre-pivotal trials or future
trials may die or suffer severe complications during the course of the trials.
See "Risk Factors--Uncertainties Related to Clinical Trials."

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 producing cells for patient treatments.
The Company plans to obtain ongoing revenue from the sale of single-use Cell
Cassettes and related cell culture media and reagents, which are utilized in
individual cell therapy applications. After cells are cultured, the Cell
Cassette is discarded and a new Cell Cassette is utilized for a subsequent
cell production procedure. Cell Cassettes are specifically designed for
particular cell types, allowing for different marketing strategies for
different cell therapy indications. Along with ongoing revenue from the sale
of instruments and single-use Cell Cassettes and reagents 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 hematopoietic system 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
and dendritic cells for use in cellular immunotherapies, chondrocytes for
cartilage replacement, and mesenchymal cells for use in certain solid tissue
repair applications. The Company believes that by providing systems with broad
cell processing capabilities, hospitals or other cell production facilities
may use the Aastrom CPS for multiple cell therapy applications.

Enter Into Collaborative Relationships. The Company plans to market its
products and establish reimbursement for such products through corporate
collaborations. The Company currently plans to establish corporate
relationships in its targeted market segments, which include immunotherapy,
solid tissue repair and ex vivo gene therapy. For the stem cell therapy market
segment, the Company has formed a strategic collaboration with Cobe, a leading
provider of blood processing equipment systems. Under the terms of this
agreement, Cobe will be the Company's exclusive worldwide marketing,
distribution and service provider for the Aastrom CPS for stem cell therapy
applications, other than stem cell gene therapy. For selected emerging cell
therapies, additional alliances will be sought by the Company to (i) secure
additional technology, such as gene vectors or growth factors, or regulatory
or marketing capability which may augment the Aastrom CPS or Aastrom Gene
Loader; (ii) assist with regulatory and reimbursement matters for new therapy
applications; and (iii) assist with marketing new therapy applications to
physicians. To assist the Company in securing new strategic alliances, the
Company has entered into an agreement with Burrill & Company, LLC ("Burrill").
Under this agreement, Burrill will work with the Company to identify and
transact cell therapy collaborations, and a majority of Burrill's compensation
under the agreement is contingent upon the Company successfully entering into
new corporate alliances. See "--Strategic Relationships."

ADDITIONAL STEM CELL AND OTHER CELL THERAPIES

The Company believes that the Aastrom CPS hardware and single-use Cell
Cassettes may be developed to serve as platform products for application in a
variety of other emerging 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. Other than a limited application of chondrocyte
therapy, novel cell therapies are still in early stages of development by
third parties, and no assurance can be given that such other cell therapies
will be successfully developed. 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; (iv)
reducing the need for specialized, environmentally controlled facilities; and
(v) providing greater accessibility of these procedures to care providers and
patients and, in certain cases, providing a more biologically active cell
product.

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 cell culture environments which may need to be
incorporated within the Company's existing Cell Cassettes. Such modifications
may require the Company to raise substantial additional funds, or to seek
additional collaborative partners, or both. 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. 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 successfully developed by other companies or approved
by applicable regulatory authorities, or that the Company's processes or
product candidates will find successful application in such therapies. In
addition, the Company may be required to obtain license rights to such
technologies in order to develop or modify existing or future products for use
in such therapies. No assurance can be given that the Company will be able to
obtain such licenses or that such licenses, if available, could be obtained on
commercially reasonable terms. See "--Business Strategy" and "--Clinical
Development," "Use of Proceeds," and "Risk Factors--Future Capital Needs;
Uncertainty of Additional Funding."

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 the Company anticipates
that many of these procedures will 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.

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 may have the potential
to reduce costs associated with the cell production procedure and, if
successfully developed by the Company for this application, may eventually
facilitate the transfer of the cell production capability away from
specialized facilities directly to the clinical care sites.

Other Stem Cell Therapies

Autoimmune Diseases. Stem cell therapy is under clinical investigation by
third parties 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 used, 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 and may
pursue development of its products for application in such therapy in the
future.

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. Successful development of the Company's
processes and product candidates for application in ex vivo gene therapy will
require substantial additional research and development, including clinical
testing, and will be subject to the Company's ability to finance such
activities on acceptable terms, if at all. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Funding."

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 anticipates that its
proprietary stem cell production process technology implemented by the Aastrom
CPS may 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 enhance the efficiency and reliability of the transfer of
new therapeutic genes, which are carried by vectors, into the target cell.
This process, which is typically inefficient in many human cells inhibits many
ex vivo gene therapies from moving forward in the clinic. The Aastrom Gene
Loader is being designed to incorporate the Company's proprietary directed
motion gene transfer technology. Complete product development is expected to
require additional funding sources or collaborations with others, or both.

The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology under development 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 marketing, distribution and service provider for the Aastrom CPS for
stem cell therapy applications (the "Stem Cell Therapy Applications"). Under
the terms of the Company's Distribution Agreement with Cobe, other than with
respect to sales to affiliates, the Company is precluded from selling the
Aastrom CPS to customers for stem cell therapy applications. The Company has,
however, reserved the right to sell the Aastrom CPS for: (i) all diagnostic or
other non-therapeutic clinical applications; (ii) all gene therapy or gene
transfer applications, including those for stem cells; (iii) all non-human
applications; (iv) certain permitted clinical research applications; and (v)
all applications that are labeled not for human use. The Company has also
reserved the unconditional right to sell other products under development,
including but not limited to products based upon its gene loading technology.
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 58% to 62% of the net sales price at which Cobe ultimately sells
the Aastrom CPS for Stem Cell Therapy Applications, subject to certain
negotiated discounts and volume-based adjustments and subject to the
obligation of the Company to make aggregate royalty payments of up to 5% to
certain licensors of its technology. 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 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.

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 elected to purchase 714,200 shares of Common Stock in
the Company's initial public offering in February 1997. See "Description of
Capital Stock--Rights of Cobe" and "Certain Transactions."

The Company has entered into a Strategic Planning Consulting Services and
Collaboration Agreement (the "Consulting Agreement") with Burrill, pursuant to
which Burrill will advise the Company on potential strategic alliances and
seek to identify potential collaborations. Pursuant to the Consulting
Agreement, Burrill will be paid a monthly retainer of $10,000 and will be
reimbursed for expenses incurred pursuant to an approved budget. Aastrom has
issued Burrill an immediately exercisable warrant to purchase 100,000 shares
of Common Stock at an exercise price of $7.24 per share and a second warrant,
which vests over a one-year period, to purchase 100,000 shares at an exercise
price of $7.24 per share. The Consulting Agreement is terminable by either
party following periods of up to 30 days following notice.

The Consulting Agreement also provides for payments to Burrill that are
based on the timing and amount of proceeds Aastrom may receive from any future
strategic alliances. In the event that the Company enters into strategic
alliances (which exclude minor technology license agreements and customary
manufacturing or supply agreements that do not involve equity investments in
Aastrom, as well as performance pursuant to any of Cobe's existing agreements
with Aastrom), the Company will pay Burrill a success fee ranging from 4% to
7.5% of the proceeds in connection with the strategic alliance. In addition to
the success fee, Aastrom will issue to Burrill additional warrants to purchase
up to 500,000 shares of Common Stock, depending upon the achievement of
certain milestones.

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.

In May 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.

In November 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
agreement, the Company and Ethox collaborated on the design of certain
bioreactor assembly and custom tubing kit components of the Aastrom CPS. 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 March 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 renewal payments equal to $1,000,000 per year
during the term of the agreement in addition to payment for supplies purchased
by the Company. In August 1997, the Company and Immunex amended the agreement
to expand the Company's territorial rights to use and sell such materials to a
worldwide basis. Unless earlier terminated or renewed by the Company for an
additional five-year term, the agreement will expire in April 2001. The
agreement may be terminated by either party effective immediately upon written
notice of termination to the other party in the event that such party
materially breaches the agreement and such breach continues unremedied after
notice and expiration of a specified cure period or in the event that a
bankruptcy proceeding is commenced against a party and is not dismissed or
stayed within a 45-day period. In addition, Immunex has the right to cease the
supply to the Company of cytokines and ancillary materials if the Company
fails to purchase a minimum amount of its forecasted annual needs from Immunex
after notice to the Company and expiration of a specified cure period. The
Company also has the right to terminate the agreement at any time subject to
the payment to Immunex of a specified amount for liquidated damages. In the
event that Immunex elects to cease to supply to the Company cytokines and
ancillary materials or is prevented from supplying such materials to the
Company by reason of force majeure, limited manufacturing rights will be
transferred to the Company under certain circumstances. There is, however, no
assurance that the Company could successfully manufacture the compounds itself
or identify others that could manufacture these compounds to acceptable
quality standards and costs, if at all.

In December 1996, the Company entered into a Collaborative Supply Agreement
with Anchor Advanced Products, Inc., Mid-State Plastics Division ("MSP").
Under this agreement, MSP will conduct both pre-production manufacturing
development and commercial manufacturing and assembly of the Cell Cassette
component of the Aastrom CPS for the Company. During the initial phase of the
seven-year agreement, the Company will pay MSP for its development activities
on a time and materials basis. Upon reaching certain commercial manufacturing
volumes, MSP will be paid by the Company on a per unit basis for Cell
Cassettes delivered to the Company under a pricing formula specified in the
agreement. Throughout the term of this agreement, the Company has agreed to
treat MSP as its preferred supplier of Cell Cassettes, using MSP as its
supplier of at least 60% of its requirements for Cell Cassettes.

