<PAGE>
 
    
 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1997     
                                                     REGISTRATION NO. 333-15415
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                               ----------------
                                AMENDMENT NO. 3     
                                      TO
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ----------------
                           AASTROM BIOSCIENCES, INC.
            (Exact name of registrant as specified in its charter)

         MICHIGAN                    2834                    94-3096597
     (State or other          (Primary Standard            (IRS Employer
     jurisdiction of              Industrial            Identification No.)
     incorporation or        Classification Code
      organization)                Number)
                               ----------------

                          24 FRANK LLOYD WRIGHT DRIVE
                                 P.O. BOX 376
                           ANN ARBOR, MICHIGAN 48106
                                (313) 930-5555
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)
                               ----------------
 
                         R. DOUGLAS ARMSTRONG, PH.D.
                      PRESIDENT, CHIEF EXECUTIVE OFFICER
                           AASTROM BIOSCIENCES, INC.
                          24 FRANK LLOYD WRIGHT DRIVE
                                 P.O. BOX 376
                           ANN ARBOR, MICHIGAN 48106
                                (313) 930-5555
(Name, address, including zip code, and telephone number, including area code,
                             of agent for service)
                               ----------------

                                  COPIES TO:
          T. KNOX BELL, ESQ.                 RICHARD R. PLUMRIDGE, ESQ.
         DOUGLAS J. REIN, ESQ.                 MICHAEL A. CONZA, ESQ.
          MATT KIRMAYER, ESQ.              BROBECK, PHLEGER & HARRISON LLP
         DAYNA J. PINEDA, ESQ.                      1633 BROADWAY
     GRAY CARY WARE & FREIDENRICH             NEW YORK, NEW YORK 10019
   4365 EXECUTIVE DRIVE, SUITE 1600
      SAN DIEGO, CALIFORNIA 92121
                               ----------------
 
  Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
 
  The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A         +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE   +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY  +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT        +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR   +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE      +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE    +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF  +
+ANY SUCH STATE.                                                               +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
 
PROSPECTUS (Subject to Completion)
   
Dated January 7, 1997     
 
                                3,250,000 Shares
 
                       [LOGO OF AASTROM BIOSCIENCES INC]
 
                                  Common Stock
 
                                --------------
 
  All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered are being sold by Aastrom Biosciences, Inc. ("Aastrom" or the
"Company").
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $8.00 and $10.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Company has applied for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ASTM."
 
  Cobe Laboratories, Inc. has agreed to purchase $5,000,000 of shares of Common
Stock in this offering at the Price to the Public set forth below. See "Certain
Transactions."
 
                                --------------
 
 THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
                           PAGE 5 OF THIS PROSPECTUS.
 
                                --------------
 
                THESE   SECURITIES  HAVE  NOT  BEEN   APPROVED  OR
                 DISAPPROVED  BY  THE   SECURITIES  AND  EXCHANGE
                  COMMISSION OR ANY  STATE SECURITIES COMMISSION
                   NOR   HAS   THE   SECURITIES   AND   EXCHANGE
                   COMMISSION    OR   ANY   STATE    SECURITIES
                    COMMISSION  PASSED  UPON THE  ACCURACY  OR
                     ADEQUACY   OF   THIS   PROSPECTUS.   ANY
                      REPRESENTATION TO  THE  CONTRARY  IS  A
                                  CRIMINAL OFFENSE.
 

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

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

(1) The Company has agreed to indemnify the Underwriters against certain
    liabilities, including liabilities under the Securities Act of 1933. See
    "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $900,000.
(3) The Company has granted to the Underwriters an option, exercisable within
    30 days of the date hereof, to purchase an aggregate of up to 487,500
    additional shares at the Price to Public less Underwriting Discounts and
    Commissions to cover over-allotments, if any. If all such additional shares
    are purchased, the total Price to Public, Underwriting Discounts and
    Commissions and Proceeds to Company will be $   , $   and $   ,
    respectively. See "Underwriting."
                                --------------
 
  The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of the certificates for the shares will be made at the offices of
Cowen & Company, New York, New York, on or about   , 1997.
                                --------------
 
COWEN & COMPANY                                               J.P. MORGAN & CO.
 
    , 1997

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

<PAGE>
 

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

                                  THE COMPANY
   
  Aastrom Biosciences, Inc. is developing proprietary process technologies and
devices for a range of cell therapy applications, including stem cell therapies
and gene therapy. The Company's lead product under development, the Aastrom
Cell Production System (the "Aastrom CPS") consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method will
be less costly, less invasive and less time consuming than currently available
stem cell collection methods. The Aastrom CPS is designed as a platform product
which implements the Company's pioneering stem cell replication technology. The
Company also believes that the Aastrom CPS can be modified to produce a wide
variety of other cell types for new, emerging therapies being developed by
others. Prior to commencement of multiple-site pivotal trials, the Company is
conducting a limited pre-pivotal trial of the Aastrom CPS under an
Investigational Device Exemption for use in stem cell therapy. The Company has
entered into a strategic collaboration for the development of the Aastrom CPS
in stem cell therapy with Cobe BCT, Inc., a subsidiary of Gambro AB and a
leading provider of blood cell processing products. In ex vivo gene therapy,
the genetic manipulation of cells outside of the body for use in therapy, the
Company is developing proprietary processes and the Aastrom CPS to enable high
efficiency genetic modification and production of cells, respectively.     
   
  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. Other novel cell
therapies are under development by third parties, including stem cell therapy
for the treatment of autoimmune diseases and for augmenting recipient
acceptance of organ transplants. Current stem cell therapy methods, including
bone marrow harvest and peripheral blood progenitor cell mobilization, are
costly, invasive and time-consuming for both medical personnel and patients.
Technologies which facilitate a more readily available source of cells may
contribute to additional growth in cell therapy procedures. Umbilical cord
blood ("UCB") is emerging as a new source of cells for stem cell therapy,
offering additional market opportunity, although the more widespread use of UCB
transplants has been restricted by cell quantity limitations, 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, the Aastrom CPS is expected to
involve two patient care episodes rather than approximately eight to 21 care
episodes, less than three hours of patient procedure time rather than
approximately 16 to 39 hours of patient procedure time and approximately four
to ten needle sticks rather than 22 or more needle sticks over the course of
collection and infusion. The Aastrom CPS may 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.
   
  Aastrom is currently conducting a pre-pivotal stem cell therapy trial. The
trial is designed to show that cells produced in the Aastrom CPS can by
themselves safely enable recovery of bone marrow and cells of the blood and
immune systems in accordance with trial endpoints in patients who have received
chemotherapy which has destroyed cells of the blood and immune systems. 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. In the near future, the Company plans to initiate a stem
cell therapy clinical trial in Europe, the results of which, if positive, are
expected to be used for the CE Mark registration necessary to market the
Aastrom CPS in Europe. The Company may not market the Aastrom CPS unless and
until FDA and other necessary regulatory approvals are received.     
 
  The Company's business strategy is to: (i) establish a consumable-based
business model; (ii) focus initially on the currently-reimbursed stem cell
therapy market; (iii) leverage Aastrom's cell production technology across
multiple cell therapy market opportunities; and (iv) market through
collaborative relationships.
   
  Aastrom has entered into a strategic collaboration with Cobe BCT to support
the development and marketing of the Aastrom CPS in the field of stem cell
therapy. In 1993, the Company entered into a series of agreements in which Cobe
BCT purchased $15,000,000 of the Company's equity securities and acquired the
worldwide distribution rights to the Aastrom CPS for stem cell therapy. Under
the terms of the collaboration, Aastrom retains manufacturing rights 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. Cobe Laboratories
Inc., an affiliate of Cobe BCT, has agreed to purchase $5,000,000 of Common
Stock in this offering at the initial public offering price per share.     
 
  The Company's patent portfolio includes patents relating to both stem and
progenitor cell production, processes for the genetic modification of stem and
other cell types, and cell culture devices for human cells. As of September 30,
1996, the Company had exclusive rights to five issued U.S. and three foreign
patents, and a number of U.S. patent applications and certain corresponding
foreign applications.
 
                                       3

<PAGE>
 
                                  THE OFFERING
 

<TABLE>
<S>                        <C>
Common Stock offered...... 3,250,000 shares(1)
Common Stock to be out-    
 standing after this 
 offering................. 13,235,734 shares(2)
Use of proceeds........... For clinical trials, the development and manufacture
                           of the Aastrom CPS, research and development of
                           other product candidates, working capital and other
                           general corporate purposes.
Proposed Nasdaq National   
 Market symbol............ ASTM
</TABLE>

 
                             SUMMARY FINANCIAL DATA
 

<TABLE>   
<CAPTION>
                                                                                                 THREE MONTHS
                                             YEAR ENDED JUNE 30,                             ENDED SEPTEMBER 30,
                         ---------------------------------------------------------------  ---------------------------
                            1992         1993         1994         1995         1996         1995           1996
                         -----------  -----------  -----------  -----------  -----------  -----------  --------------
<S>                      <C>          <C>          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS
 DATA:
Total revenues.......... $       --   $   784,000  $   872,000  $   517,000  $ 1,609,000  $   211,000   $   224,000
Costs and expenses:
 Research and
  development...........   1,090,000    2,600,000    5,627,000    4,889,000   10,075,000    1,195,000     3,160,000
 General and
  administrative........     272,000    1,153,000    1,565,000    1,558,000    2,067,000      446,000       452,000
                         -----------  -----------  -----------  -----------  -----------  -----------   -----------
  Total costs and
   expenses.............   1,362,000    3,753,000    7,192,000    6,447,000   12,142,000    1,641,000     3,612,000
Other income, net.......      94,000      122,000      180,000      213,000      616,000      131,000       115,000
                         -----------  -----------  -----------  -----------  -----------  -----------   -----------
Net loss................ $(1,268,000) $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(1,299,000)  $(3,273,000)
                         ===========  ===========  ===========  ===========  ===========  ===========   ===========
Pro forma net loss per
 share(3)...............                                                     $      (.98)               $      (.32)
                                                                             ===========                ===========
Pro forma weighted
 average number of
 shares outstanding(3)..                                                      10,103,000                 10,107,000
                                                                             ===========                ===========
<CAPTION>
                                                                                              SEPTEMBER 30, 1996
                                                                                          ---------------------------
                                                                                            ACTUAL     AS ADJUSTED(4)
                                                                                          -----------  --------------
<S>                                                                                       <C>          <C>
BALANCE SHEET DATA:
 Cash, cash equivalents and short-term investments..................................      $ 7,108,000   $33,410,500
 Working capital....................................................................        6,540,000    32,842,500
 Total assets.......................................................................        8,931,000    35,233,500
 Deficit accumulated during the development stage...................................      (30,298,000)  (30,298,000)
 Total shareholders' equity.........................................................        7,618,000    33,920,500
</TABLE>
    
- -------
(1) Includes 555,556 shares which Cobe Laboratories, Inc. has agreed to
    purchase, assuming an initial public offering price of $9.00 per share.
(2) Excludes options and warrants to purchase 1,132,361 shares of Common Stock
    at a weighted average exercise price of $6.50 per share, assuming the
    closing of this offering at an initial public offering price of $9.00 per
    share. See "Management--Stock Option and Employee Benefit Plans" and Notes
    4 and 9 of Notes to Financial Statements.
(3) See Note 1 of Notes to Financial Statements for information concerning the
    computation of pro forma net loss per share and shares used in computing
    pro forma net loss per share.
(4) Adjusted to reflect the sale by the Company of 3,250,000 shares of Common
    Stock offered hereby at an assumed initial public offering price of $9.00
    per share, after deduction of underwriting discounts and commissions and
    estimated offering expenses. See "Use of Proceeds" and "Capitalization."
 
  Unless otherwise indicated, all information contained in this Prospectus (i)
gives effect to a two-for-three reverse stock split to be effected prior to the
closing of this offering, (ii) gives effect to the conversion of all
outstanding shares of the Company's Preferred Stock into 8,098,422 shares of
Common Stock upon the closing of this offering, (iii) gives effect to the
filing of an Amended and Restated Articles of Incorporation upon the closing of
this offering to, among other things, create a new class of undesignated
preferred stock and (iv) assumes no exercise of the Underwriters' over-
allotment option. See "Description of Capital Stock" and "Underwriting." This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
 
                                       4

<PAGE>
 

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

<PAGE>
 
study. The Company has experienced delays in patient accrual in its current
pre-pivotal clinical trial. Further delays in patient accrual, in the
Company's current pre-pivotal clinical trial or in future clinical trials,
could result in increased costs associated with clinical trials or delays in
receiving regulatory approvals and commercialization, if any. Furthermore, the
progress of clinical investigations with the Aastrom CPS and the Company's
other product candidates will be monitored by the FDA, which has the authority
to cease clinical investigations, at any time, due to patient safety or other
considerations. Any of the foregoing would have a material adverse effect on
the Company's business, financial condition and results of operations. See "--
Uncertainty of Regulatory Approval; --Extensive Government Regulation."
 