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 has exclusive rights to 13 issued U.S. patents and one patent
application with respect to which the Company has received a notice of
allowance from the U.S. Patent and Trademark Office that present claims to (i)
certain methods for ex vivo stem cell division as well as ex vivo human
hematopoietic stem cell stable genetic 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; (iii) certain methods of
infecting or transfecting target cells with vectors; and (iv) a cell
composition containing human stem cells or progenitor cells, or genetically
modified stem cells, when such cells are produced in an ex vivo medium
exchange culture. Patents equivalent to two of these U.S. patents have also
been issued in other jurisdictions: one in Australia and another in Canada and
under the European Patent Convention. These 13 issued patents, in addition to
the one patent application with respect to which the Company has received a
notice of allowance, are due to expire beginning in 2006, through 2015. 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 a number of U.S. patent applications and corresponding applications
in other countries related to various components of the Aastrom CPS.

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 "--Research and
License Agreements."

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.

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 U.S. 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
United States are to be manufactured substantially in the United States,
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.

RESEARCH AND LICENSE AGREEMENTS

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.

In March 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, in March 1992, October 1993
and June 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 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.

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
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
earlier terminated, the License Agreement will continue in effect until the
latest expiration date of the patents to which the License Agreement applies,
which latest expiration date is currently August 2009. The License Agreement
may be terminated by either party upon default by the other party of any of
its obligations under the agreement without cure after expiration of a 30-day
notice period. The Company also has the right to terminate the License
Agreement at any time without cause upon 30 days prior written notice to Dr.
Cremonese.

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 United States, 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 cell 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 draft documents concerning the
regulation of umbilical cord blood stem cell products, as well as cellular and
tissue-based 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.

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 submission with the FDA prior to commencing human clinical
trials. The IDE submission must be supported by data, typically including the
results of pre-clinical and laboratory testing. If the IDE submission is
granted, 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 pre-pivotal clinical studies under these IDEs. The
Company believes that the Aastrom CPS product will be regulated by the FDA as
a Class III device, although there can be no assurance that the FDA will not
choose to regulate this product in a different manner.

The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented.

The Medical Device Reporting regulation requires that the Company provide
information to the FDA on deaths or serious injuries alleged to be associated
with the use of its devices, as well as product malfunctions that are 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 the 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 cGMP 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, 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, suggests
that cells expanded in the Aastrom CPS using its current process will enable
hematopoietic recovery within the time frames currently achieved by bone
marrow harvest, however, neutrophil and platelet recovery times may be slower
than with PBPC collection methods. The Company is evaluating techniques and
methods to optimize the cells produced in the Aastrom CPS to reduce the
recovery time of neutrophils and platelets in patients. There can be no
assurance that if such procedure optimization does not lead to recovery times
equal to or faster than those of PBPC collection methods, such outcome would
not have a material adverse effect on the Company's business, financial
condition and results of operations. 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, Novartis, A.G., 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 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, 1997, the Company employed approximately 70 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.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their respective
ages as of October 31, 1997, are as follows:

NAME AGE POSITION
---- --- --------

Robert J. Kunze (1)................... 62 Chairman of the Board and Director
R. Douglas Armstrong, Ph.D. (1)....... 44 President, Chief Executive Officer and Director
James Maluta.......................... 50 Vice President, Product Development
Todd E. Simpson....................... 36 Vice President, Finance & Administration,
Chief Financial Officer, Secretary and Treasurer
Walter C. Ogier (2)................... 40 Vice President, Marketing
Thomas E. Muller, Ph.D. (3)........... 62 Vice President, Regulatory Affairs
Alan K. Smith, Ph.D. ................. 42 Vice President, Research
Bruce W. Husel (4).................... 39 Vice President, Quality Systems
Stephen G. Emerson, M.D., Ph.D. ...... 44 Director and Scientific Advisor
G. Bradford Jones (1)(5).............. 42 Director
Horst R. Witzel, Dr.-Ing.............. 70 Director
Edward C. Wood, Jr. (1)(5)............ 52 Director

- --------
(1) Member of Executive Committee.
(2) Mr. Ogier resigned from the Company in November 1997.
(3) Dr. Muller notified the Company in November 1997 of his intent to resign
from the Company.
(4) Mr. Husel's employment with the Company commenced in November 1997.
(5) Member of Audit Committee.

All directors hold office until the next election of the class for which
such directors have been chosen 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 six 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 and Mr. Wood, 1999; Mr. Kunze
and Dr. Emerson, 1998; and Dr. Armstrong and Dr. Witzel, 1997. Pursuant to the
Stock Purchase Equity Commitment with Cobe, dated October 29, 1996, the
Company agreed to use reasonable and good faith efforts to cause a nominee of
Cobe, who most be deemed by the Board of Directors to be qualified, to be
elected to the Board of Directors for so long as Cobe owns at least 15% of the
outstanding shares of Common Stock. There are no family relationships among
the directors or officers of the Company. Officers of the Company are elected
by and serve at the discretion of the Board of Directors.

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. Mr. Kunze is a general partner of McFarland and Dewey, an
investment bank. From 1987 through early 1997, he was 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
that is now known as The Burnham Institute. 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 over 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, Madison.

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.

Bruce W. Husel joined the Company in November 1997 as Vice President,
Quality Systems. From May 1994 to September 1997, Mr. Husel served as Director
of Quality Assurance for Sanofi Diagnostics Pasteur, where he led efforts to
achieve EN 46001 registration and prepare for CE Marking. From June 1992 to
May 1994, Mr. Husel was Director of Quality and Regulatory Affairs for Baxter
Anesthesia Division (formerly known

as Bard MedSystems). Prior to that, he served as Quality Manager for McGaw,
Inc. Mr. Husel received his B.S. degree in Electrical Engineering from Rice
University in 1980, an M.S. degree in Engineering Management from Southern
Methodist University in 1986 and an M.B.A. degree in Accounting from the
University of Texas at Dallas in 1987.

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.

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.

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and each of the Company's five
other most highly compensated executive officers (the "Named Executive
Officers") for services rendered in all capacities to the Company, during the
fiscal years ended June 30, 1996 and 1997.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
NAME AND PRINCIPAL ---------------------- UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
------------------ ---- ------ --------- ------------ ------------

R. Douglas Armstrong,
Ph.D. ................. 1997 $ 183,583 -- 333,333 $ 7,108(1)
President and Chief 1996 156,962 $ 55,000 -- 8,885(1)
Executive Officer
James Maluta............ 1997 130,354 -- 120,000 --
Vice President, Product 1996 118,942 10,000 -- --
Development
Walter C. Ogier (2)..... 1997 120,265 -- 80,000 --
Vice President, 1996 106,250 7,500 6,667 --
Marketing
Todd E. Simpson......... 1997 125,593 12,500 75,000 --
Vice President, Finance 1996 60,779(3) -- 40,000 48,061(4)
and Administration
and Chief Financial
Officer
Alan K. Smith, Ph.D. ... 1997 128,685 -- 75,000 60(4)
Vice President, 1996 77,740(5) -- 40,000 76,000(4)
Research
Thomas E. Muller,
Ph.D.(6)............... 1997 119,517 -- 20,000 --
Vice President, 1996 118,560 -- 6,667 --
Regulatory Affairs

- --------
(1) Consists of vacation pay.
(2) Mr. Ogier resigned from the Company in November 1997.
(3) Mr. Simpson began his employment with the Company in January 1996.
(4) Consists of relocation expenses.
(5) Dr. Smith began his employment with the Company in October 1995.
(6) Dr. Muller notified the Company in November 1997 of his intent to resign
from the Company.

The following table provides information with respect to stock option grants
to the Named Executive Officers during the year ended June 30, 1997.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
------------------------------------------------ ---------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED(2) IN FISCAL YEAR SHARE(2) DATE 5% 10%
- ---- ---------- -------------- ----------- ---------- ---------- ----------

R. Douglas Armstrong,
Ph.D................... 333,333 42.5% $7.00 2/3/07 $3,800,750 $6,052,060
James Maluta............ 120,000 15.3 7.00 2/3/07 1,368,271 2,178,744
Walter C. Ogier......... 80,000 10.2 7.00 2/3/07 912,181 1,452,496
Todd E. Simpson......... 75,000 9.6 7.00 2/3/07 855,170 1,361,715
Alan K. Smith, Ph.D..... 75,000 9.6 7.00 2/3/07 855,170 1,361,715
Thomas E. Muller, Ph.D.. 20,000 2.6 7.00 2/3/07 228,045 363,124

- --------
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future price of
the Common Stock.
(2) Each of these options was granted under the Company's Amended and Restated
1992 Incentive and Non-Qualified Stock Option Plan (the "1992 Plan") at an
exercise price equal to the fair market value of the Common Stock on the
date of grant. With the exception of the option grant to Dr. Armstrong,
which is immediately exercisable, all such options vest over a four-year
period, subject to continued employment with the Company.

The following table provides information with respect to exercises of stock
options during the year ended June 30, 1997, and unexercised options held as
of June 30, 1997, by the Named Executive Officers.

AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES

NUMBER OF SHARES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT JUNE 30, 1997 JUNE 30, 1997(2)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------

R. Douglas Armstrong,
Ph.D................... -- -- 333,333 -- $ 41,667 --
James Maluta............ 16,667 $99,169 -- 120,000 -- $ 15,000
Walter C. Ogier......... -- -- 22,083 92,917 130,842 86,533
Todd E. Simpson......... -- -- 12,500 102,500 74,063 172,313
Alan K. Smith, Ph.D..... -- -- 15,000 100,000 88,875 157,500
Thomas E. Muller, Ph.D.. -- -- 22,083 31,251 130,842 69,162

- --------
(1) "Value Realized" represents the fair market value of the underlying shares
of Common Stock on the exercise date, minus the aggregate exercise price
of such options.
(2) The value of "in-the-money" stock options represents the difference
between the exercise price of such options and the fair market value of
$7.125 per share of Common Stock as of June 30, 1997, the closing price of
the Common Stock reported on the Nasdaq National Market on such date.