  The Company's current pre-pivotal trial is designed to demonstrate specific
biological safety and activity of cells produced in the Aastrom CPS, but is
not designed to demonstrate long-term sustained engraftment of such cells. The
patients enrolled in this pre-pivotal trial will have undergone extensive
chemotherapy treatment prior to the infusion of cells produced in the Aastrom
CPS. Such treatments will have substantially weakened these patients and may
have irreparably damaged their hematopoietic systems. Due to these and other
factors, it is possible that one or more of these patients may die or suffer
severe complications during the course of the pre-pivotal trial. Further,
there can be no assurance that patients receiving cells produced with the
Company's technologies and product candidates will demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES
   
  The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the 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. Furthermore, the Company
currently only has the right to distribute cytokines obtained from Immunex in
the United States and there can be no assurance that the Company will be able
to obtain the worldwide right to distribute such cytokines or manufacture such
cytokines by or for itself in the event that the Company's agreement with
Immunex is terminated. There can also be no assurance that the Company will be
able to obtain alternative components and materials from other manufacturers
of acceptable quality, or on terms or in quantities acceptable to the Company
or that the Company will not require additional cytokines, components and
other materials to manufacture or use its product candidates. In the event
that any of the Company's key manufacturers or suppliers fail to perform their
respective obligations or the Company's supply of such cytokines, components
or other materials become limited or interrupted, the Company would not be
able to market its product candidates on a timely and cost-competitive basis,
if at all, which would have a material adverse effect on the Company's
business, financial condition and results of operations.     
 
  Like SeaMED, 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
 
                                       6

<PAGE>
 
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, 1996, the Company has incurred net operating
losses totaling approximately $30.3 million. Such losses have resulted
principally from costs incurred in the research and development of the
Company's cell culture technologies and the Aastrom CPS, general and
administrative expenses, and the prosecution of patent applications. The
Company expects to incur significant and increasing operating losses for at
least the next several years, primarily owing to the expansion of its research
and development programs, including preclinical studies and clinical trials.
The amount of future losses and when, if ever, the Company will achieve
profitability, are uncertain. The Company's ability to achieve profitability
will depend, among other things, on successfully completing the development of
its product candidates, obtaining regulatory approvals, establishing
manufacturing, sales and marketing arrangements with third parties, and
raising sufficient funds to finance its activities. No assurance can be given
that the Company's product development efforts will be successful, that
required regulatory approvals will be obtained, that any of the Company's
product candidates will be manufactured at a competitive cost and will be of
acceptable quality, or that the Company will be able to achieve profitability
or that profitability, if achieved, can be sustained.
 
LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS
 
  The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution
capabilities. The Company has established a strategic alliance with Cobe
Laboratories, Inc. and Cobe BCT, Inc. (collectively, "Cobe") for the worldwide
distribution of the Aastrom CPS for stem cell therapy and related uses. Cobe
has the right to terminate its Distribution Agreement with the Company upon
twelve months' notice upon a change of control of the Company, other than to
Cobe, or at any time after December 31, 1997, if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. See "--Consequences of Cobe Relationship."
 
  The amount and timing of resources that Cobe commits to its strategic
alliance activities with the Company are, to a significant extent, outside of
the control of the Company. There can be no assurance that Cobe will pursue
the marketing and distribution of the Company's products, continue to perform
its obligations under its agreements with the Company or that the Company's
strategic alliance with Cobe will result in the successful commercialization
and distribution of the Company's technologies and product candidates. There
can also be no assurance that Cobe will be successful in its efforts to market
and distribute the Company's products for stem cell therapy. The suspension or
termination of the Company's strategic alliance with Cobe or the failure of
the strategic alliance to be successful would have a material adverse effect
on the Company's business, financial condition and results of operations.
 
                                       7

<PAGE>
 
  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. The inability of the Company to
establish such collaborative relationships may require the Company to curtail
its development or marketing activities with regard to its potential products
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
 
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
 
  To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. The Company anticipates that
the net proceeds of this offering, together with the Company's available cash
and expected interest income thereon, will be sufficient to finance its
research and development and other working capital requirements 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
 
                                       8

<PAGE>
 
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 requirements for approval of such product
candidates will continue to be subject to significant uncertainty.
 
  Before marketing, the Aastrom CPS or other product candidates developed by
the Company must undergo an extensive regulatory approval process. The
regulatory process, which includes preclinical studies and clinical trials to
establish safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent FDA approval. In addition, delays or rejections may be encountered
based upon changes in FDA policy for medical product approvals during the
period of product development and FDA regulatory review of applications
submitted by the Company for product approval. Similar delays may also be
encountered in foreign countries. There can be no assurance that, even after
the expenditures of substantial time and financial resources, regulatory
approval will be obtained for any products developed by the Company. Moreover,
if regulatory approval of a product is obtained, such approval may be subject
to limitations on the indicated uses for which it may be marketed. Further,
even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions
on such product or manufacturer, including a withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. Further,
additional government regulation may be established which could prevent or
delay regulatory approval of the Company's products. See "Business--Government
Regulation."
 
CONSEQUENCES OF COBE RELATIONSHIP
 
  Following the completion of this offering, Cobe will be the largest single
shareholder of the Company, beneficially owning approximately 23.1% of the
outstanding Common Stock. In addition, Cobe has certain preemptive rights to
maintain its relative percentage ownership and voting interest in the Company
following this offering, and has the option, for a period of three years
following this offering, to purchase from the Company an amount of Common
Stock equal to 30% of the Company's fully diluted shares after the exercise of
such option, at a purchase price equal to 120% of the public market trading
price of the Company's Common Stock. If such option is exercised, Cobe would
significantly increase its ownership interest in the Company and, as a
consequence of such share ownership, obtain effective control of the Company.
Such effective control would include the ability to influence the outcome of
shareholder votes, including votes concerning the election of directors, the
amendment of provisions of the Company's Restated Articles of Incorporation or
Bylaws, and the approval of mergers and other significant transactions. Cobe
also has been granted a "right of first negotiation" in the event that the
Company determines to sell all, or any material portion, of its assets to
another company or to merge with another company. Furthermore, the Company has
agreed to use reasonable and good faith efforts to cause a nominee designated
by Cobe to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding Common Stock. In addition, Edward C. Wood, Jr.,
the President of Cobe BCT, is a
 
                                       9

<PAGE>
 
director of the Company. The existence of the foregoing rights or the exercise
of such control by Cobe could have the effect of delaying, deterring or
preventing certain takeovers or changes in control of the management of the
Company, including transactions in which shareholders might otherwise receive
a premium for their shares over then current market prices. See "Description
of Capital Stock--Rights of Cobe."
 
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
 
  Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes,
preserve its trade secrets, defend and enforce its rights against infringement
and operate without infringing the proprietary rights of third parties, both
in the United States and in other countries. The validity and breadth of
claims in medical technology patents involve complex legal and factual
questions and, therefore, may be highly uncertain. No assurance can be given
that any patents based on pending patent applications or any future patent
applications of the Company or its licensors will be issued, that the scope of
any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the patents that have been or may be
issued to the Company or its licensors will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company. Furthermore,
there can be no assurance that others have not developed or will not develop
similar products, duplicate any of the Company's products or design around any
patents that have been or may be issued to the Company or its licensors. Since
patent applications in the United States are maintained in secrecy until
patents issue, the Company also cannot be certain that others did not first
file applications for inventions covered by the Company's and its licensors'
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications. The
Company relies on certain licenses granted by the University of Michigan and
Dr. Cremonese for the majority of its patent rights. If the Company breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, the Company may lose its rights
under the patents held by the University of Michigan and Dr. Cremonese, which
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business--Patents and Proprietary
Rights--University of Michigan Research Agreement and License Agreement" and
"--Patents and Proprietary Rights--License Agreement with J.G. Cremonese." The
Company also relies on trade secrets and unpatentable know-how which it seeks
to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets or unpatentable know-how
will not otherwise become known or be independently developed by competitors.
 
  The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurance that the Company
would be able to obtain such licenses or that such licenses, if available,
could be obtained on commercially reasonable terms. Furthermore, the failure
to either develop a commercially viable alternative or obtain such licenses
could result in delays in marketing the Company's proposed products or the
inability to proceed with the development, manufacture or sale of products
requiring such licenses, which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to defend itself against charges of patent infringement or
to protect its own proprietary rights against third parties, substantial costs
will be incurred regardless of whether the Company is successful. Such
proceedings are typically protracted with no certainty of success. An adverse
outcome could subject the Company to significant liabilities to third parties,
and force the Company to curtail or cease its development and sale of its
products and processes. See "Business--Patents and Proprietary Rights."
 
                                      10

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

<PAGE>
 
Company's product candidates will be able to supplant established products and
methodologies in the therapeutic areas that are targeted by the Company. The
foregoing factors could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
HAZARDOUS MATERIALS
 
  The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and regulations governing
the use, manufacture, storage, handling and disposal of such materials and
certain waste products. In the event of any contamination or injury from these
materials, the Company could be held liable for any damages that result and
any such liability could exceed the resources of the Company. Furthermore, the
failure to comply with current or future regulations could result in the
imposition of substantial fines against the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations. There
can be no assurance that the Company will not be required to incur significant
costs to comply with any such laws and regulations in the future, or that such
laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. Any failure by the
Company to control the use, disposal, removal or storage of, or to adequately
restrict the discharge of, or assist in the cleanup of, hazardous chemicals or
hazardous, infectious or toxic substances could subject the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities would have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
 
  The Company is, and will continue to be, subject to the risk of product
liability claims alleging that the use of its products has adverse effects on
patients. This risk exists for product candidates tested in human clinical
trials as well as products that are sold commercially, if any. Further, given
the medical conditions for which the Aastrom CPS is expected to be utilized,
any product liability claim could entail substantial compensatory and punitive
damages. The assertion of product liability claims against the Company could
result in a substantial cost to, and diversion of efforts by, the Company.
There can be no assurance that the Company would prevail in any such
litigation or that product liability claims, if made, would not result in a
recall of the Company's products or a change in the indications for which they
may be used. The Company maintains product liability insurance coverage in the
aggregate of $5,000,000 for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that the Company will
be able to maintain such insurance or obtain product liability insurance in
the future to cover any of its product candidates which are commercialized or
that such existing or any future insurance and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. Consequently, a product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
DEPENDENCE ON KEY PERSONNEL
 
  The success of the Company depends in large part upon the Company's ability
to attract and retain highly qualified scientific and management personnel.
The Company faces competition for such personnel from other companies,
research and academic institutions and other entities. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. See "Business--Employees" and "Management."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
  Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon
completion of this offering, the Company will have a total of 13,235,734
shares of Common Stock outstanding, of which the 3,250,000 shares offered
hereby will be freely tradeable without restriction under the Securities Act
of 1933, as amended (the "Securities Act") by persons other than "affiliates"
of the Company,
 
                                      12

<PAGE>
 
as defined under the Securities Act. The remaining 9,985,734 shares of Common
Stock outstanding are "restricted securities" as the term is defined by Rule
144 promulgated under the Securities Act (the "Restricted Shares"). Of the
9,985,734 Restricted Shares, 6,996,920 shares may be sold under Rule 144,
subject in some cases to certain volume restrictions and other conditions
imposed thereby. An additional 152,056 shares will become eligible for sale 90
days after completion of the offering pursuant to Rule 144 and 701. The
remaining 2,836,758 shares will be eligible for sale upon the expiration of
their respective holding periods as set forth in Rule 144. The Securities and
Exchange Commission has proposed certain amendments to Rule 144 that would
reduce by one year the holding periods required for shares subject to Rule 144
to become eligible for resale in the public market. This proposal, if adopted,
would permit earlier resale of shares of Common Stock currently subject to
holding periods under Rule 144. No assurance can be given concerning whether
or when the proposal will be adopted by the Securities and Exchange
Commission. Furthermore, 9,947,757 of the Restricted Shares are subject to
lock-up agreements expiring 180 days following the date of this Prospectus.
Such agreements provide that Cowen & Company may, in its sole discretion and
at any time without notice, release all or a portion of the shares subject to
these lock-up agreements. Upon the expiration of the lock-up agreements,
7,148,976 of the 9,985,734 Restricted Shares may be sold pursuant to Rule 144
or 701, subject in some cases to certain volume restrictions imposed thereby.
Certain existing shareholders have rights to include shares of Common Stock
owned by them in future registrations by the Company for the sale of Common
Stock or to request that the Company register their shares under the
Securities Act. See "Description of Capital Stock--Registration Rights."
Following the date of this Prospectus, the Company intends to register on one
or more registration statements on Form S-8 approximately 1,837,160 shares of
Common Stock issuable under its stock option and stock purchase plans. Of the
1,837,160 shares issuable under its stock option and stock purchase plans,
336,254 shares are subject to outstanding options as of September 30, 1996,
all of which shares are subject to lock-up agreements. Shares covered by such
registration statements will immediately be eligible for sale in the public
market upon the filing of such registration statements. The Company also has
issued warrants to purchase 69,444 shares of Common Stock which become
exercisable 90 days after the closing of this offering and, upon the effective
date of this offering, will grant an immediately exercisable option to
purchase 333,333 shares of Common Stock. The shares issuable upon exercise of
such warrants and the shares issuable upon exercise of such option will be
subject to lock-up agreements. In addition, Cobe has agreed to purchase
$5,000,000 of Common Stock in this offering at the initial public offering
price per share, all of which shares will be subject to a lock-up agreement.
See "Management--Benefit Plans," "Certain Transactions" and "Shares Eligible
for Future Sale."
 
CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS
   
  Upon completion of this offering, the Company's directors, executive
officers, and certain principal shareholders, including Cobe, affiliated with
members of the Board of Directors and their affiliates will beneficially own
approximately 45% of the Common Stock (approximately 43% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such shareholders,
acting together, may have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to
the Company's shareholders for approval. The voting power of these holders may
discourage or prevent certain takeovers or changes in control of the
management of the Company unless the terms are approved by such holders. See
"Principal Shareholders."     
 
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
 
  Prior to this offering there has been no public market for the Common Stock,
and an active public market for the Common Stock may not develop or be
sustained. The initial public offering price will be determined through
negotiation between the Company and the Representatives of the Underwriters
based on several factors that may not be indicative of future market prices.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price. The trading price of the Common Stock and
the price at which the Company may sell securities in the future could be
subject to wide fluctuations in response to announcements of clinical results,
research activities, technological innovations or new products by the Company
or competitors,
 
                                      13

<PAGE>
 
changes in government regulation, developments concerning proprietary rights,
variations in the Company's operating results, announcements by the Company of
regulatory developments, litigation, disputes concerning patents or
proprietary rights or public concern regarding the safety, efficacy or other
implications of the products or methodologies to be developed by the Company
or its collaborators or enabled by the Company's technology, general market
conditions, the liquidity of the Company or its ability to raise additional
funds, and other factors or events. In addition, the stock market has
experienced extreme fluctuations in price and volume. This volatility has
significantly affected the market prices for securities of emerging
biotechnology companies for reasons frequently unrelated to or
disproportionate to the operating performance of the specific companies. These
market fluctuations as well as general fluctuations in the stock markets may
adversely affect the market price of the Common Stock.
 
ANTI-TAKEOVER EFFECT OF CHARTER AND BY-LAW PROVISIONS AND MICHIGAN LAW
 
  The Company's Restated Articles of Incorporation authorize the Board of
Directors to issue, without shareholder approval, 5,000,000 shares of
Preferred Stock with voting, conversion, and other rights and preferences that
could materially and adversely affect the voting power or other rights of the
holders of Common Stock. The issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited
acquisition proposal. The Company's Bylaws contain procedural restrictions on
director nominations by shareholders and the submission of other proposals for
consideration at shareholder meetings. The possible issuance of Preferred
Stock and the procedures required for director nominations and shareholder
proposals could discourage a proxy contest, make more difficult the
acquisition of a substantial block of Common Stock, or limit the price that
investors might be willing to pay in the future for shares of Common Stock. In
addition, certain provisions of Michigan law applicable to the Company could
also delay or make more difficult a merger, tender offer, or proxy contest
involving the Company. See "Description of Capital Stock."
 
IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
 
  Purchasers of the Common Stock in this offering will experience immediate
and substantial dilution in the net tangible book value of the Common Stock.
Additional dilution is likely to occur upon the exercise of outstanding
options granted by the Company. The Company has never paid cash dividends and
does not anticipate paying any cash dividends in the foreseeable future. See
"Dilution" and "Dividend Policy."
 
                                      14

<PAGE>
 

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

                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered hereby are estimated to be $26,302,500 ($30,382,875 if
the Underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $9.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
 
  The Company currently intends to use approximately $16,000,000 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 $7,000,000 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 $339,000 of outstanding equipment lease commitments as of
September 30, 1996 with final payments due between November 1996 and May 1999
and bear interest ranging from 9.7% to 12.1%.
 
   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
Company's research and development and other working capital 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.
 

                                DIVIDEND POLICY
 
  The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying such cash dividends in the foreseeable
future. The Company currently anticipates that it will retain all future
earnings, if any, for use in the development of its business.
 
                                      15

<PAGE>
 

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

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

- --------
(1) See Note 7 of Notes to Financial Statements.
(2) Excludes options and warrants to purchase 1,132,361 shares of Common Stock
    at a weighted average exercise price of $6.50 per share, assuming the
    closing of this offering at an initial public offering price of $9.00 per
    share. See "Management--Stock Option and Employee Benefit Plans" and Notes
    4 and 9 of Notes to Financial Statements.
 
                                      16

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

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

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

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

- --------
  The foregoing excludes options and warrants to purchase 1,132,361 shares of
Common Stock at a weighted average exercise price of $6.50 per share, assuming
the closing of this offering at an initial public offering price of $9.00 per
share. In the event such options and warrants are exercised, investors may
experience further dilution. See "Management--Stock Option and Employee
Benefit Plans" and Notes 4 and 9 of Notes to Financial Statements.
 
                                      17

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

<TABLE>   
<CAPTION>
                                                   YEAR ENDED JUNE 30,                           INCEPTION TO
                               ----------------------------------------------------------------    JUNE 30,
                                  1992         1993         1994         1995          1996          1996
                               -----------  -----------  -----------  -----------  ------------  ------------
<S>                            <C>          <C>          <C>          <C>          <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 Research and
  development
  agreements....               $       --   $       --   $    49,000  $   396,000  $  1,342,000  $  1,787,000
 Grants.........                       --       784,000      823,000      121,000       267,000     1,995,000
                               -----------  -----------  -----------  -----------  ------------  ------------
 Total revenues.                       --       784,000      872,000      517,000     1,609,000     3,782,000
Costs and ex-
 penses:
 Research and
  development...                 1,090,000    2,600,000    5,627,000    4,889,000    10,075,000    25,075,000
 General and
  administrative.                  272,000    1,153,000    1,565,000    1,558,000     2,067,000     7,089,000
                               -----------  -----------  -----------  -----------  ------------  ------------
 Total costs
  and expenses..                 1,362,000    3,753,000    7,192,000    6,447,000    12,142,000    32,164,000
                               -----------  -----------  -----------  -----------  ------------  ------------
Loss before
 other income
 and expense....                (1,362,000)  (2,969,000)  (6,320,000)  (5,930,000)  (10,533,000)  (28,382,000)
                               -----------  -----------  -----------  -----------  ------------  ------------
Other income
 (expense):
 Interest in-
  come..........                    94,000      148,000      245,000      279,000       678,000     1,576,000
 Interest ex-
  pense.........                       --       (26,000)     (65,000)     (66,000)      (62,000)     (219,000)
                               -----------  -----------  -----------  -----------  ------------  ------------
Net loss........               $(1,268,000) $(2,847,000) $(6,140,000) $(5,717,000) $ (9,917,000) $(27,025,000)
                               ===========  ===========  ===========  ===========  ============  ============
Pro forma net
 loss per
 share(1).......                                                                   $       (.98)
                                                                                   ============
Pro forma
 weighted
 average number
 of shares
 outstanding(1).                                                                     10,103,000
                                                                                   ============
<CAPTION>
                                    THREE MONTHS
                                 ENDED SEPTEMBER 30,     INCEPTION TO
                               ------------------------- SEPTEMBER 30,
                                  1995         1996          1996
                               ------------ ------------ --------------
<S>                            <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 Research and
  development
  agreements....               $   172,000  $   195,000  $  1,982,000
 Grants.........                    39,000       29,000     2,024,000
                               ------------ ------------ --------------
 Total revenues.                   211,000      224,000     4,006,000
Costs and ex-
 penses:
 Research and
  development...                 1,195,000    3,160,000    28,235,000
 General and
  administrative.                  446,000      452,000     7,541,000
                               ------------ ------------ --------------
 Total costs
  and expenses..                 1,641,000    3,612,000    35,776,000
                               ------------ ------------ --------------
Loss before
 other income
 and expense....                (1,430,000)  (3,388,000)  (31,770,000)
                               ------------ ------------ --------------
Other income
 (expense):
 Interest in-
  come..........                   149,000      126,000     1,702,000
 Interest ex-
  pense.........                   (18,000)     (11,000)     (230,000)
                               ------------ ------------ --------------
Net loss........               $(1,299,000) $(3,273,000) $(30,298,000)
                               ============ ============ ==============
Pro forma net
 loss per
 share(1).......                            $      (.32)
                                            ============
Pro forma
 weighted
 average number
 of shares
 outstanding(1).                             10,107,000
                                            ============
</TABLE>
    
 

<TABLE>
<CAPTION>
                                                 JUNE 30,
                         -------------------------------------------------------------  SEPTEMBER 30,
                            1992        1993        1994         1995         1996          1996
                         ----------  ----------  -----------  -----------  -----------  -------------
<S>                      <C>         <C>         <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
 Cash, cash equivalents
  and short-term invest-
  ments................. $5,640,000  $3,085,000  $ 6,730,000  $11,068,000  $10,967,000   $ 7,108,000
 Working capital........  5,399,000   2,744,000    6,187,000   10,319,000    9,851,000     6,540,000
 Total assets...........  6,414,000   4,156,000    8,227,000   12,551,000   12,673,000     8,931,000
 Long-term capital lease
  obligations...........        --      311,000      425,000      412,000      189,000       147,000
 Deficit accumulated
  during the development
  stage................. (2,404,000) (5,251,000) (11,391,000) (17,108,000) (27,025,000)  (30,298,000)
 Total shareholders' eq-
  uity..................  6,104,000   3,268,000    6,985,000   11,186,000   10,850,000     7,618,000
</TABLE>

- -------
(1) See Note 1 of Notes to Financial Statements for information concerning the
    computation of pro forma net loss per share and shares used in computing
    pro forma net loss per share.
 
                                      18

<PAGE>
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
   
  Since inception, the Company has been in the development stage and engaged
in research and product development, conducted both on its own behalf and in
connection with various collaborative research and development agreements with
other entities. The Company expects that its revenue sources for at least the
next several years will continue to be limited to grant revenues and research
funding, milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future 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 timing of the
achievement of certain 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 four years. Under the Company's Distribution Agreement
with Cobe, regulatory approval activities for the Company's products for stem
cell therapies outside of the United States will be conducted, and paid for,
by Cobe. As a result of these factors, the Company's results of operations
have 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 results of operations for other periods.     
 
  Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs and administration.
Assuming capital is available to finance such growth, the Company's operating
expenses will continue to increase as a result. At least until such time as
the Company enters into arrangements providing research and development
funding, the net loss will continue to increase as well. The Company has been
unprofitable since its inception and does not anticipate having net income for
several years. Through September 30, 1996, the Company had an accumulated
deficit of $30,298,000. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis, if at all.
 
  This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed under this caption, as well as those discussed under
the caption "Risk Factors" and elsewhere in this Prospectus.
 
RESULTS OF OPERATIONS
 
  THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
 
  Total revenues were $224,000 for the three months ended September 30, 1996
compared to $211,000 for the same period in 1995. These revenues consist
primarily of research and development revenue under the Company's research
collaboration with RPR, which was terminated in September 1996. See "Certain
Transactions."
 