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 Named Executive
Officers. The Company does not have any defined benefit or actuarial plan with
any of the Named Executive Officers 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 Company entered into employment agreements with James Maluta, Walter C.
Ogier, Thomas E. Muller, Ph.D., Alan K. Smith, Ph.D., Todd E. Simpson and
Bruce W. Husel in June 1992, February 1994, April 1994, October 1995, December
1995 and October 1997, respectively. Pursuant to these agreements, the Company
agreed to pay Messrs. Maluta, Ogier, Muller, Smith, Simpson and Husel annual
base salaries of $90,000, $87,500, $110,000, $122,500, $122,500 and $110,000,
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.

STOCK OPTION AND EMPLOYEE BENEFIT PLANS

1989 STOCK OPTION PLAN

In 1989, the Company established the 1989 Stock Option Plan. As of September
30, 1997, 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 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 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 508,530 shares have been
exercised as of September 30, 1997. As of September 30, 1997, options to
purchase 1,076,448 shares of Common Stock were outstanding.

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.

In the event of a transfer of control of the Company, as defined under the
1992 Option Plan, 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 the options become exercisable in full and such options
will be terminated if not exercised prior to such merger, consolidation or
dissolution. The vesting of certain options granted to executive officers of
the Company accelerates if such officer is terminated following a change of
control.

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 September 30, 1997, options to purchase 30,000 shares of Common
Stock 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 will automatically be granted an option
to purchase 5,000 shares of Common Stock 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"). As of September 30, 1997, 6,961 shares of Common Stock have
been issued under the Purchase Plan. 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.

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
1998 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.

COMPENSATION OF DIRECTORS

Each Outside Director receives a cash payment of $1,000 for each meeting of
the Board of Directors attended in person and a cash payment of $500 for each
telephonic meeting of the Board of Directors attended telephonically. In lieu
of such cash payments for attending meetings, Mr. Kunze receives $5,000 per
month for his services as Chairman of the Board of Directors, which payments
have been approved through the date of the Company's 1997 annual meeting of
shareholders. Directors also receive reimbursement for expenses incurred in
attending each meeting of the Board of Directors and its committees. In
addition, Outside Directors receive annual grants of options to purchase
shares of Common Stock in accordance with the Directors Plan. 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, 1997, Robert J. Kunze, who served as
President and Chief Executive Officer of the Company until 1991 and currently
serves as its Chairman of the Board, and Albert B. Deisseroth, M.D., Ph.D., a
former director of the Company, were initially the members of the Compensation
Committee of the Board of Directors. Currently, all of the Company's directors
comprise the Compensation Committee, including Mr. Kunze and R. Douglas
Armstrong, Ph.D., the Company's President and Chief Executive Officer. During
the last fiscal year, none of the executive officers who serve on the Board of
Directors participated in deliberations regarding their own compensation. No
member of the Board of Directors of the Company serves as a member of the
board of directors or compensation committee of an entity that has one or more
executive officers serving as members of the Company's Board of Directors.

CERTAIN TRANSACTIONS

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 the Company's initial public offering in February 1997, each outstanding
share of Series D Preferred Stock was 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. During September 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. Upon the closing of
the Company's initial public offering in February 1997, each outstanding share
of Series E Preferred Stock was converted into two-thirds of a share of Common
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 941,177 shares for a total purchase price of
$4,000,002.

In November 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted under the 1989 Stock Option Plan to R.
Douglas Armstrong, the Company's President and Chief Executive Officer, the
Company loaned to Dr. Armstrong $120,000 at an interest rate of 4% per annum
pursuant to a full recourse promissory note. During September 1997, Dr.
Armstrong repaid the outstanding principal under the note plus $18,467 in
accrued interest by surrendering 15,711 shares of Common Stock to the Company,
which shares were canceled.

In October 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted under the 1989 Stock Option Plan and the
1992 Plan to Stephen G. Emerson, a director of the Company, 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 all principal and accrued but unpaid interest is due on June 30, 1998. The
loan is secured by the shares of Common Stock held by Dr. Emerson. During May
1997, the Company and Dr. Emerson entered into an agreement, pursuant to which
Dr. Emerson was able to repay the outstanding balance under the note by
surrendering shares of Common Stock to the Company, and, during October 1997,
Dr. Emerson repaid outstanding principal and accrued interest under the note
by surrendering 6,789 shares of Common Stock to the Company, which shares were
canceled. In November 1997, Dr. Emerson notified the Company of his intention
to repay additional outstanding principal and accrued interest by surrendering
an additional 2,000 shares of Common Stock to 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"). Both the Equity Commitment and

the Convertible Loan Commitment terminated in February 1997 upon the closing
of the Company's initial public offering. The Company issued warrants to
Michigan to purchase 69,444 shares of Common Stock as consideration for
securing the Convertible Loan 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 of February 7, 1998, 1999 and 2000; and (b) 85% of the fair
market value of the Company's Common Stock at the time of exercise.

Cobe Laboratories, Inc. purchased 714,200 shares of Common Stock in the
Company's initial public offering at the initial public offering price of
$7.00 per share. 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."

The Company believes that all of the foregoing transactions were on terms no
less favorable to the Company than would be obtained from unrelated third
parties. Any future transactions between the Company and its executive
officers, directors and affiliates will be on terms no less favorable to the
Company than can be obtained from unaffiliated third parties, and any material
transactions with any such person will be approved by a majority of the
members of the Company's Board of Directors and by a majority of the
disinterested members of the Company's Board of Directors.

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the outstanding shares of the Company's Common Stock (assuming
conversion of the 2,200,000 shares of Preferred Stock offered hereby into
Common Stock) as of September 30, 1997, and as adjusted to give effect to the
sale of 2,200,000 shares of Preferred Stock in this offering by (i) each
person known by the Company to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii)
each director of the Company, and (iv) all executive officers and directors of
the Company as a group.

PERCENTAGE
BENEFICIALLY OWNED(1)
-------------------------
NUMBER OF SHARES OF
COMMON STOCK BEFORE THE AFTER THE
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
---------------- -------------------- ---------- ---------

Cobe Laboratories, Inc.(2)...................... 3,214,199 24.2% 20.8%
1185 Oak Street
Lakewood, CO 80215
State Treasurer of the State of Michigan(3)..... 1,408,168 10.6 9.1
Custodian of Certain Retirement Systems
c/o Venture Capital Division
430 West Allegan
Lansing, MI 48992
H&Q London Ventures............................. 816,666 6.2 5.3
One Bush Street, 18th Floor
San Francisco, CA 94104
R. Douglas Armstrong, Ph.D.(4).................. 807,177 5.9 5.1
Albert B. Deisseroth, M.D., Ph.D.(5)............ 28,333 * *
Stephen G. Emerson, M.D., Ph.D.(6).............. 260,539 2.0 1.7
G. Bradford Jones(7)............................ 381,637 2.9 2.5
Robert J. Kunze(8).............................. 47,227 * *
James Maluta(9)................................. 83,332 * *
Thomas E. Muller, Ph.D.(10)..................... 24,584 * *
Walter C. Ogier(11)............................. 32,083 * *
Todd E. Simpson(12)............................. 17,500 * *
Alan K. Smith, Ph.D.(13)........................ 21,488 * *
Horst R. Witzel, Dr.-Ing.(14)................... 15,311 * *
Edward C. Wood, Jr.(15)......................... 3,220,949 24.3 20.8
All officers and directors as a group (12 per-
sons)(16)...................................... 4,940,160 36.0 31.0

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

(1) Shares beneficially owned and percentage of ownership are based on
13,272,674 shares of Common Stock outstanding as of September 30, 1997
and (assuming conversion of the 2,200,000 shares of Preferred Stock
offered hereby into Common Stock) 15,472,674 shares of Common Stock to be
outstanding after the closing of this offering. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or disposition power with
respect to such shares.

(2) 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. The option expires on
February 6, 2000. 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 Cobe's
distribution

agreement with the Company 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 15, below and "Description of Capital Stock--Rights of Cobe."

(3) Includes 69,444 shares issuable upon exercise of warrants held by the
State Treasurer of the State of Michigan ("Michigan") that are
exercisable until October 15, 2000.

(4) Includes 333,333 shares issuable upon exercise of options held by Dr.
Armstrong that are exercisable within the 60-day period following
September 30, 1997. Dr. Armstrong's address is 24 Frank Lloyd Wright
Drive, Ann Arbor, MI 48106.

(5) Includes 3,333 shares issuable upon exercise of options held by Dr.
Deisseroth that are exercisable within the 60-day period following
September 30, 1997. Dr. Deisseroth resigned from his position as a
director of the Company in October 1997. 6,250 of the shares held by Dr.
Deisseroth are subject to vesting and a right of repurchase by the
Company until December 15, 1997.

(6) Includes (a) 3,750 shares issuable upon exercise of options held by Dr.
Emerson that are exercisable within the 60-day period following September
30, 1997, (b) 90,000 shares which Dr. Emerson transferred as a gift
subsequent to September 30, 1997, (c) 6,789 shares that were surrendered
to the Company and canceled in payment of the outstanding balance under a
promissory note subsequent to September 30, 1997, and (d) 2,000 shares
that, to the Company's knowledge, Dr. Emerson intends to surrender to the
Company in payment of the outstanding balance under a promissory note.

(7) Includes 370,831 shares held by Brentwood Associates V, L.P. 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. Also includes 3,750 shares issuable upon exercise of
options held by Mr. Jones that are exercisable within the 60-day period
following September 30, 1997.

(8) Includes 3,750 shares issuable upon exercise of options held by Mr. Kunze
that are exercisable within the 60-day period following September 30,
1997.

(9) Consists of 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 shares issuable upon exercise of options held by Dr. Muller
that are exercisable within the 60-day period following September 30,
1997.

(11) Includes 27,083 shares issuable upon exercise of options held by Mr.
Ogier that are exercisable within the 60-day period following September
30, 1997.

(12) Consists of shares issuable upon exercise of options held by Mr. Simpson
that are exercisable within the 60-day period following September 30,
1997.

(13) Includes 20,000 shares issuable upon exercise of options held by Dr.
Smith that are exercisable within the 60-day period following September
30, 1997.

(14) Includes 9,311 shares issuable upon exercise of options held by Dr.
Witzel that are exercisable within the 60-day period following September
30, 1997.

(15) Includes 3,214,199 shares held by Cobe. Mr. Wood, as the President of
Cobe BCT, Inc., an affiliate of Cobe, may be deemed to beneficially own
shares held by Cobe, but Mr. Wood disclaims beneficial ownership of all
such shares. See footnote 2, above. Also includes 3,750 shares issuable
upon exercise of options that are exercisable within the 60-day period
following September 30, 1997. Mr. Wood's address is 1201 Oak Street,
Lakewood, CO 80215.

(16) Includes 450,144 shares issuable upon exercise of options that are
exercisable within the 60-day period following September 30, 1997. Also
includes 370,831 shares held by Brentwood Associates V, L.P. and
3,214,199 shares held by Cobe.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, no par value, and 5,000,000 shares of preferred stock, no par
value.

The following summary of certain provisions of the Common Stock and the
Company's preferred stock does not purport to be complete and is subject to,
and qualified in its entirety by, the provisions of the Company's Restated
Articles of Incorporation and the Certificate of Designation of the Preferred
Stock, which are included as exhibits to the Registration Statement of which
this Prospectus forms a part, as well as by the provisions of applicable law.

COMMON STOCK

As of September 30, 1997, there were 13,272,674 shares of Common Stock
outstanding held by approximately 125 shareholders of record. The holders of
Common Stock are entitled to one vote per share on all matters to be voted
upon by the Company's 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 any 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 set forth in the Company's Restated Articles of
Incorporation, which Articles may only be amended by the holders of at least
two-thirds of the outstanding shares of Common Stock. The rights of the
holders of Common Stock are also subject to, and may be adversely affected by,
the rights of the holders of any shares of the Preferred Stock and any
preferred stock which the Company may designate and issue in the future.

PREFERRED STOCK

The Company is authorized to issue up to 5,000,000 shares of preferred
stock, 2,200,000 of which are designated as 5 1/2% Convertible Preferred Stock
and none of which were outstanding prior to this offering.

Dividends on the Preferred Stock are cumulative, accrue commencing on the
date of issuance on a quarterly basis (on the last day of March, June,
September and December of each year) at an annual rate of $.275 per share and
are payable within 30 days of each accrual date. The payment of such dividends
shall be senior in priority to dividends on the Common Stock and shall be on
at least a pari passu basis with any other series of preferred stock of the
Company. At the Company's option, the Company may pay dividends in either cash
or shares of Common Stock, valued on the basis of the then current market
price of such shares. The Preferred Stock is convertible into Common Stock at
the option of the holder, and each share of Preferred Stock will automatically
convert into Common Stock following the second anniversary of the initial sale
date of the Preferred Stock in the event that the closing bid price of the
Common Stock exceeds $10.00 per share for twenty consecutive trading days. The
Preferred Stock will also automatically convert into Common Stock in the event
that, at any time following the original issuance of the Preferred Stock, less
than 500,000 shares of Preferred Stock remain outstanding or upon a merger in
which the Company or its shareholders receive consideration of at least $10.00
per share and either the Company is not the surviving entity or the holders of
the Company's voting securities before the transaction own less than 50% of
the voting securities of the combined entity. Each share of Preferred Stock is
convertible into one share of Common Stock, subject to adjustment for stock
splits, dividends, reclassifications and similar events. In addition, with
certain exceptions relating to issuances of securities under stock option or
employee stock purchase plans, pursuant to existing contractual obligations,
in connection with acquisitions of other companies or in connection with
strategic alliances, the conversion price of the Preferred

Stock is subject to adjustment, pursuant to a weighted average anti-dilution
formula, in the event that the Company shall issue shares of Common Stock, or
securities convertible into or exchangeable or exercisable for shares of
Common Stock, or rights to acquire shares of Common Stock, for consideration
of less than $5.00 per share of Common Stock. The holders of the Preferred
Stock are entitled to a liquidation preference of $5.00 per share, plus
accrued but unpaid dividends. The payment of such liquidation preference shall
be senior in priority to any payment with respect to the Common Stock and
shall be on at least a pari passu basis with any other series of preferred
stock of the Company. There are no redemption or sinking fund provisions
applicable to the Preferred Stock.

The Preferred Stock will be voted together with the Common Stock at any
annual or special meeting of the shareholders of the Company, and each share
of Preferred Stock shall have voting rights equal to the voting rights of that
number of shares of Common Stock into which such share of Preferred Stock
would then be convertible. Except as required by law or in connection with any
amendment to the liquidation preference or other rights of the Preferred
Stock, the shares of Preferred Stock shall not vote as a separate class on any
matter submitted for shareholder approval.

The Board of Directors of the Company is authorized, without further
shareholder approval, to issue up to an additional 2,800,000 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 other than the Preferred Stock
offered hereby.

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
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." In addition, the MBCA
requires class or series votes in certain circumstances with respect to
proposed business combinations.

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, do not provide
for cumulative voting in the election of directors and provide that the
holders of at least two-thirds of the outstanding shares of Common Stock must
approve certain transactions resulting in a change of control of the Company.
The amendment of any of these provisions would require approval by holders of
at least two-thirds of the outstanding shares of 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.

RIGHT OF FIRST REFUSAL

So long as any purchaser of at least 500,000 shares of Preferred Stock in
this offering continues to hold at least 500,000 shares of Preferred Stock, in
the event that the Company proposes to offer any shares of its capital stock,
or securities convertible into or exercisable or exchangeable for shares of
its capital stock, for the purpose of financing its business (other than
pursuant to stock option or stock purchase plans, in connection with mergers
or acquisitions of other companies, pursuant to existing contractual
obligations, in underwritten public offerings or in connection with strategic
alliances), such purchaser will have the right to purchase a pro rata amount
of such shares equivalent to their then current percentage ownership of the
outstanding shares of Common Stock (on an as-converted, fully-diluted basis).

REGISTRATION RIGHTS

Pursuant to the Amended and Restated Investors Rights Agreement, dated as of
April 7, 1992, as amended (the "Investors Agreement"), the provisions of which
are incorporated into the agreements relating to the purchase of the Company's
Series D and Series E Preferred Stock, certain holders of outstanding shares
of Common Stock 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 (as defined therein) may require
the Company to use its diligent best efforts to register Registrable
Securities for public resale on one occasion (so long as such registration
includes at least 20% of the Registrable Securities or a lesser percentage if
the anticipated aggregate offering price net of underwriting discounts and
commissions would exceed $2 million). In addition, whenever the Company
proposes to register any of its securities under the Act, holders of
Registrable Securities are entitled, subject to certain restrictions
(including customary underwriters "cut back" limitations), to include their
Registrable Securities in such registration. Subject to certain limitations,
the holders of Registrable Securities may also require the Company to register
such shares on Form S-3 no more than once every twelve months, provided that
the anticipated aggregate proceeds would exceed $500,000. The Company is
required to bear all registration and selling expenses (other than
underwriter's discounts and commissions and more than a single special counsel
to the selling shareholders) in connection with the registration of
Registrable Securities in one demand registration and two piggy-back
registrations. The participating investors are required to bear all expenses
in connection with the registration of Registrable Securities on Form S-3.

Registration rights may be transferred to an assignee or transferee provided
that such assignee or transferee acquires at least 66,667 shares of the
Registrable Securities held by the transferring holder (13,333 shares in the
case of a transfer from the holder of certain stock options). These
registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding.

The registration rights granted under the Investors Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.

Pursuant to the Stock Purchase Agreement dated October 22, 1993 by and
between Cobe and the Company (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 during August 2000, 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 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 90-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.

The Company has agreed, at its expense and subject to certain restrictions
and limitations, to undertake up to two registrations (and, in certain
circumstances, a third registration) of shares of Common Stock issued as
dividends on the Preferred Stock and to include such shares in registrations
otherwise undertaken by the Company. In addition, in the event that legal
counsel for the purchasers of the Preferred Stock in this offering reasonably
determines that registration of the shares of Common Stock issuable upon
conversion of the Preferred Stock is necessary for the resale of such shares,
the Company will, at its expense and subject to certain restrictions and
limitations, undertake up to two registrations of such shares on behalf of and
at the request of the purchasers (or their eligible transferees). Upon such
request, in the event that the Company shall fail to file a registration
statement relating to such shares by the tenth day following the filing of the
Company's next Annual Report on Form 10-K or Quarterly Report on Form 10-Q
(or, if later, within twenty days of receipt of such request), the holders
initiating such request shall be entitled to liquidated damages in the amount
of $1,000 per day until the filing of the registration statement.