  Total costs and expenses were $3,612,000 for the three months ended
September 30, 1996 compared to $1,641,000 for the same period in 1995. The
increase in costs and expenses in 1996 is primarily the result of an increase
in research and development expenses to $3,160,000 in 1996 from $1,195,000 in
1995 and to a lesser extent by general and administrative expenses, which
increased to $452,000 for the three months ended September 30, 1996 from
$446,000 for the same period in 1995.
 
                                      19

<PAGE>
 
  Interest income was $126,000 for the three months ended September 30, 1996
compared to $149,000 for the same period in 1995 and reflects a decrease in
the levels of cash, cash equivalents and short-term investments in 1996.
 
  The Company's net loss increased to $3,273,000 for the three months ended
September 30, 1996 from $1,299,000 for the same period in 1995, primarily as a
result of increased costs and expenses in 1996.
 
  YEARS ENDED JUNE 30, 1996, 1995 AND 1994
   
  Total revenues were $1,609,000 in 1996, $517,000 in 1995, and $872,000 in
1994. Grant revenues increased to $267,000 in 1996 from $121,000 in 1995,
which had decreased from $823,000 in 1994, reflecting the timing of grant
awards and related research activities, to the extent that such associated
costs are reimbursed under the grants. Grant revenues accounted for 17%, 23%
and 94% of total revenues for the years ended June 30, 1996, 1995 and 1994,
respectively, and are recorded on a cost-reimbursement basis. Revenues from
research and development agreements totaled $1,342,000 in 1996, $396,000 in
1995 and $49,000 in 1994, reflecting research funding received by the Company
under its collaboration with RPR which commenced in September 1995. Revenues
from RPR accounted for 83% and 48% of such revenue in 1996 and 1995,
respectively. In September 1996, the Company's research collaboration with RPR
terminated.     
 
  Total costs and expenses were $12,142,000 in 1996, $6,447,000 in 1995, and
$7,192,000 in 1994. The increase in 1996 costs and expenses, compared with
1995, is primarily the result of an increase in research and development
expense to $10,075,000 in 1996 from $4,889,000 in 1995. The increase in
research and development expense reflects an increase in research, clinical
development and product development activities. The decrease in costs and
expenses in 1995, compared with 1994, is primarily the result of a decrease in
research and development expense to $4,889,000 in 1995 from $5,627,000 in
1994. General and administrative expenses were $2,067,000 in 1996, $1,558,000
in 1995 and $1,565,000 in 1994. The increase in general and administrative
expenses in 1996 is the result of increasing finance, legal and other
administrative and marketing expenses which are expected to continue to
increase in support of the Company's increasing product development and
research activities. The decrease in general and administrative expense in
1995 is reflective of generally lower spending in 1995 as compared to 1994.
 
  Interest income was $678,000 in 1996, $279,000 in 1995, and $245,000 in
1994. The increases in interest income in 1996 and 1995 are due primarily to
corresponding increases in the levels of cash, cash equivalents and short-term
investments for such periods. Interest expense was $62,000 in 1996, $66,000 in
1995, and $65,000 in 1994, reflecting varying amounts outstanding under
capital leases during the periods.
 
  The Company's net loss was $9,917,000 in 1996, $5,717,000 in 1995, and
$6,140,000 in 1994. The Company expects to report substantial net losses for
at least the next several years.
 
  The Company has not generated any net income to date and therefore has not
paid any federal income taxes since inception. At June 30, 1996, the Company
had deferred tax assets totaling $9,650,000 consisting primarily of net
operating loss and research tax credits that begin to expire from 2004 through
2011, if not utilized. A full valuation allowance for deferred tax assets has
been provided. Utilization of federal income tax carryforwards is subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. The completion of this offering is likely to limit the Company's
ability to utilize federal income tax carryforwards under Section 382. The
annual limitation could result in expiration of net operating losses and
research and development credits before their complete utilization.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has financed its operations since inception primarily through
private placements of Preferred Stock and other equity investments, which from
inception, have totaled approximately $37,916,000, and to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest
 
                                      20

<PAGE>
 
earned on cash, cash equivalents, and short-term investments, and funding
under equipment leasing agreements. These financing sources have historically
allowed the Company to maintain adequate levels of cash and other liquid
investments.
 
  The Company's combined cash, cash equivalents and short-term investments
totaled $10,967,000 at June 30, 1996, a decrease of $101,000 from June 30,
1995. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1996 included $8,967,000 to finance the
Company's operations and working capital requirements, $445,000 in capital
equipment additions and $270,000 in scheduled debt payments. During the year
ended June 30, 1996, the Company received $3,500,000 in equity payments from
RPR and $5,965,000 in net proceeds from the sale of Series E Convertible
Preferred Stock. The Company plans to continue its policy of investing excess
funds in short-term, investment-grade, interest-bearing instruments.
 
  The Company's combined cash, cash equivalents and short-term investments
totaled $7,108,000 as of September 30, 1996 compared to $10,967,000 at June
30, 1996. The decrease was primarily attributable to the use of $3,614,000 to
fund operations and working capital requirements during the period and to a
lesser degree by $173,000 in capital equipment purchases and $73,000 in
scheduled debt payments.
 
  In October 1996, the Company executed a financing commitment to provide the
Company with up to $5,000,000 in additional equity funding from Cobe and
$5,000,000 under a convertible loan agreement with another current investor.
In connection with the convertible loan agreement, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made hereby; or (b) 85% of the fair market value
of the Company's Common Stock at the time of exercise. As of the date of this
Prospectus, the Company has not obtained any financing under these
commitments. These funding commitments expire upon the closing of this
offering. On December 10, 1996, the Company issued to Cobe a notice to sell to
Cobe 500,000 shares of Series F Preferred Stock for an aggregate purchase
price of $3,000,000. Such sale is scheduled to close on March 19, 1997. In the
event that this offering closes prior to March 19, 1997, Cobe's obligation to
purchase Series F Preferred Stock under the equity commitment will terminate.
In the event that this offering closes after March 19, 1997, Cobe's
participation in this offering will be reduced by $3,000,000, the amount of
its purchase of Series F Preferred Stock pursuant to the equity commitment.
   
  The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for several years, if
at all, due to the expected increase in spending for research and development
programs and the expected cost of commercializing its product candidates. The
Company may seek additional funding through research and development
agreements with suitable corporate collaborators, 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 its research and
development and other working capital 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 equity securities. There can be no assurance
that such collaboration arrangements, or any public or private financing
transaction, will be available on acceptable terms, if at all, or can be
sustained on a long-term basis. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or
more of its research and development programs, which may have a material
adverse effect on the Company's business. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Funding" and Notes to Financial Statements.
    
                                      21

<PAGE>
 
RECENT PRONOUNCEMENTS
 
  During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based
compensation and incentive plans and requires additional disclosures for those
companies that elect not to adopt the new method of accounting. Adoption of
the new accounting pronouncement is required for the Company's fiscal year
beginning July 1, 1996 and the Company intends to provide the additional
disclosures required by the pronouncement in its financial statements for the
year ended June 30, 1997.
 
  During March 1995, the Financial Accounting Standards Board issued Statement
No. 121, ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," which requires the Company to review
for impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset might not be recoverable. In
certain situations, an impairment loss would be recognized. SFAS 121 will
become effective for the Company's fiscal year beginning July 1, 1996.
Management has studied the effect of implementing SFAS 121 and, based upon its
evaluation, has determined that the impact on the Company's financial
condition and results of operations is not significant for the period ended
September 30, 1996.
 
                                      22

<PAGE>
 

 
                                  BUSINESS
 
OVERVIEW
 
  Aastrom is developing proprietary process technologies and devices for a
range of cell therapy applications, including stem cell therapies and gene
therapy. The Company's lead product under development, the Aastrom Cell
Production System (the "Aastrom CPS"), consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method
will be less costly, less invasive and less time consuming than currently
available stem cell collection methods. The Aastrom CPS is designed as a
platform product which implements the Company's pioneering stem cell
replication technology. The Company also believes that the Aastrom CPS can be
modified to produce a wide variety of other cell types for new, emerging
therapies being developed by others. Prior to commencement of multiple-site
pivotal trials, the Company is conducting a limited "pre-pivotal" trial of the
Aastrom CPS under an Investigational Device Exemption for use in stem cell
therapy. The Company has entered into a strategic collaboration for the
development of the Aastrom CPS in stem cell therapy with Cobe BCT, Inc., a
subsidiary of Gambro AB and a leading provider of blood cell processing
products. Additionally, Aastrom is developing products and processes for the
delivery of ex vivo gene therapy that are designed to address the production
of gene-modified cells.
 
CELL THERAPY
 
  Cell therapy is the use of human cells to treat a medical disorder. The most
common types of cell therapy, blood and platelet transfusions, have been
widely used for many decades. More recently, bone marrow-derived cells have
been used to restore the bone marrow and the blood and immune system cells
which are damaged by chemotherapy and radiation therapy during the treatment
of many cancers. Transplantation of these cells is known as stem cell therapy.
Other cell therapies have recently been used for generating skin and cartilage
tissue and additional cell therapies are being developed by various companies
and researchers to restore immune system cells as well as bone, kidney, liver,
vascular and neuronal tissues.
 
  Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with FDA good manufacturing practices ("GMP"), which are not generally
available in hospitals. As a result, cells needed for such therapies often
require specialized cell production facilities which use labor-intensive,
manual cell culture techniques.
 
  There are numerous forms of cell therapy at an early stage of development.
One such example is ex vivo gene therapy, in which genes are introduced into
target cells in order to selectively correct or modulate disease conditions,
or to modify cells for production of a therapeutic protein. The Company
believes that the successful practice of ex vivo gene therapy will require the
development of processes and products for the reliable, high-efficiency
transfer of genes into cells and a means to produce the necessary dose of the
genetically modified cells under GMP conditions.
 
STEM CELL THERAPY
 
  Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic
system, which is comprised of the bone marrow and cells of the blood and
immune systems. The objective of stem cell therapy is to restore the
hematopoietic system via the infusion and subsequent engraftment of healthy
cells to replace bone marrow and result in the rapid recovery of neutrophils
and platelets that have been destroyed by chemotherapy and radiation therapy.
Stem cell therapy
 
                                      23

<PAGE>
 
reduces the risk of life-threatening infections and bleeding episodes
following cancer treatments. In order to treat many cancers, high intensity
chemotherapy or radiation is often required, which may severely destroy
("myeloablation") or partially destroy ("myelosuppression") the patient's
hematopoietic system.
 
  Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment
the growth of bone marrow. In the adult, all of these cell types originate in
the bone marrow. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under anesthesia, known as bone
marrow collection, or through blood apheresis following treatment with drugs
which cause cells to be released or mobilized from the bone marrow into the
blood. This latter technique is known as a peripheral blood progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently,
it has been demonstrated that the blood cells found in the umbilical cord of
newborn infants include cells effective for stem cell therapy. This source of
cells is being explored by physicians as a major new direction in stem cell
therapy, but is currently limited by difficulties in obtaining sufficient
quantities of these cells.
 
  Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, cells from a suitable
donor are generally required in order to avoid reintroducing the disease
during cell infusion. Such donor derived transplants are termed "allogeneic"
transplants. Procedures using cells derived from the patient are termed
"autologous" transplants.
 
  STEM CELL THERAPY MARKET OPPORTUNITY
 
  The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. Stem cell therapy, in the
form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been
shown to promote the rapid recovery of hematopoietic function, it is now being
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high-
intensity therapies have a greater probability of eradicating dose-sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be
given without stem cell therapy. As a result, some patients are treated with
lower and less effective doses, and fewer cycles, of therapy than might
otherwise be used.
 
  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 stem cell therapy procedures will continue
to grow due to increased incidence and prevalence of cancer, continued
clinical demand for myelotoxic cancer treatment, and the increased cost
effectiveness of stem cell therapy treatments.
 
  Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets because
a delayed recovery of these cells can leave the patient susceptible to life-
threatening infection and bleeding episodes, and this limitation may allow for
the regrowth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such
as Leukine, which enhance the development of mature circulating white blood
cells and platelets from the early progenitor bone-marrow derived cells,
thereby decreasing the time between cycles of therapy and the probability of
infection. However, during high dose or multicycle therapy, the stem and
progenitor cells on which these growth
 
                                      24

<PAGE>
 
factors act are often depleted. Without these cells, growth factors have a
limited or negligible effect. Stem cell therapy generally enhances the
effectiveness of growth factors by introducing target stem and progenitor
cells for growth factors to act upon such that patients generally exhibit a
more rapid and consistent hematopoietic recovery.
 
  CURRENT STEM CELL COLLECTION METHODS
 
  Currently, the bone marrow-derived cells required for stem cell therapy are
collected primarily either through the bone marrow harvest method or the PBPC
collection method.
 
  Bone Marrow Harvest
 
  A traditional bone marrow harvest is a costly and invasive surgical
procedure in which a physician removes approximately one liter of bone marrow
from a patient or donor. This volume of bone marrow is removed using needles
inserted into the cavity of the hip bone. The bone marrow harvest procedure
typically requires between two to four hours of operating room time, with the
physician often making more than 90 separate puncture sites in the hip bone to
collect the necessary amount of bone marrow. Due to the length of the
procedure and the trauma to the patient, general surgical anesthesia is
administered and the patient is often hospitalized for a day. Frequently, the
patient suffers pain from the procedure for several days after being
discharged from the hospital. Furthermore, complications resulting from the
general anesthesia or invasive nature of the procedure occur in a small
percentage of patients. Bone marrow harvest provides a reliable source of stem
and stromal accessory cells and has been the preferred source of cells in
allogeneic transplants.
 
  PBPC Mobilization and Collection
 
  PBPC mobilization is a newer technique in which bone marrow-derived cells
are harvested from a patient's or donor's circulating blood, rather than from
bone marrow. In a PBPC mobilization procedure, the patient receives multiple
injections of growth factors or cytotoxic drugs, or both, over the course of a
week or more, which cause stem and progenitor cells resident in the bone
marrow to mobilize into the circulating blood. The mobilized cells are then
collected by connecting the patient to a blood apheresis device, which draws
and returns large volumes of the patient's or donor's blood in order to
selectively remove the therapeutic volume of stem and progenitor cells. Each
collection procedure typically lasts for two to six hours and is typically
repeated on two to eight consecutive days. Specialized laboratory testing over
the period of mobilization and cell harvesting is necessary to determine that
a sufficient quantity of desired cells has been collected, adding to the cost
of the procedure. The PBPC process has become the predominant procedure in
autologous stem cell therapy.
 
  Procedure Considerations
 
  Although stem cell therapy is being utilized to treat more patients for a
broader range of diseases, its availability continues to be limited by the
high costs of procuring cells, the invasive nature of traditional cell
procurement techniques, and by the technical difficulties related to those
collection procedures. The Company believes that current charges for bone
marrow harvest, processing and infusion are approximately $10,000 to $15,000
per procedure, with considerable variability between institutions. The Company
believes that current charges for PBPC collection, including mobilization and
infusion, are approximately $12,000 to $20,000 for a two to three cycle
procedure, with considerable variability between institutions depending on the
mobilization regimen and the total volume, time and number of aphereses
required.
 
  Overall costs of stem cell therapy include the costs of the cell collection
and infusion procedures, and the costs associated with supporting the patient
during post-transplant recovery. Post-transplant costs include hospitalization
time, antibiotic support, management of adverse reactions to the large volume
cell infusions, and infusions of platelets and red blood cells. Any new stem
cell therapy process will generally need to provide similar recovery endpoints
to be competitive with the current procedures. In this regard, PBPC procedures
have gained popularity compared with bone marrow harvests because the number
of platelet transfusions is reduced for some patients.
 
                                      25

<PAGE>
 
   
  Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC collections. CD34 selection is a process designed to
isolate specific types of cells in order to decrease storage and infusion
problems associated with the large volume of fluids collected in bone marrow
or multiple apheresis procedures. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. A
future objective of CD34 selection is to assist in depleting tumor cells from
the transplant cells collected, thereby expanding the availability of stem
cell therapy to new patient populations.     
 
  UMBILICAL CORD BLOOD
   
  Umbilical cord blood ("UCB"), which is collected directly from the umbilical
cord after delivery, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBPC collection methods. After
collection, UCB is typically frozen for later use in a stem cell therapy
procedure. Storage of UCB samples involves small volumes of cells, compared to
typical bone marrow or PBPC storage. Accordingly, the costs of collection and
storage of UCB cells are comparatively low. This source of cells is also
"tumor-free," such that UCB would be preferred for many current stem cell
therapy procedures in metastatic cancer patients. Before UCB can become a
major supply source for stem cell therapy, a coordinated UCB banking system
must emerge. In this regard, several 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.     
 
  One current disadvantage of UCB is the relatively low number of available
cells. Unlike bone marrow or PBPC harvest, where the collection of more cells
to meet a particular treatment is typically achievable, the number of cells
available from a UCB donor is limited. This problem is exacerbated by the
required cryopreservation of the cells, which causes significant cell loss.
The resultant low cell number is believed to be responsible for the longer
hematopoietic recovery times observed with UCB transplants, as compared with
bone marrow or PBPC transplants. Further, because of the low cell number, UCB
transplants are typically restricted to small patients. Therefore, increasing
the number of therapeutic cells from a UCB sample would facilitate the more
widespread use of UCB transplants. Aastrom believes that providing the
transplant site with the capability to carry out the UCB cell expansion will
be a major factor in the increased use of UCB for stem cell therapy and a
significant business opportunity.
 
AASTROM TECHNOLOGY
 
  Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology and is designed to
enable the ex vivo production of human stem and progenitor cells as an
alternative to the bone marrow harvest and PBPC mobilization methods and as an
enhancement to the UCB collection method. The Company believes that the
Aastrom CPS may be used for other cell production processes which are being
developed by third parties and, in combination with the Company's proprietary
gene transfer process, may have application in the developing field of ex vivo
gene therapy.
 
  CORE TECHNOLOGY
 
  Stem Cell Growth Process
 
  Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of
 
                                      26

<PAGE>
 
natural bone marrow. This process enables the stem and early and late-stage
progenitor cells needed for an effective stem cell therapy procedure to be
concurrently expanded. Growth factors can be added to stimulate specific cell
lineages to grow or to increase cell growth to meet a particular therapeutic
objective. The stem cell growth process can best be completed with little or
no additional stem cell selection or purification procedures. This stem cell
replication process can also enable or augment the genetic modification of
cells by providing the cell division step needed for new genes to integrate
into the stem cell DNA. Currently available cell culture methods tend to
result in a loss of stem cells, either through death or through
differentiation into mature cells. The Company has exclusive licenses to two
U.S. patents and additional applications that cover these processes. See "--
Additional Stem Cell and Other Cell Therapies."
 
  Aastrom Cell Culture Chamber
 
  Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale, and allow for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells used for
lymphocyte therapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive
licenses to two U.S. patents and additional applications for its cell culture
chamber device technology. See "--Additional Stem Cell and Other Cell
Therapies."
 
  Efficient Gene Transfer
   
  Aastrom has developed proprietary processes and device technology that 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 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. 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 is the exclusive licensee of a U.S. Patent, and has
additional applications pending, for this technology. See "Aastrom Product
Candidates For Ex Vivo Gene Therapy."     
 
  THE AASTROM CPS
 
  The Aastrom CPS is the Company's lead product under development for multiple
cell therapy applications, including stem cell therapy. The Aastrom CPS is a
proprietary system that the Company believes will enable the large scale ex
vivo production of a variety of therapeutic cells at health care facilities,
independent laboratories, transplant centers and blood banks, and has been
designed to implement Aastrom's stem cell growth process as well as processes
for the production of other cell types.
 
  The Aastrom CPS is comprised of several components, including single-use
disposable cassettes and reagents and microprocessor-controlled instruments,
which are at various stages of development. The Cell Cassette is a single-use
disposable cartridge which contains the Aastrom cell culture chamber and the
related media supply waste reservoirs and harvest bag. The microprocessor-
controlled instruments include the Incubator which controls the culture
conditions for the operation of the Cell Cassette, and the Processor which
automates the priming and harvesting of the cells from the Cell Cassette. The
System Manager is a user interface computer that is being developed to
simultaneously track and monitor the cell production process in over thirty
CPS Incubators and record relevant process variables and operator actions.
Prototype components of the Aastrom CPS are currently being used in a clinical
trial and ongoing development activities are directed at completing other
production level components of the Aastrom CPS.
 
  The Aastrom CPS is designed to be operated with minimal operator activity by
a medical or laboratory technician and can implement clinical scale cell
production at the patient care site. The end product of the Aastrom process is
a blood-bag container with the cell product. The control and documentation
features of the Aastrom CPS have been designed to meet GMP requirements for
the therapeutic production of cells.
 
                                      27

<PAGE>
 
  AASTROM CPS FOR STEM CELL THERAPY
 
  The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS is based on a comparatively simple process in which a small volume
of bone marrow cells are collected from the patient or donor using a needle
aspiration procedure typically under a local anesthetic or sedative. This cell
mixture is quantified, and an appropriate volume of cells is then inoculated
into one or more Cell Cassettes with the necessary growth media. 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.
 
  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 the Company's 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, procedure time and needle sticks for
currently established cell collection and infusion techniques with the Aastrom
CPS method of cell procurement:
 

<TABLE>
<CAPTION>
                                       CARE     PROCEDURE TIME
CELL SOURCE                         EPISODES(1)   (HOURS)(1)   NEEDLE STICKS(2)
- -----------                         ----------- -------------- ----------------
<S>                                 <C>         <C>            <C>
Bone Marrow Harvest(3).............       8           16              103
PBPC Mobilization and Collec-
 tion(4)...........................      21           39               22
Aastrom CPS(5).....................       2          1-3             4-10
</TABLE>

 --------
 (1) Includes all outpatient, inpatient, and home care episodes.
 (2) Includes bone marrow aspirates, blood samples, catheter placements and
     other venous access, and subcutaneous injections.
 (3) Includes operating room procedure and all preparatory and recovery
     procedures.
 (4) Based on an average of three rounds of apheresis following cell
     mobilization injections.
 (5) Projections, based on data accumulated during the Company's pre-clinical
     research and clinical trials.
 
  Reduced Cost. The Company believes the Aastrom CPS has the potential to
replace more costly, labor intensive and invasive cell collection and infusion
procedures currently employed for stem cell therapy and to reduce physician,
staff and patient time requirements.
 
  Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the requirement for
general surgical anesthesia, multiple drug injections and blood apheresis.
Patient benefits are expected to include fewer needle sticks than with current
cell collection and infusion methods and a reduction in overall patient
procedure time. Additionally, Aastrom's process for cell expansion is expected
to minimize the time requirement for physicians compared with bone marrow
harvest.
 
  Enhanced Multicycle High-Dose Chemotherapy.  The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.
 
  Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.
 
                                      28

<PAGE>
 
  Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because transplant may
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells in their marrow or PBPC transplant, which can
reestablish the cancer in the patient following transplant. The Aastrom CPS
process may offer benefits for these groups of patients. The Company and other
investigators have shown that some primary human tumor cells die or do not
grow during hematopoietic cell culture. Further, the smaller volume of
starting cells used for the Aastrom CPS compared with bone marrow harvest or
PBPC transplants may provide approximately 10 to 70 fold less tumor cells in a
transplant. This combination of passive depletion during culture with the
lower starting volume of tumor cells may result in a tumor-free or tumor-
reduced cell product for transplant. The benefit of such tumor depletion, if
any, will vary depending upon the type of cancer and state of disease.
 
CLINICAL DEVELOPMENT
 
  The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and in Europe for more general cell therapy applications. The
Company also intends to pursue approval of the Aastrom CPS for additional
clinical indications.
 
  The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a PMA application to, and obtain approval from, the FDA to allow it to market
this product in the United States. In order to obtain PMA approval, the
Company will be required to complete clinical trials under an IDE. See "--
Government Regulation--Devices."
 
  In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.
 
  Aastrom completed the first feasibility trial of its cell production system
technology under an IDE at the MD Anderson Cancer Center in October 1995. In
this trial, ten breast cancer patients, who were subjected to myeloablative
chemotherapy, were treated with cells obtained from a bone marrow harvest and
with cells produced from a sample of such cells with a predecessor of the
Aastrom CPS. The patients exhibited standard clinical recoveries, providing
evidence of the clinical safety of cells obtained from the Company's cell
production process and of the feasibility of cell production with a
predecessor of the Aastrom CPS by clinical personnel at an investigational
site.
   
  Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial under an IDE submitted to the FDA. This clinical trial is designed to
demonstrate that cells produced using the Aastrom CPS can provide
hematopoietic recovery in accordance with trial endpoints in breast cancer
patients who have received myeloablative chemotherapy. Bone marrow obtained
from the patients by traditional methods will be available for precautionary
reasons at defined clinical stages. The results from the five patients accrued
at the first trial site have provided evidence of the clinical safety of the
Aastrom CPS-produced cells in patients and that the hematopoietic recovery
endpoints specified for the trial are achievable. The patients at this trial
site were Stage IV breast cancer patients who had received significant prior
cytotoxic therapies for their cancer. Four of these five patients received the
precautionary bone marrow pursuant to the trial protocol. Preliminary results
from the first trial site were reviewed with the FDA, and the IDE was amended
to expand the trial to a second site. The amended IDE provided for the
enrollment of Stage II, III and IV patients, and a delayed use of the
precautionary bone marrow. As of the date of this Prospectus, patient data
from this site provides further evidence that the hematopoietic recovery
endpoints specified for the trial are achievable. Following review by the FDA,
the IDE was recently amended to expand the trial to a third site. As of the
date of this Prospectus, patient accrual in this trial is ongoing.     
 
                                      29

<PAGE>
 
  The objective of the current and anticipated future trials is to establish
the protocol for the pivotal trial of the Aastrom CPS in autologous stem cell
therapy in breast cancer. Provided that these pre-pivotal trials provide
further evidence of feasibility and safety of the cells produced in the
Aastrom CPS, the Company anticipates initiating a pivotal clinical trial at
multiple sites no earlier than mid-1997, with the patient enrollment typical
to support a PMA filing, although this schedule is subject to numerous risks
and uncertainties. See "Risk Factors--Uncertainties Related to Preclinical and
Clinical Testing."
 
  Aastrom, in partnership with Cobe, intends to initiate a clinical trial in
Europe by mid-1997 to evaluate the use of Aastrom CPS cells to promote
hematopoietic recovery in breast cancer patients undergoing aggressive
myelosuppressive chemotherapy. The Company intends to seek approval to market
the Aastrom CPS in Europe through CE Mark Registration. See "--Government
Regulation--Regulatory Process in Europe."
 
  The preliminary results of the Company's pre-pivotal trial may not be
predictive of results that will be obtained from subsequent patients in the
trial or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trial will be successful, or that PMA
approval or required foreign regulatory approvals for the Aastrom CPS will be
obtained in a timely fashion, or at all.
 
BUSINESS STRATEGY
 
  Aastrom's objective is to build a leadership position in cell therapy
process technology. The primary elements of the Company's business strategy
are as follows:
 
  Establish Consumable Based Business Model. Aastrom's strategy is to sell the
Aastrom CPS to institutions, hospitals, and other clinical care or commercial
cell production facilities that are administering cell therapy. The Company
plans to obtain ongoing revenue from the sale of single-use disposable Cell
Cassettes and related cell culture media and reagents, which are utilized in
individual cell therapy applications. After cells are cultured in the Cell
Cassette, the cassette is discarded and a new cassette is utilized for a
subsequent patient. Along with ongoing revenue from the sale of instruments
and disposables for cell therapy applications, the Company believes it will be
able to obtain license revenue from its stem cell therapy applications for its
proprietary stem cell processes.
 
  Focus Initially on Established and Reimbursed Therapies. Aastrom will seek
to establish the use of the Aastrom CPS in the field of stem cell therapy for
the treatment of toxicity resulting from many cancer therapies, including
those for breast cancer, lymphoma, ovarian cancer, germ cell cancers,
leukemias and aplastic anemias. Stem cell therapy is a well-established and
growing treatment modality in cancer therapy, and current cell collection
procedures are widely reimbursed by third party payors.
 
  Leverage Platform Technology Across Multiple Market Opportunities. In
addition to stem cell therapy applications, the Company believes that the
Aastrom CPS may serve as a platform product that can be used to produce a
variety of other cells for multiple therapeutic applications, such as T-cells
for use in lymphocyte therapies, chondrocytes for cartilage replacement, and
mesenchymal cells for use in certain solid tissue therapies. The Company
believes that if the Aastrom CPS is well established as a method for cell
production for use in stem cell therapy, the system will be positioned for
commercialization of new cell and ex vivo gene therapies that are under
development.
 
  Market Through Collaborative Relationships. The Company plans to reach end-
user markets through collaborative relationships with companies that have
established positions in those markets. In 1993, the Company formed a
strategic partnership with Cobe, a leading provider of blood cell processing
equipment and disposables. Cobe is the Company's exclusive, worldwide
distributor of the Aastrom CPS for stem cell therapy applications, not
including stem cell gene therapy. The Company will seek to establish
additional collaborations for other cell therapies as those therapies and the
Company's product lines develop. See "Business--Strategic Relationships."
 
 
                                      30

<PAGE>
 
ADDITIONAL STEM CELL AND OTHER CELL THERAPIES
 
  The Company believes that the Aastrom CPS hardware and disposables may be
developed to serve as platform products for application in a variety of other
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; and (iv) reducing the need
for specialized, environmentally controlled facilities.
 
  Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized culture environments and which may need to be
incorporated within the Company's existing cell cassettes. There can be no
assurance that the Company will be able to successfully modify or develop
existing or future products to enable such additional cell production
processes. 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. 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
 
                                      31

<PAGE>
 
autoimmune diseases such as rheumatoid arthritis, multiple sclerosis and lupus
erythematosus. The generic cause of these diseases is a malfunctioning immune
system, including T-lymphocytes. Clinical trials in which the patient receives
treatment resulting in immune ablation (usually involving myelotoxic cancer
drugs or radiation), followed by stem cell therapy to restore the bone marrow
and cells of the blood and immune system, have demonstrated remission of the
autoimmune disease in some patients.
 
  Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell
therapy to facilitate successful solid organ and tissue transplants between
human donors and recipients, as well as using organs from non-human species
for transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior
to the organ transplant, can provide for reduction of the normal immune
rejection response by the transplant recipient (e.g. heart, lung, liver or
kidney transplants).
 
  A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are available, which has
traditionally been the source of cells for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures 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
 
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<PAGE>
 
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 distributor of 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.
 
                                      33

<PAGE>
 
  In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and other
rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe has elected to purchase $5,000,000 of Common Stock in
this offering at the initial public offering price per share. See "Description
of Capital Stock--Rights of Cobe" and "Certain Transactions."
 
MANUFACTURING
 
  The Company has no current intention of internally manufacturing its product
candidates and, accordingly, is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.
 
  On May 10, 1994, the Company entered into a Collaborative Product
Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this
agreement, the Company and SeaMED will collaborate on the further design of
certain instrument components in the Aastrom CPS, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory
and clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a "time and materials" basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. Subject to certain
conditions, the Company has committed to enter into a manufacturing agreement
with SeaMED for commercial manufacture of the instrument components for three
years after shipment by SeaMED of the first commercial unit pursuant to a
pricing formula set forth in the agreement. The Company retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement.
 
  On November 8, 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
agreement, the Company and Ethox will collaborate on the further design of
certain bioreactor assembly and custom tubing kit components of the Aastrom
CPS, and enable Ethox to manufacture pre-production units of such components
for laboratory and clinical evaluation. The Company is paying Ethox for its
design and production work on a "time and materials" basis, utilizing Ethox's
customary hourly billing rates and actual costs for materials. The Company
retains all proprietary rights to its intellectual property which are utilized
by Ethox pursuant to this Agreement.
 
  In April 1996, the Company entered into a five-year License and Supply
Agreement with Immunex to purchase and resell certain cytokines and ancillary
materials for use in conjunction with the Aastrom CPS. The agreement required
the Company to pay Immunex an initial up-front fee of $1,500,000 to be
followed by subsequent annual 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. Unless earlier terminated or renewed by the Company for an
additional 5 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.
 
  On December 16, 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
 
                                      34

<PAGE>
 
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 and its licensors are seeking patent protection for technologies
related to (i) human stem and progenitor cell production processes; (ii)
bioreactors and systems for stem and progenitor cell production and production
of other cells; and (iii) gene transfer devices and processes. The Company has
exclusive license rights to five issued United States patents that present
claims to (i) certain methods for ex vivo stem cell division as well as ex
vivo human hematopoietic stem cell stable genetic transformation and expanding
and harvesting a human hematopoietic stem cell pool; (ii) certain apparatus
for cell culturing, including a bioreactor suitable for culturing human stem
cells or human hematopoietic cells; and (iii) certain methods of infecting or
transfecting target cells with vectors. Patents equivalent to two of these
United States patents have also been issued in other jurisdictions: one in
Australia and another in Canada and under the European Patent Convention.
These eight issued patents are due to expire beginning in 2006, through 2013.
In addition, the Company and its exclusive licensors have filed applications
for patents in the United States and equivalent applications in certain other
countries claiming other aspects of the Company's products and processes,
including five United States patent applications and corresponding
applications in other countries related to various components of the Aastrom
CPS. Of these pending patent applications, the Company has received notices of
allowance for certain claims in a United States application relating to
methods for obtaining ex vivo stem cell division, and claims in a European
Patent Convention application and in a United States application relating to
methods for efficient proliferation of hematopoietic cells in culture.
 
  The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company or its licensors
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
patents that have been or may be issued to the Company or its licensors will
be held valid if subsequently challenged or that others will not claim rights
in or ownership of the patents and other proprietary rights held or licensed
by the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that have been or may be issued to the
Company or its licensors. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's and its licensors' pending patent applications, nor can the Company
be certain that it will not infringe any patents that may issue to others on
such applications.
 
  The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose
its rights under the patents held by the University of Michigan and Dr.
Cremonese, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--University of
Michigan Research Agreement and License Agreement" and "--License Agreement
with J.G. Cremonese."
 
                                      35

<PAGE>
 
  The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.
 
  The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurances that the
Company would be able to obtain such licenses or that such licenses, if
available, could be obtained on commercially reasonable terms. Furthermore,
the failure to either develop a commercially viable alternative or obtain such
licenses could result in delays in marketing the Company's proposed products
or the inability to proceed with the development, manufacture or sale of
products requiring such licenses, which could have a material adverse effect
on the Company's business, financial condition and results of operations. If
the Company is required to defend itself against charges of patent
infringement or to protect its own proprietary rights against third parties,
substantial costs will be incurred regardless of whether the Company is
successful. Such proceedings are typically protracted with no certainty of
success. An adverse outcome could subject the Company to significant
liabilities to third parties and force the Company to curtail or cease its
development and sale of its products and processes.
 
  Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business
Innovation Research Grant obtained from the Department of Health and Human
Services. As a result of such funding, the United States Government has
certain rights in the technology developed with the funding. These rights
include a non-exclusive, paid-up, worldwide license under such inventions for
any governmental purpose. In addition, the government has the right to require
the Company to grant an exclusive license under any of such inventions to a
third party if the government determines that (i) adequate steps have not been
taken to commercialize such inventions, (ii) such action is necessary to meet
public health or safety needs or (iii) such action is necessary to meet
requirements for public use under federal regulations. Additionally, under the
federal Bayh Dole Act, a party which acquires an exclusive license for an
invention that was partially funded by a federal research grant is subject to
the following government rights: (i) products using the invention which are
sold in the U.S. are to be manufactured substantially in the U.S., unless a
waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. government may use the invention for its
own needs.
 
  UNIVERSITY OF MICHIGAN RESEARCH AGREEMENT AND LICENSE AGREEMENT
 
  In August 1989, the Company entered into a Research Agreement (the "Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of
 
                                      36

<PAGE>
 
Stephen G. Emerson, M.D., Ph.D., as the principal inventor, together with
Michael F. Clarke, M.D., and Bernhard O. Palsson, Ph.D., as co-inventors.
Pursuant to the Research Agreement, the Company was granted the right to
acquire an exclusive, worldwide license to utilize all inventions, know-how
and technology derived from the research project. By Extension Agreements, the
Company and the University extended the scope and term of the Research
Agreement through December 1994.
 