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 automatically converted into 1,666,666 shares of
Common Stock upon the closing of the Company's initial public offering in
February 1997.

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 elected to purchase 714,200 shares of Common
Stock for approximately $5,000,000 in the Company's initial public offering in
February 1997. 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 Put Option was not exercised
by the Company in connection with its initial public offering in February
1997. The Put Option does not apply to any public offerings, including this
offering. The Company and Cobe are evaluating whether or not the Put Option
remains in effect as to any future private offerings of the Company's equity
securities.

Additionally, until February 2000, Cobe has 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 shares of Common Stock.

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.

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 13,266,926 shares of Common
Stock outstanding, based upon the number of shares outstanding as of October
31, 1997, all of which are eligible for resale in the public market, subject
in some cases to certain volume restrictions and other conditions imposed by
Rule 144 under the Securities Act. In addition, the 2,200,000 shares of Common
Stock issuable upon conversion of the Preferred Stock will also be freely
tradeable. However, 6,161,496 outstanding shares of Common Stock are subject
to lock-up agreements expiring 90 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. Certain existing shareholders, as well as the
purchasers of the Preferred Stock in this offering, have certain 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 "Plan of Distribution" and
"Description of Capital Stock--Registration Rights."

PLAN OF DISTRIBUTION

The shares of Preferred Stock offered hereby are being offered, on an all or
none basis, for sale by the Company principally to selected institutional
investors. The Placement Agent has been retained to act as agent for the
Company in connection with the arrangement of such offers and sales on a best
efforts basis. The Placement Agent is not obligated and does not intend to
itself take (or purchase) any of the shares offered hereby. It is anticipated
that the Placement Agent will obtain indications of interest from potential
investors for the number of shares offered hereby and that effectiveness of
the Registration Statement of which this Prospectus forms a part will not be
requested, and no investor funds will be accepted, until indications of
interest have been received for all of the shares offered hereby. Confirmation
and definitive prospectuses will be distributed to all investors at the time
of pricing, informing investors of the closing date, which will be scheduled
for three business days after pricing. No investor funds will be accepted
prior to the effectiveness of the Registration Statement. Prior to the closing
date, an escrow account with the Escrow Agent will be established for the
benefit of the investors. Prior to the closing date, the Placement Agent from
time to time will cause to be wired to or deposited with the Escrow Agent
funds or checks of the investors delivered in payment for the shares offered
hereby. The Placement Agent will promptly place all investor funds in the
escrow account. Such investor funds will be wired to or deposited with the
Escrow Agent not later than 12:00 noon on the date following the date on which
it is received by the Placement Agent. Any checks delivered to the Escrow
Agent shall be made payable to or endorsed to the order of the Escrow Agent.
The Escrow Agent, upon receipt of such checks, will present such checks for
payment to the drawee-bank under such checks. Any checks not honored by the
drawee-bank after the first presentment for payment will be returned to the
Company. Upon receipt of funds or checks from the Placement Agent, the Escrow
Agent will credit such funds and the amount of such checks to the escrow
account. The Escrow Agent will invest such funds in accordance with Rule 15c2-
4 promulgated under the Securities Exchange Act of 1934, as amended. Prior to
the closing date, the Escrow Agent will advise the Company that payment for
the purchase of the shares offered hereby has been affirmed by the investors
and that the investors have deposited the requisite funds in the escrow
account with the Escrow Agent. Investor funds, together with interest thereon,
if any, will be collected by the Company from the Escrow Agent on the
scheduled closing date, and the Company will deliver the certificates
representing the shares of Preferred Stock to the Placement Agent for delivery
to the investors. This offering will not continue after the closing date, as
extended by the parties. In the event that investor funds are not received in
the full amount necessary to satisfy the requirements of this offering, all
funds deposited in the escrow account will promptly be returned.

The Company has agreed to pay the Placement Agent, as the Placement Fee, an
aggregate of 6% of the gross proceeds of the sale of the shares of Preferred
Stock offered hereby and to indemnify the Placement Agent against certain
liabilities, including liabilities under the Securities Act.

The Company and its directors and certain of its officers and other
shareholders, have entered into agreements providing that, for a period of 90
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."

LEGAL MATTERS

The validity of the Preferred Stock offered hereby will be passed upon for
the Company by Pepper, Hamilton & Scheetz, Detroit, Michigan. Gray Cary Ware &
Freidenrich, A Professional Corporation, San Diego, California, has acted as
special counsel to the Company in connection with this offering. Certain legal
matters in connection with this offering will be passed upon for the Placement
Agent by Brobeck Phleger & Harrison LLP, New York, New York.

EXPERTS

The balance sheets of the Company as of June 30, 1996 and 1997, and the
statements of operations, shareholders' equity, and cash flows for the years
ended June 30, 1995, 1996 and 1997 and the cumulative period from March 24,
1989 (Inception) to June 30, 1997 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said 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 (the
"Commission"), Washington, D.C., a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the
Preferred Stock offered hereby. The Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith files reports and other information with the Securities
and Exchange Commission. 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
Preferred 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 to the Registration Statement, reference is
made to the copy of such contract or document filed as an exhibit, each such
statement being qualified in all respects by such reference. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 10661. Copies
of all or any part of such materials may be obtained from the Commission upon
the payment of certain fees prescribed by the Commission. Such reports and
other information may also be inspected without charge at the Commission's Web
site, located at http://www.sec.gov.

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

PAGE
----

Report of Independent Accountants........................................ F-2
Balance Sheets as of June 30, 1996 and 1997, and September 30, 1997 (Un-
audited)................................................................ F-3
Statements of Operations for the years ended June 30, 1995, 1996 and
1997, for the period from March 24, 1989 (Inception) to June 30, 1997,
for the three months ended September 30, 1996 and 1997 (Unaudited), and
for the period from March 24, 1989 (Inception) to September 30, 1997
(Unaudited)............................................................. F-4
Statements of Shareholders' Equity from March 24, 1989 (Inception) to
June 30, 1997, and for the three months ended September 30, 1997 (Unau-
dited).................................................................. F-5
Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997, for the period from March 24, 1989 (Inception) to June 30, 1997,
for the three months ended September 30, 1996 and 1997 (Unaudited), and
for the period from March 24, 1989 (Inception) to September 30, 1997
(Unaudited)............................................................. F-6
Notes to Financial Statements............................................ F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Aastrom Biosciences, Inc.

In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Aastrom Biosciences, Inc. (a
development stage company) at June 30, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1997, and for the period from March 24, 1989 (Inception) to June 30,
1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

PRICE WATERHOUSE LLP

Detroit, Michigan
August 15, 1997

F-2

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

JUNE 30,
-------------------------- SEPTEMBER 30,
1996 1997 1997
------------ ------------ -------------
(Unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 10,967,000 $ 1,943,000 $ 1,505,000
Short-term investments............. -- 15,064,000 12,126,000
Receivables........................ 81,000 229,000 209,000
Prepaid expenses................... 437,000 126,000 93,000
------------ ------------ ------------
Total current assets............. 11,485,000 17,362,000 13,933,000
PROPERTY, NET........................ 1,188,000 1,048,000 941,000
------------ ------------ ------------
Total assets..................... $ 12,673,000 $ 18,410,000 $ 14,874,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 1,192,000 $ 1,508,000 $ 1,606,000
Accrued employee expenses.......... 97,000 130,000 115,000
Current portion of capital lease
obligations....................... 223,000 124,000 99,000
Deferred revenue................... 122,000 -- --
------------ ------------ ------------
Total current liabilities........ 1,634,000 1,762,000 1,820,000
CAPITAL LEASE OBLIGATIONS............ 189,000 65,000 48,000
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; shares
authorized--9,951,765, 5,000,000 and
5,000,000, respectively; shares
issued and outstanding--9,451,766, 0
and 0, respectively................. 34,218,000 -- --
Common Stock, no par value; shares
authorized--18,500,000, 40,000,000
and 40,000,000, respectively; shares
issued and outstanding--1,886,479,
13,275,208 and 13,272,674,
respectively........................ 324,000 58,073,000 57,989,000
Deficit accumulated during the
development stage................... (27,025,000) (41,313,000) (44,938,000)
Shareholder notes receivable......... (167,000) (167,000) (47,000)
Stock purchase rights................ 3,500,000 -- --
Unrealized gains (losses) on
investments......................... -- (10,000) 2,000
------------ ------------ ------------
Total shareholders' equity......... 10,850,000 16,583,000 13,006,000
------------ ------------ ------------
Total liabilities and
shareholders' equity............ $ 12,673,000 $ 18,410,000 $ 14,874,000
============ ============ ============

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

F-3

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

MARCH 24, 1989 THREE MONTHS ENDED MARCH 24, 1989
YEAR ENDED JUNE 30, (INCEPTION) TO SEPTEMBER 30, (INCEPTION) TO
--------------------------------------- JUNE 30, ------------------------ SEPTEMBER 30,
1995 1996 1997 1997 1996 1997 1997
----------- ------------ ------------ -------------- ----------- ----------- --------------
(Unaudited) (Unaudited)