  On March 13, 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, dated March 13, 1992, October
8, 1993 and June 21, 1995. Pursuant to this License Agreement, (i) the Company
acquired exclusive worldwide license rights to the patents and know-how for
the production of blood cells and bone marrow cells as described in the
University's research project or which resulted from certain further research
conducted through December 31, 1994, and (ii) the Company is obligated to pay
to the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.
 
  LICENSE AGREEMENT WITH J. G. CREMONESE
 
  In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to
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 U.S., in addition to meeting
FDA regulations, the Company is also subject to other federal laws, such as
the Occupational Safety and Health Act and the Environmental Protection Act,
as well as certain state laws.
 
  REGULATORY PROCESS IN THE UNITED STATES
 
  To the Company's knowledge, it is the first to develop a culture system for
ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.
 
  The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS product for
 
                                      37

<PAGE>
 
stem cell therapy as a Class III medical device through the Center for
Biologics Evaluation and Research. However, there can be no assurance that FDA
will ultimately regulate the Aastrom CPS as a medical device.
 
  Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued a draft document concerning the
regulation of umbilical cord blood stem cell products. If the FDA adopts the
regulatory approach set forth in the draft document, the FDA may require
separate regulatory approval for such cells in some cases. The FDA also
recently proposed a new type of license, called a biologic license application
("BLA"), for autologous cells manipulated ex vivo and intended for structural
repair or reconstruction. This proposal may indicate that the FDA will extend
a similar approval requirement to other types of autologous cellular
therapies, such as autologous cells for stem cell therapy. Any such additional
regulatory or approval requirements could significantly delay the introduction
of the Company's product candidates to the market, and have a material adverse
impact on the Company.
 
  Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that the Company's product
candidates will ultimately receive regulatory approval.
 
  Regardless of how the Company's product candidates are regulated, the
Federal Food, Drug, and Cosmetic Act and other Federal statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, distribution, use, reporting,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in civil penalties, recall, injunction or seizure of
products, refusal of the government to approve or clear product approval
applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.
 
  DEVICES
 
  In order to obtain FDA approval of a new medical device sponsors must
generally submit proof of safety and efficacy. In some cases, such proof
entails extensive clinical and preclinical laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing testing and surveillance of approved products, or place
other conditions on the approvals. These requirements could cause it to be
more difficult or expensive to sell the products, and could therefore restrict
the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.
 
  If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of pre-clinical and laboratory testing. If the IDE
application is approved, human clinical trials may commence at a specified
number of investigational sites with the number of patients approved by the
FDA.
 
  The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre-
market notification, and are subject to other general controls. Class II
devices may be subject to additional regulatory controls, including
performance standards and other special controls, such as postmarket
surveillance. Class III devices, which are either invasive or life-sustaining
products, or new products never before
 
                                      38

<PAGE>
 
marketed (for example, non-"substantially equivalent" devices), require
clinical testing to demonstrate safety and effectiveness and FDA approval
prior to marketing and distribution. The FDA also has the authority to require
clinical testing of Class I and Class II devices.
 
  If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported
by extensive data, including preclinical and human clinical trial data, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days
to review a PMA application once it is filed, although PMA application reviews
more often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.
 
  Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the Aastrom CPS,
and is currently conducting a pre-pivotal clinical study under one of these
IDEs. The Company believes that the Aastrom CPS product will be regulated by
the FDA as a Class III device, although there can be no assurance that the FDA
will not choose to regulate this product in a different manner.
 
  The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of its devices, as well as product malfunctions that
are likely to cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits a company from
promoting an approved device for unapproved applications and reviews company
labeling for accuracy.
 
  BIOLOGICAL PRODUCTS
 
  For certain of the Company's new products which may be regulated as
biologics, the FDA requires (i) preclinical laboratory and animal testing,
(ii) submission to the FDA of an investigational new drug ("IND") application
which must be effective prior to the initiation of human clinical studies,
(iii) adequate and well-controlled clinical trials to establish safety and
efficacy of the product for its intended use, (iv) submission to the FDA of a
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.
 
  Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the
IND. Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company
is not notified of objections within that period, clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases.
Phase I represents the initial administration of the drug or biologic to a
small group of humans, either healthy volunteers or patients, to test for
safety and other relevant factors. Phase II involves studies in a small number
of patients to assess the efficacy of the product, to ascertain dose tolerance
and the optimal dose range and to gather additional data relating to safety
and potential adverse effects. Once an investigational drug is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, multi-center Phase III studies are initiated to establish safety
and efficacy in an expanded patient population and multiple clinical study
sites. The FDA reviews both the clinical plans and the results of the trials
and may request the Company to discontinue the trials at any time if there are
significant safety issues.
 
                                      39

<PAGE>
 
  The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
 
  Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, an ELA must be filed with the FDA. The
ELA describes the facilities, equipment and personnel involved in the
manufacturing process. An establishment license is granted on the basis of
inspections of the applicant's facilities in which the primary focus is on
compliance with GMP and the ability to consistently manufacture the product in
the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.
 
  As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may
also be required for a biological product to be shipped out of state.
 
  REGULATORY PROCESS IN EUROPE
 
  The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies to medical laboratory equipment and
supplies including, among other products, many devices that are used for the
collection and processing of blood for patient therapy. Certain ancillary
products (e.g., biological reagents) used with the Aastrom CPS may be
considered Class III medical devices.
 
  The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private and state organizations
which operate under license from the EU to certify that appropriate quality
assurance standards and compliance procedures are followed by developers and
manufacturers of medical device products or, alternatively, that a
manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.
 
COMPETITION
 
  The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical
and marketing resources significantly greater than those of the Company. In
addition, many biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization
of products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, is
inconclusive as to whether or not cells expanded in the Aastrom CPS will
enable hematopoietic recovery within the time frames currently achieved by
 
                                      40

<PAGE>
 
the bone marrow harvest and PBPC collection methods. In addition, the bone
marrow harvest and PBPC collection methods have been widely practiced for a
number of years and, recently, the patient costs associated with these
procedures have begun to decline. There can be no assurance that the Aastrom
CPS method, if approved for marketing, will prove to be competitive with these
established collection methods on the basis of hematopoietic recovery time,
cost or otherwise. The Company is aware of certain other products manufactured
or under development by competitors that are used for the prevention or
treatment of certain diseases and health conditions which the Company has
targeted for product development. In particular, the Company is aware that
competitors such as Amgen, Inc., CellPro, Incorporated, Systemix, Inc., Baxter
Healthcare Corp. and RPR are in advanced stages of development of technologies
and products for use in stem cell therapy and other market applications
currently being pursued by the Company. In addition, Cobe, a significant
shareholder of the Company, is a market leader in the blood cell processing
products industry and, accordingly, a potential competitor of the Company.
There can be no assurance that developments by others will not render the
Company's product candidates or technologies obsolete or noncompetitive, that
the Company will be able to keep pace with new technological developments or
that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
  The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company's products are
developed and ultimately approved by regulatory authorities. In addition, the
first product to reach the market in a therapeutic or preventive area is often
at a significant competitive advantage relative to later entrants to the
market. Accordingly, the relative speed with 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 November 30, 1996, the Company employed approximately 65 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.
 
LEGAL PROCEEDINGS
 
  The Company is not party to any material legal proceedings, although from
time to time it may become involved in disputes in connection with the
operation of its business.
 
                                      41

<PAGE>
 

                                  MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
  The following table provides information concerning directors and executive
officers of the Company as of November 30, 1996:
 

<TABLE>
<CAPTION>
              NAME                    AGE     POSITION
              ----                    ---     --------
<S>                                <C>        <C>
Robert J. Kunze(2)(3)............      61     Chairman of the Board; Director
R. Douglas Armstrong, Ph.D.(3)...      43     President and Chief Executive Officer; Director
James Maluta.....................      49     Vice President, Product Development
Todd E. Simpson..................      35     Vice President, Finance & Administration; Chief
                                              Financial Officer; Secretary; and Treasurer
Walter C. Ogier..................      40     Vice President, Marketing
Thomas E. Muller, Ph.D...........      61     Vice President, Regulatory Affairs
Alan K. Smith, Ph.D..............      41     Vice President, Research
Stephen G. Emerson, M.D., Ph.D...      43     Director; Scientific Advisor
Albert B. Deisseroth, M.D.,
 Ph.D.(2)........................      55     Director; Scientific Advisor
G. Bradford Jones(1)(3)..........      41     Director
Horst R. Witzel, Dr.-Ing.........      69     Director
Edward C. Wood, Jr.(1)(3)........      52     Director
</TABLE>

- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Executive 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 seven members. The Bylaws also provide that the
Board of Directors will serve staggered three-year terms, or until their
successors are elected and qualified. The terms of office of the Company's
current directors expire as follows: Mr. Jones, Dr. Deisseroth and Mr. Wood,
1999; Mr. Kunze and Dr. Emerson, 1998; and Dr. Armstrong and Dr. Witzel, 1997.
Officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors or officers of the
Company.
 
  Robert J. Kunze a director of the Company since its inception in 1989, is a
founder of the Company and served as its President and Chief Executive Officer
through May 1991. Since 1987, he has been a General Partner of H&Q Life
Science Venture Partners, a venture capital fund specializing in medical
products and biotechnology investments. Previous to that, Mr. Kunze was
Managing Partner of Hambrecht & Quist Venture Partners. Prior to that he
served as a senior executive with W.R. Grace & Co. and General Electric. Mr.
Kunze also serves on the Board of Directors of Escalon Medical Corporation.
 
  R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director
and as its President and Chief Executive Officer. From 1987 to 1991, Dr.
Armstrong served in different capacities, including as Executive Vice
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
a 250-employee scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.
 
  James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with 25 years of experience in the industry,
principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr.
Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for
blood cell processing and apheresis. Mr. Maluta held other engineering
management positions and also was director of Quality Assurance for Cobe BCT.
Mr. Maluta received his degree in electrical engineering from the University
of Wisconsin.
 
                                      42

<PAGE>
 
  Todd E. Simpson joined the Company in January 1996 as Vice President,
Finance and Administration and Chief Financial Officer and is also the
Company's Secretary and Treasurer. Prior to that, Mr. Simpson was Treasurer of
Integra LifeSciences Corporation ("Integra"), a biotechnology company, which
acquired Telios Pharmaceuticals, Inc. ("Telios") in August 1995 in connection
with the reorganization of Telios under Chapter 11 of the U.S. Bankruptcy
Code. Mr. Simpson served as Vice President of Finance and Chief Financial
Officer of Telios up until its acquisition by Integra and held various other
financial positions at Telios after joining that company in February 1992.
Telios was a publicly-held company engaged in the development of
pharmaceutical products for the treatment of dermal and ophthalmic wounds,
fibrotic disease, vascular disease, and osteoporosis. From August 1983 through
February 1992, Mr. Simpson practiced public accounting with the firm of Ernst
& Young, LLP. Mr. Simpson is a Certified Public Accountant and received his
B.S. degree in Accounting and Computer Science from Oregon State University.
 
  Walter C. Ogier joined the Company in March 1994 as Director of Marketing
and was promoted to Vice President, Marketing during 1995. Prior to that, Mr.
Ogier was at Baxter Healthcare Corporation's Immunotherapy Division, where he
served as Director, Business Development from 1992 to 1994 and as Manager,
Marketing and Business Development in charge of the company's cell therapy
product lines from 1990 to 1992. Mr. Ogier previously held positions with
Ibbottson Associates and with the Business Intelligence Center at SRI
International (formerly Stanford Research Institute). Mr. Ogier received his
B.A. degree in Chemistry from Williams College in 1979 and his Masters of
Management degree from the Yale School of Management in 1987.
 
  Thomas E. Muller, Ph.D. joined the Company in May 1994 as Vice President,
Regulatory Affairs. Prior to that, Dr. Muller was Director, Biomedical Systems
with W.R. Grace & Company in Lexington, Massachusetts. Prior to this, Dr.
Muller was Vice President, Engineering and Director of Research and
Development with the Renal Division of Baxter Healthcare in Deerfield,
Illinois. Dr. Muller has also served as Adjunct Professor at Columbia
University and as Visiting Professor at the University of Gent, Belgium. Dr.
Muller graduated from the Technical University in Budapest, Hungary, in 1956
with a B.S. in Chemical Engineering. Dr. Muller received his M.S. degree in
1959 and was awarded a Ph.D. in 1964, both in Polymer Chemistry, from McGill
University.
 