REVENUES:
Research and
development
agreements........... $ 396,000 $ 1,342,000 $ 230,000 $ 2,017,000 $ 195,000 $ 3,000 $ 2,020,000
Grants................ 121,000 267,000 148,000 2,143,000 29,000 13,000 2,156,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Total revenues........ 517,000 1,609,000 378,000 4,160,000 224,000 16,000 4,176,000
COSTS AND EXPENSES:
Research and
development.......... 4,889,000 10,075,000 13,357,000 38,432,000 3,160,000 3,243,000 41,675,000
General and
administrative....... 1,558,000 2,067,000 1,953,000 9,042,000 452,000 613,000 9,655,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
Total costs and
expenses............. 6,447,000 12,142,000 15,310,000 47,474,000 3,612,000 3,856,000 51,330,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
LOSS FROM OPERATIONS... (5,930,000) (10,533,000) (14,932,000) (43,314,000) (3,388,000) (3,840,000) (47,154,000)
OTHER INCOME (EXPENSE):
Interest income....... 279,000 678,000 676,000 2,252,000 126,000 220,000 2,472,000
Interest expense...... (66,000) (62,000) (32,000) (251,000) (11,000) (5,000) (256,000)
----------- ------------ ------------ ------------ ----------- ----------- ------------
Other income.......... 213,000 616,000 644,000 2,001,000 115,000 215,000 2,216,000
----------- ------------ ------------ ------------ ----------- ----------- ------------
NET LOSS............... $(5,717,000) $ (9,917,000) $(14,288,000) $(41,313,000) $(3,273,000) $(3,625,000) $(44,938,000)
=========== ============ ============ ============ =========== =========== ============
NET LOSS PER SHARE..... $ (.66) $ (.98) $ (1.26) $ (.32) $ (.27)
=========== ============ ============ =========== ===========
Weighted average number
of common and common
equivalent shares
outstanding........... 8,644,000 10,103,000 11,315,000 10,107,000 13,279,000
=========== ============ ============ =========== ===========

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

F-4

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY

DEFICIT
ACCUMULATED UNREALIZED
PREFERRED STOCK COMMON STOCK DURING THE SHAREHOLDER STOCK GAINS
----------------------- ----------------------- DEVELOPMENT NOTES PURCHASE (LOSSES) ON
SHARES AMOUNT SHARES AMOUNT STAGE RECEIVABLE RIGHTS INVESTMENTS
---------- ----------- ---------- ----------- ------------ ----------- ----------- -----------

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
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
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
Issuance of
Common Stock
for services... 33,333 10,000
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.. 1,229,482 230,000 (198,000)
Net loss........ (11,391,000)
---------- ----------- ---------- ----------- ------------ --------- ----------- --------
BALANCE, JUNE 30,
1994............ 5,540,000 18,334,000 1,717,360 240,000 (11,391,000) (198,000) -- --
Issuance of
Series D
Preferred Stock
in April and
May 1995 at
$4.00 per
share, net of
issuance costs
of $81,000..... 2,500,001 9,919,000
Exercise of
stock options.. 39,103 8,000
Retirement of
Common Shares
outstanding.... (25,000) (7,000)
Unrealized loss
on
investments.... (2,000)
Net loss........ (5,717,000)
---------- ----------- ---------- ----------- ------------ --------- ----------- --------
BALANCE, JUNE 30,
1995............ 8,040,001 28,253,000 1,731,463 241,000 (17,108,000) (198,000) -- (2,000)
Issuance of
Series E
Preferred Stock
in January 1996
at $4.25 per
share, net of
issuance costs
of $35,000..... 1,411,765 5,965,000
Exercise of
stock options.. 130,016 53,000
Issuance of
Common Stock at
$1.20 per
share.......... 25,000 30,000
Issuance of
Stock Purchase
Rights for cash
in September
1995 and March
1996........... 3,500,000
Repurchase of
Series D
Preferred Stock
at $4.00 per
share.......... (62,500) (250,000)
Sale of Series D
Preferred Stock
at $4.00 per
share.......... 62,500 250,000
Principal
payment
received under
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 --
Exercise of
stock options.. 40,307 26,000
Issuance of
Series E
Preferred Stock
at $17.00 per
share.......... 205,882 3,500,000 (3,500,000)
Issuance of
Common Stock at
$7.00 per
share, net of
issuance costs
of $2,865,000.. 3,250,000 19,885,000
Conversion of
Preferred
Stock.......... (9,657,648) (37,718,000) 8,098,422 37,718,000
Compensation
expense related
to stock
options
granted........ 120,000
Unrealized
losses on
investments.... (10,000)
Net loss........ (14,288,000)
---------- ----------- ---------- ----------- ------------ --------- ----------- --------
BALANCE, JUNE 30,
1997............ -- -- 13,275,208 58,073,000 (41,313,000) (167,000) -- (10,000)
Unaudited:
Exercise of
stock options.. 6,216 7,000
Compensation
expense related
to stock
options
granted........ 25,000
Cancellation of
Common Stock to
repay
shareholder
note receivable
and accrued
interest....... (15,711) (138,000) 120,000
Issuance of
Common Stock... 6,961 22,000
Unrealized gain
on investments. 12,000
Net loss........ (3,625,000)
---------- ----------- ---------- ----------- ------------ --------- ----------- --------
BALANCE, SEPTEM-
BER 30, 1997
(Unaudited)..... -- $ -- 13,272,674 $57,989,000 $(44,938,000) $ (47,000) $ -- $ 2,000
========== =========== ========== =========== ============ ========= =========== ========

TOTAL
SHAREHOLDERS'
EQUITY
--------------

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
Issuance of
Series A
Preferred Stock
in March 1991
at $1.00 per
share, net of
issuance costs
of $5,000...... 995,000
Issuance of
Series B
Preferred Stock
in April 1992
at $2.00 per
share, net of
issuance costs
of $46,000..... 6,014,000
Issuance of
Common Stock
for services... 10,000
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.. 32,000
Net loss........ (11,391,000)
--------------
BALANCE, JUNE 30,
1994............ 6,985,000
Issuance of
Series D
Preferred Stock
in April and
May 1995 at
$4.00 per
share, net of
issuance costs
of $81,000..... 9,919,000
Exercise of
stock options.. 8,000
Retirement of
Common Shares
outstanding.... (7,000)
Unrealized loss
on
investments.... (2,000)
Net loss........ (5,717,000)
--------------
BALANCE, JUNE 30,
1995............ 11,186,000
Issuance of
Series E
Preferred Stock
in January 1996
at $4.25 per
share, net of
issuance costs
of $35,000..... 5,965,000
Exercise of
stock options.. 53,000
Issuance of
Common Stock at
$1.20 per
share.......... 30,000
Issuance of
Stock Purchase
Rights for cash
in September
1995 and March
1996........... 3,500,000
Repurchase of
Series D
Preferred Stock
at $4.00 per
share.......... (250,000)
Sale of Series D
Preferred Stock
at $4.00 per
share.......... 250,000
Principal
payment
received under
shareholder
note
receivable..... 31,000
Unrealized gain
on
investments.... 2,000
Net loss........ (9,917,000)
--------------
BALANCE, JUNE 30,
1996............ 10,850,000
Exercise of
stock options.. 26,000
Issuance of
Series E
Preferred Stock
at $17.00 per
share.......... --
Issuance of
Common Stock at
$7.00 per
share, net of
issuance costs
of $2,865,000.. 19,885,000
Conversion of
Preferred
Stock.......... --
Compensation
expense related
to stock
options
granted........ 120,000
Unrealized
losses on
investments.... (10,000)
Net loss........ (14,288,000)
--------------
BALANCE, JUNE 30,
1997............ 16,583,000
Unaudited:
Exercise of
stock options.. 7,000
Compensation
expense related
to stock
options
granted........ 25,000
Cancellation of
Common Stock to
repay
shareholder
note receivable
and accrued
interest....... (18,000)
Issuance of
Common Stock... 22,000
Unrealized gain
on investments. 12,000
Net loss........ (3,625,000)
--------------
BALANCE, SEPTEM-
BER 30, 1997
(Unaudited)..... $ 13,006,000
==============

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

F-5

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

MARCH 24, 1989 THREE MONTHS ENDED MARCH 24, 1989
YEAR ENDED JUNE 30, (INCEPTION) TO SEPTEMBER 30, (INCEPTION) TO
--------------------------------------- JUNE 30, ------------------------ SEPTEMBER 30,
1995 1996 1997 1997 1996 1997 1997
------------ ----------- ------------ -------------- ----------- ----------- --------------
(Unaudited) (Unaudited)

OPERATING ACTIVITIES:
Net loss.............. $ (5,717,000) $(9,917,000) $(14,288,000) $(41,313,000) $(3,273,000) $(3,625,000) $(44,938,000)
Adjustments to
reconcile net loss to
net cash used for
operating activities:
Depreciation and
amortization........ 329,000 536,000 564,000 1,831,000 136,000 151,000 1,982,000
Loss on property held
for resale.......... -- -- -- 110,000 -- -- 110,000
Amortization of
discounts and
premiums on
investments......... (9,000) (110,000) (84,000) (203,000) -- (50,000) (253,000)
Stock compensation
expense............. -- -- 120,000 130,000 40,000 25,000 155,000
Changes in assets and
liabilities:
Receivables......... 132,000 18,000 (148,000) (229,000) (139,000) 2,000 (227,000)
Prepaid expenses.... (59,000) (332,000) 311,000 (126,000) 59,000 33,000 (93,000)
Accounts payable and
accrued expenses... (40,000) 864,000 316,000 1,508,000 (351,000) 98,000 1,606,000
Accrued employee
expenses........... 28,000 (33,000) 33,000 130,000 (17,000) (15,000) 115,000
Deferred revenue.... 79,000 (103,000) (122,000) -- (69,000) -- --
------------ ----------- ------------ ------------ ----------- ----------- ------------
Net cash used for
operating activities. (5,257,000) (9,077,000) (13,298,000) (38,162,000) (3,614,000) (3,381,000) (41,543,000)
------------ ----------- ------------ ------------ ----------- ----------- ------------
INVESTING ACTIVITIES:
Organizational costs.. -- -- -- (73,000) -- -- (73,000)
Purchase of short-term
investments.......... (10,981,000) -- (19,190,000) (31,138,000) (1,200,000) (500,000) (31,638,000)
Maturities of short-
term investments..... 3,567,000 8,500,000 4,200,000 16,267,000 -- 3,500,000 19,767,000
Capital purchases..... (118,000) (445,000) (424,000) (2,142,000) (173,000) (44,000) (2,186,000)
Proceeds from sale of
property held for
resale............... -- -- -- 400,000 -- -- 400,000
------------ ----------- ------------ ------------ ----------- ----------- ------------
Net cash provided by
(used for) investing
activities........... (7,532,000) 8,055,000 (15,414,000) (16,686,000) (1,373,000) 2,956,000 (13,730,000)
------------ ----------- ------------ ------------ ----------- ----------- ------------
FINANCING ACTIVITIES:
Issuance of Preferred
Stock................ 9,919,000 5,965,000 -- 34,218,000 -- -- 34,218,000
Issuance of Common
Stock................ 1,000 83,000 19,911,000 20,027,000 1,000 29,000 20,056,000
Payments received for
stock purchase
rights............... -- 3,500,000 -- 3,500,000 -- -- 3,500,000
Payments received
under shareholder
notes................ -- 31,000 -- 31,000 -- -- 31,000
Principal payments
under capital lease
obligations.......... (214,000) (270,000) (223,000) (985,000) (73,000) (42,000) (1,027,000)
------------ ----------- ------------ ------------ ----------- ----------- ------------
Net cash provided by
(used for) financing
activities........... 9,706,000 9,309,000 19,688,000 56,791,000 (72,000) (13,000) 56,778,000
------------ ----------- ------------ ------------ ----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... (3,083,000) 8,287,000 (9,024,000) 1,943,000 (5,059,000) (438,000) 1,505,000
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD... 5,763,000 2,680,000 10,967,000 -- 10,967,000 1,943,000 --
------------ ----------- ------------ ------------ ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................ $ 2,680,000 $10,967,000 $ 1,943,000 $ 1,943,000 $ 5,908,000 $ 1,505,000 $ 1,505,000
============ =========== ============ ============ =========== =========== ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid........ $ 66,000 $ 62,000 $ 32,000 $ 251,000 $ 11,000 $ 5,000 $ 256,000
Additions to capital
lease obligations... 270,000 -- -- 1,174,000 -- -- 1,174,000

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

F-6

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 principally on its own
behalf but also 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, obtaining regulatory
approval and market acceptance for its products and the Company's continued
ability to maintain adequate levels of funding.

SIGNIFICANT REVENUE RELATIONSHIPS--Two companies accounted for 49% and 28%
of total revenues for the year ended June 30, 1995 and one company accounted
for 83% and 52% of total revenues for the year ended June 30, 1996 and 1997,
respectively. One company accounted for 43% of total revenues for the period
from Inception to June 30, 1997. One company accounted for 87% and 43% of
total revenues for the three months ended September 30, 1996 and the period
from Inception to September 30, 1997, respectively. 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 presented at market value, with unrealized gains and losses
on investments reflected as a component of shareholders' equity.

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. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant realized
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 $146,000, $1,294,000 and $154,000 for
the years ended June 30, 1995, 1996 and 1997, respectively, $1,642,000 for the
period from Inception to June 30, 1997, and $117,000, $3,000 and $1,645,000
for the three months ended September 30, 1996 and 1997, and for the period
from Inception to September 30, 1997, respectively.

F-7

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

STOCK COMPENSATION--The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (SFAS 123) as of July 1, 1996. As permitted by SFAS 123,
the Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its plans and does not recognize
compensation expense for its employee stock-based compensation plans as
prescribed in SFAS 123.

INCOME TAXES--The Company recognizes deferred tax assets and liabilities for
the differences between the carrying amounts and the tax basis of assets and
liabilities, as well as net operating loss and tax credit carryforwards.
Additionally, the Company establishes a valuation allowance to reflect the
likelihood of realization of deferred tax assets.

NET LOSS PER SHARE--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. However, common
and common equivalent shares issued during the twelve month period preceding
the filing of the registration statement for the Company's initial public
offering which was completed in February 1997, (the IPO) at a price below the
expected offering price are considered to be cheap stock and are included in
the calculation for periods prior to the IPO, as if they were outstanding for
all periods using the treasury stock method, as applicable, even though their
inclusion is anti-dilutive. Due to the automatic conversion of all outstanding
shares of Preferred Stock into Common Stock upon the completion of the IPO,
Preferred Stock is assumed to have been converted into 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.

During March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128)
which amends the standards for computing earnings per share previously set
forth in Accounting Principles Board Opinion No. 15 "Earnings per Share" (APB
15). SFAS 128, which will be adopted by the Company for the periods ending
December 31, 1997, will not have a material effect on the computation of net
loss per share for the periods presented in the accompanying financial
statements.

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--The Company evaluates the fair value of those assets
and liabilities identified as financial instruments 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.

LONG-LIVED ASSETS--The Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121) as of July 1, 1996 and evaluates the impairment
of long-lived assets and long-lived assets to be disposed of whenever events
or changes in circumstances indicate that the carrying amount of those assets
may not be recoverable. Adoption of this pronouncement has not significantly
impacted the accompanying financial statements as no impairment losses have
been identified by the Company.

F-8

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

UNAUDITED FINANCIAL INFORMATION--The financial information as of September
30, 1997, and for the three-month periods ended September 30, 1996 and 1997,
and for the period from Inception to September 30, 1997, 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, 1997, 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:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------

June 30, 1997:
U.S. Government Securities..... $13,574,000 $1,000 $(11,000) $13,564,000
Commercial Paper............... 1,500,000 -- -- 1,500,000
----------- ------ -------- -----------
$15,074,000 $1,000 $(11,000) $15,064,000
=========== ====== ======== ===========
September 30, 1997 (Unaudited):
U.S. Government Securities..... $11,624,000 $5,000 $ (3,000) $11,626,000
Commercial Paper............... 500,000 -- -- 500,000
----------- ------ -------- -----------
$12,124,000 $5,000 $ (3,000) $12,126,000
=========== ====== ======== ===========

3. PROPERTY

Property consists of the following:

JUNE 30,
------------------------ SEPTEMBER 30,
1996 1997 1997
----------- ----------- -------------
(Unaudited)

Machinery and equipment.............. $ 1,337,000 $ 1,425,000 $ 1,439,000
Office equipment..................... 482,000 733,000 763,000
Leasehold improvements............... 520,000 605,000 605,000
----------- ----------- -----------
2,339,000 2,763,000 2,807,000
Less accumulated depreciation and
amortization........................ (1,151,000) (1,715,000) (1,866,000)
----------- ----------- -----------
$ 1,188,000 $ 1,048,000 $ 941,000
=========== =========== ===========

Equipment under capital leases totaled $1,131,000 at June 30, 1996 and 1997,
and September 30, 1997, with related accumulated amortization of $622,000,
$844,000 and $898,000, respectively (Note 7).

4. SHAREHOLDERS' EQUITY

INITIAL PUBLIC OFFERING--In February 1997, the Company completed an
underwritten initial public offering of 3,000,000 shares of its Common Stock
at an offering price of $7.00 per share. In March 1997, the underwriters

F-9

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

elected to purchase an additional 250,000 shares of Common Stock pursuant to
the underwriters' over-allotment option at a price of $7.00 per share.
Proceeds from the offering, net of underwriter's commissions and expenses,
were $19,885,000.

PREFERRED STOCK--The Company had the following classes of preferred stock
outstanding as of June 30, 1996. As a result of the IPO, all 9,657,648 shares
of previously outstanding preferred stock were automatically converted into
8,098,422 shares of Common Stock.

SHARES ISSUED
SHARES AND LIQUIDATION
AUTHORIZED OUTSTANDING PREFERENCE
---------- ------------- -----------

Series A........................... 2,500,000 2,500,000 $ 2,500,000
Series B........................... 3,030,000 3,030,000 6,060,000
Series C........................... 10,000 10,000 10,000,000
Series D........................... 3,000,000 2,500,001 10,000,000
Series E........................... 1,411,765 1,411,765 6,000,000
--------- --------- -----------
Balance, June 30, 1996............. 9,951,765 9,451,766 $34,560,000
========= ========= ===========

No dividends have ever been declared or paid.

COBE LABORATORIES, INC. STOCK PURCHASE RIGHTS--In connection with the
purchase of the Series C Convertible 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 underwriter's discounts and commissions, if any. The agreements
establishing the Company's relationship with Cobe provide the Company with an
option (the Put Option) to require Cobe to purchase the lesser of 20%, or
$5,000,000, in an initial public offering or a private offering 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. While
the Put Option was not exercised by the Company in connection with the IPO,
Cobe elected to purchase an additional $5,000,000 in Common Stock as part of
the IPO. The Company and Cobe are evaluating whether or not the Put Option
remains in effect as it relates to the Company's ability to exercise the
option in a subsequent private offering of its equity securities.

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, which is exercisable until February 2000, must be exercised in
full with the purchase price of the shares equal to 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 of the
Company's equity securities 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 obligation 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
2,986,594 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

F-10

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

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 year ended June 30, 1997,
compensation expense totaling approximately $120,000 has been charged with
respect to these options. Additional future compensation expense with respect
to the issuance of such options totals approximately $135,000 and will be
recognized through December 2001.

As permitted by SFAS 123, the Company continues to apply APB 25 and related
interpretations in accounting for its stock option plans and does not
recognize compensation expense for its employee stock-based compensation plans
as prescribed in SFAS 123. If the Company had elected to recognize
compensation expense based upon the fair value at the grant dates for stock
option awards granted in 1996 and 1997, in accordance with SFAS No. 123, the
pro forma net loss and net loss per share would be as follows.

JUNE 30,
-----------------------
1996 1997
---------- -----------

Net Loss:
As reported................................... $9,917,000 $14,288,000
Pro forma..................................... 9,942,000 14,793,000
Net Loss per common share:
As reported................................... $ (.98) $ (1.26)
Pro forma..................................... (.98) (1.31)

The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions; no dividend
yields, 40% volatility, risk free interest rates ranging from 5.2% to 6.8% and
expected option lives of three to five years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the use of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock based
compensation plans.

F-11

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

The following table summarizes option activity under the Company's stock
option plans:

OPTIONS OPTIONS WEIGHTED AVERAGE OPTIONS
OPTIONS AVAILABLE EXERCISE PRICE EXERCISABLE
OUTSTANDING FOR GRANT PER SHARE AT PERIOD END
----------- --------------- ---------------- -------------

March 24, 1989 (Incep-
tion)
Options authorized.... -- 1,703,261
Options granted....... 1,727,111 (1,727,111) $ .31
Options exercised..... (1,229,482) -- $ .19
Options canceled...... (103,964) 103,964 $ .66
---------- ----------
Balance, June 30, 1994.. 393,665 80,114 $ .61 77,682
Options authorized.... -- 333,333
Options granted....... 55,333 (55,333) $1.20
Options exercised..... (39,103) -- $ .21
Options canceled...... (60,230) 60,230 $ .34
---------- ----------
Balance, June 30, 1995.. 349,665 418,344 $ .78 108,492
Options authorized.... -- 800,000
Options granted....... 155,337 (155,337) $1.44
Options exercised..... (130,016) -- $ .41
Options canceled...... (44,690) 44,690 $ .85
---------- ----------
Balance, June 30, 1996.. 330,296 1,107,697 $1.20 101,021
Options authorized.... -- 150,000
Options granted....... 785,200 (785,200) $6.78
Options exercised..... (40,307) -- $ .65
Options canceled...... (16,818) 16,818 $1.83
---------- ----------
Balance, June 30, 1997.. 1,058,371 489,315 $5.36 483,376
Unaudited:
Options granted....... 96,250 (96,250) $5.57
Options exercised..... (6,216) -- $1.16
Options canceled...... (41,957) 41,957 $4.35
---------- ----------
Balance, September 30,
1997 (Unaudited)....... 1,106,448 435,022 $5.44 504,585
========== ==========

OUTSIDE DIRECTORS' STOCK OPTION PLAN--The Company has an outside directors'
stock option plan which provides for the issuance of options to purchase up to
150,000 shares of Common Stock to outside directors. Under this plan, non-
qualified options to purchase 5,000 shares of Common Stock are granted to each
outside director on the day of the Annual Shareholders' meeting. These options
generally vest over a one-year period and expire ten years after the date of
grant. As of June 30, 1997 and September 30, 1997, options to purchase 30,000
shares of Common Stock at $7.00 per share are outstanding under this plan, of
which options to purchase 10,002 and 17,502 shares of Common Stock are
exercisable at June 30, 1997 and September 30, 1997, respectively.

F-12

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

The following table summarizes information about stock-based compensation
plans outstanding as of June 30, 1997:

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

$ .30 - $1.20 260,170 7.7 $1.15 135,542 $1.11
$3.20 - $3.88 58,418 9.2 $3.24 4,501 $3.20
$7.00 - $7.13 739,783 9.6 $7.00 343,333 $7.00
--------- -------
1,058,371 483,376
========= =======

The weighted average fair value of options granted during the year ended
June 30, 1997 was $6.78 per share.

EMPLOYEE STOCK PURCHASE PLAN--The Company has an employee stock purchase
plan under which eligible employees can purchase Common Stock, at a discount
to the market price, through payroll deductions up to 10% of the employees
base compensation, subject to certain limitations, during sequential 24-month
offering periods. Each offering period is divided into four consecutive six-
month purchase periods ending on March 1 and September 1 of each year. 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 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. As of September 30, 1997, 6,961
shares of Common Stock has been sold under this plan.

STOCK PURCHASE WARRANTS--The Company has issued warrants to purchase 69,444
shares of Common Stock which expire on October 15, 2000. These warrants 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 February 7, 1998, 1999
and 2000; or (b) 85% of the fair market value of the Company's Common Stock at
the time of exercise.

COMMON SHARES RESERVED--The Company has reserved shares of Common Stock for
future issuance as follows:

JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(unaudited)

Issuance under stock option plans:
1992 Incentive and Non-Qualified Stock Option Plan.... 1,397,686 1,391,470
1995 Outside Director Stock Option Plan............... 150,000 150,000
--------- ---------
1,547,686 1,541,470
Issuance under 1996 Employee Stock Purchase Plan........ 250,000 250,000
Exercise of Stock Purchase Warrants..................... 69,444 69,444
--------- ---------
1,867,130 1,860,914
========= =========

F-13

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

5. INCOME TAXES

Deferred tax assets consist of the following:

JUNE 30,
-------------------------
1996 1997
----------- ------------

Net operating loss carryforwards............... $ 9,210,000 $ 14,150,000
Tax credits and other.......................... 440,000 1,162,000
----------- ------------
Gross deferred tax assets...................... 9,650,000 15,312,000
Deferred tax assets valuation allowance........ (9,650,000) (15,312,000)
----------- ------------
$ -- $ --
=========== ============

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 future
income taxes.

At June 30, 1997, the Company's Federal tax net operating loss and tax
credit carryfowards were $40,420,000 and $971,000, respectively, which will
expire from 2004 through 2012, if not utilized. The Company underwent an
ownership change in October 1993 which has resulted in a limitation under
which the Company can utilize a portion of its federal net operating loss
carryforward amounting to $1,153,000 per year. As of June 1997, the portion of
the Company's net operating loss that remains subject to this limitation is
$2,490,000 and therefore is not expected to ultimately effect the Company's
ability to utilize the benefit. If certain changes in ownership should occur
again in the future, the Company's ability to utilize its net operating loss
and tax credit carryforwards may become subject to further annual limitation.

6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS:

UNIVERSITY OF MICHIGAN--In August 1989, the Company entered into a research
agreement with the University of Michigan (the University). Under the terms of
this research agreement, as amended, the Company agreed to reimburse the
University for certain research costs through the date of its expiration in
December 1994. Payments made to the University under the aforementioned
agreements totaled $121,000 and $2,521,000 for the years ended June 30, 1995
and for the period from Inception to June 30, 1997, respectively, which
amounts are included in research and development expense in the accompanying
Statements of Operations. 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, and as provided for under the research agreement, 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. Cobe has the right to terminate its Distribution Agreement with the
Company with 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

F-14

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. 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.

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.

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 payable of up to 3% of net sales
on products containing 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, if renewed by the Company, 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. Pursuant to the agreements establishing this collaboration, RPR
was obligated to fund certain research 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. In
September 1996, RPR notified the Company of its intent to not exercise its
additional options under the collaboration. This notification was made after
RPR had determined that for strategic reasons it would not pursue Lymphoid
cell therapy applications, including those being pursued under the
collaboration the Company. The Company received $3,500,000 in equity payments
and recognized $1,538,000 in research revenue under this collaboration. 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 have been terminated.

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 through May 1999.
Additionally, the Company leases its facility 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-15

AASTROM BIOSCIENCES, INC
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE THREE-MONTH PERIODS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED)

Future minimum payments under capital leases and non-cancelable operating
leases are as follows:

CAPITAL OPERATING
LEASES LEASES
-------- ---------

Year Ending June 30,
1998.................................................... $138,000 $435,000
1999.................................................... 69,000 --
-------- --------
Total minimum lease payments.............................. 207,000 $435,000
========
Less amount representing interest......................... (18,000)
--------
Obligations under capital lease........................... $189,000
========

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 lease agreements become immediately due and
payable.

Rent expense for the years ended June 30, 1995, 1996 and 1997, was $241,000,
$338,000 and $456,000, respectively, and $1,278,000 for the period from
Inception to June 30, 1997. Rent expense for the three months ended September
30, 1996 and 1997, was $107,000 and $120,000, respectively, and $1,398,000 for
the period from Inception to September 30, 1997.

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, 1997, the
Company has made no contributions to the plan.

F-16

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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, the Placement Agent
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 hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction 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.

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TABLE OF CONTENTS

Page
----

Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
The Company............................................................... 18
Use of Proceeds........................................................... 18
Price Range of Common Stock............................................... 18
Dividend Policy........................................................... 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 25
Management................................................................ 46
Certain Transactions...................................................... 54
Principal Shareholders.................................................... 56
Description of Capital Stock.............................................. 58
Shares Eligible for Future Sale........................................... 62
Plan of Distribution...................................................... 63
Legal Matters............................................................. 63
Experts................................................................... 64
Additional Information.................................................... 64
Index to Financial Statements............................................. F-1

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[LOGO OF AASTROM BIOSCIENCES INC]

2,200,000 Shares of
5 1/2% Convertible Preferred Stock

-------------------
PROSPECTUS
-------------------

COWEN & COMPANY

November 26, 1997

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