  Alan K. Smith, Ph.D. joined the Company in November 1995 as Vice President,
Research. Previously, Dr. Smith was Vice President of Research and Development
at Geneic Sciences, Inc., a developmental stage bone marrow transplantation
company. Prior to that, Dr. Smith held the position of Director, Cell
Separations Research and Development of the Immunotherapy Division of Baxter
Healthcare Corporation. In this capacity, he was responsible for the research
and development activities for a stem cell concentration system approved for
clinical use in Europe and currently in pivotal clinical trials in the United
States. Dr. Smith has also held positions as Research and Development Manager
at BioSpecific Technologies, as Director of Biochemistry at HyClone
Laboratories and as a member of the Board of Directors of Dallas Biomedical.
Dr. Smith received his B.S. degree in Chemistry from Southern Utah State
College in 1976 and a Ph.D. in Biochemistry from Utah State University in
1983.
 
  Stephen G. Emerson, M.D., Ph.D. a director since the inception of the
Company in 1989, is a scientific founder of the Company and has been an active
advisor of the Company since that time. Dr. Emerson has been a Professor of
Medicine at the University of Pennsylvania since 1994 where he serves as head
of Hematology and Oncology. From 1991 to 1994, Dr. Emerson was an Associate
Professor of Medicine at the University of Michigan. Dr. Emerson received his
doctorate degrees in Medicine and Cell Biology/Immunology from Yale
University. He completed his internship and residency at Massachusetts General
Hospital and his clinical and research fellowship in hematology at the Brigham
and Women's Hospital, the Dana-Farber Cancer Institute and Children's Hospital
Medical Center.
 
  Albert B. Deisseroth, M.D., Ph.D. a director since August 1991, currently
serves as an Ensign Professor of Medicine and the Chief, Section of Medical
Oncology at Yale University and is a professor at both the University of Texas
Graduate School of Biomedical Sciences and the University of Texas Health
Science Center Medical
 
                                      43

<PAGE>
 
School in Houston, Texas. Prior to that, Dr. Deisseroth had been Chairman of
the Department of Hematology and a Professor of Medicine and Cancer Treatment
and Research at the University of Texas, M.D. Anderson Cancer Center in
Houston, Texas. Previous to this, Dr. Deisseroth served as Professor of
Medicine at the University of California, San Francisco, and Chief,
Hematology/Oncology at the San Francisco Veteran's Administration Medical
Center. Dr. Deisseroth received his doctorate degrees in Medicine and
Biochemistry from the University of Rochester. Dr. Deisseroth is currently a
member of the Scientific Advisory Boards of Ingenex, Inc., Genvec, Inc. and
Incell.
 
  G. Bradford Jones a director since April 1992, is a general partner of
Brentwood V Ventures, L.P., the general partner of Brentwood Associates V,
L.P.  Brentwood Associates V, L.P. is a partnership organized by the firm
Brentwood Venture Capital, which Mr. Jones joined in 1981. Mr. Jones was
elected to the Board of Directors of the Company pursuant to the terms of the
Series B Preferred Stock Purchase Agreement dated April 7, 1992 with the
Company, of which Brentwood Associates V, L.P. is a party. Mr. Jones received
a B.A. degree in Chemistry and an M.A. degree in Physics from Harvard
University and M.B.A. and J.D. degrees from Stanford University. Mr. Jones
also serves on the Board of Directors of Interpore International, ISOCOR, Onyx
Acceptance Corporation, Plasma & Materials Technologies, and several
privately-held companies.
 
  Horst R. Witzel, Dr.-Ing. a director since June 1994, served as Chairman of
the Board of Executive Directors of Schering AG in Berlin, Germany from 1986
until his retirement in 1989, whereupon he became a member of the Supervisory
Board of Schering AG until 1994. Prior to that, Dr. Witzel held various
leadership positions in research and development with Schering AG where he was
responsible for worldwide production and technical services. Dr. Witzel
received his doctorate in chemistry from the Technical University of West
Berlin. Dr. Witzel also serves on the Board of Directors of The Liposome
Company, Inc. and Cephalon, Inc. and is a member of the Supervisory Board of
Brau and Brunnen AG.
 
  Edward C. Wood, Jr. a director since August 1994, has served as president of
Cobe BCT, Inc., a division of Cobe Laboratories, Inc., since 1991. Cobe is a
subsidiary of Gambro AB, a Swedish company, and is a leading provider of blood
cell processing products. Prior to that, Mr. Wood held various positions in
manufacturing, research and development, and marketing with Cobe. Mr. Wood
received degrees in chemistry from Harvey Mudd College and in management from
the University of Colorado.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
  The Company has adopted provisions in its Restated Articles of Incorporation
that limit the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors, except under certain
circumstances which include breach of the director's duty of loyalty to the
Company or its shareholders, acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of the law.
 
  The Company's Bylaws provide that the Company shall indemnify its directors
to the fullest extent authorized or permitted by the Michigan Business
Corporation Act. Additionally, the Company has entered into an Indemnification
Agreement, originally dated as of December 14, 1993 (the "Indemnification
Agreement"), with certain of its directors, officers and other key personnel,
which may, in certain cases, be broader than the specific indemnification
provisions contained under applicable law. The Indemnification Agreement may
require the Company, among other things, to indemnify such officers, directors
and key personnel against certain liabilities that may arise by reason of
their status or service as directors, officers or employees of the Company, to
advance the expenses incurred by such parties as a result of any threatened
claims or proceedings brought against them as to which they could be
indemnified, and to cover such officers, directors and key employees under the
Company's directors' and officers' liability insurance policies to the maximum
extent that insurance coverage is maintained.
 
  At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification by
the Company will be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
 
                                      44

<PAGE>
 

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

<TABLE>
<CAPTION>
                                        ANNUAL COMPENSATION
                               -------------------------------------
     NAME AND 1996                                    OTHER ANNUAL      ALL OTHER
   PRINCIPAL POSITION     YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)
   ------------------     ---- ---------- --------- ---------------- ----------------
<S>                       <C>  <C>        <C>       <C>              <C>
R. Douglas Armstrong,     1996  $156,962   $55,000         --             $8,885(1)
 Ph.D...................
 President and Chief 
 Executive Officer

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

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

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

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

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

- --------
(1) The 5% and the 10% assumed rates of appreciation are established by the
    rules of the Securities and Exchange Commission and do not represent the
    Company's estimate or projection of the future Common Stock price. If the
    Common Stock price of $1.20 on the date of grant for the options granted
    in 1996 were to appreciate at the rates indicated, it would be $1.95 per
    share (at a 5% compounded appreciation) and $3.11 per share (at a 10%
    compounded appreciation) on the date of expiration of those options.
 
                                      45

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

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

- --------
(1) The option value represents fair market value of the underlying securities
    on the exercise date minus the aggregate exercise price of such options,
    multiplied by the number of shares of Common Stock subject to the option.
    For purposes of this calculation, a fair market value of $3.20 per share
    was used, the fair market value of the securities as determined by the
    Board of Directors on June 30, 1996.
 
  No compensation intended to serve as incentive for performance to occur over
a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the persons named in the
Summary Compensation Table. The Company does not have any defined benefit or
actuarial plan with any of the persons named in the Summary Compensation Table
under which benefits are determined primarily by final compensation or average
final compensation and years of service.
 
EMPLOYMENT AGREEMENTS
 
  The Company has a policy of entering into employment agreements with all of
its employees, and has entered into such agreements with all of its executive
officers other than Dr. Armstrong. Such employment agreements generally
establish salary levels (which are subject to periodic review) and provide for
customary fringe benefits such as vacation leave, sick leave and health
insurance. The agreements also generally provide for the protection of
confidential information and the assignment to the Company of inventions
conceived by the employee during his or her employment and permit the
termination of the employment relationship by either party upon fourteen days
prior written notice. The following is a summary of the employment agreements
between the Company and its executive officers.
 
  The Company entered into employment agreements with no defined terms with
James Maluta, Walter C. Ogier, Thomas E. Muller, Ph.D., Alan K. Smith, Ph.D.
and Todd E. Simpson in June 1992, February 1994, April 1994, October 1995 and
December 1995, respectively. Pursuant to these agreements, the Company agreed
to pay Messrs. Maluta, Ogier, Muller, Smith and Simpson annual base salaries
of $90,000, $87,500, $110,000, $122,500 and $122,500, respectively, certain of
which base salaries have been increased by the Board of Directors and are
subject to annual review and adjustment. Pursuant to the terms of the
foregoing employment agreements, either party may generally terminate the
employment relationship without cause at any time upon 14 days prior written
notice to the other party or immediately with cause upon notice.
 
 
                                      46

<PAGE>
 
STOCK OPTION AND EMPLOYEE BENEFIT PLANS
 
  1989 STOCK OPTION PLAN
 
  In 1989, the Company established the 1989 Stock Option Plan. As of September
30, 1996, options to purchase an aggregate of 932,266 shares of Common Stock
have been exercised at $0.15 per share. Options to purchase 13,127 shares of
Common Stock at $0.15 per share were cancelled unexercised. No additional
shares remain available for grant under the 1989 Stock Option Plan.
 
  ANCILLARY PLAN
 
  In 1991, the Company established an Ancillary Plan to grant options to
individuals who were not eligible to receive options under the 1989 Stock
Option Plan. Options to purchase an aggregate of 7,498 shares of the Company's
Common Stock were granted under the Ancillary Plan, of which options to
purchase 4,328 shares have been exercised at $0.15 per share and the remaining
options to purchase 3,170 shares have been cancelled. No additional shares
remain available for grant under the Ancillary Plan.
 
  AMENDED AND RESTATED 1992 INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN
 
  In 1992, the Company adopted the 1992 Incentive and Non-Qualified Stock
Option Plan (the "1992 Plan"), providing for the grant of options to purchase
666,667 shares of Common Stock. The Company allocated an additional 100,000
shares of Common Stock during 1992, an additional 333,333 shares of Common
Stock in 1994 and an additional 800,000 shares of Common Stock in 1996 to the
1992 Plan, resulting in a total share reserve of 1,900,000 shares. The 1992
Plan was amended and restated to its current form in 1996. Options under the
1992 Plan for a total of 462,840 shares have been exercised as of September
30, 1996. As of September 30, 1996, options to purchase 336,254 shares of
Common Stock were outstanding with a weighted average exercise price of $1.27
per share.
 
  The 1992 Plan provides for grants to employees and officers of "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, provided that such employee or officer is an employee on
the date of grant. The 1992 Plan also provides for grants to employees,
officers, consultants or service providers of nonqualified stock options. The
1992 Plan previously has been administered by the Board of Directors, but is
currently administered by the Compensation Committee of the Board of Directors
(the "Committee"). Each option granted pursuant to the 1992 Plan is authorized
by the Committee and evidenced by a notice in such form as the Committee may
from time to time determine.
 
  The exercise price of each incentive stock option granted under the 1992
Plan must be at least equal to the fair market value of a share of Common
Stock on the date of grant, except for incentive stock options granted to
individuals who, at the time of grant, own stock possessing more than 10% of
the total combined voting power of the Company, which options must have an
exercise price of at least 110% of the fair market value of a share of Common
Stock on the date of grant and must expire five years from the date of grant.
The exercise price of each nonqualified stock option granted under the 1992
Plan must be at least 85% of the fair market value of the shares on the date
of grant. No option shall be treated as an incentive stock option to the
extent that such option would cause the aggregate fair market value
(determined as of the date of grant of such option) of the shares with respect
to which incentive stock options are exercisable by such optionee for the
first time during any calendar year to exceed $100,000. The terms of all
incentive stock options and nonqualified stock options granted under the 1992
Plan may not exceed ten years. The exercise price may be paid in cash or, at
the Committee's discretion, by delivery of previously owned shares of the
Company's Common Stock, by a combination of cash and shares, or any other form
of legal consideration acceptable to the Committee. Options under the 1992
Plan generally may not be granted after April 2006.
 
                                      47

<PAGE>
 
  The 1992 Plan provides that if the Company is a party to any merger in which
the Company is not the surviving entity, any consolidation or dissolution
(other than the merger or consolidation of the Company with one or more of its
wholly-owned subsidiaries), the Company must cause any successor corporation
to assume the options or substitute similar options for outstanding options or
continue such options in effect. In the event that any successor to the
Company in a merger, consolidation or dissolution will not assume the options
or substitute similar options, then with respect to options held by optionees
performing services for the Company, the time for exercising such options will
be accelerated and such options will be terminated if not exercised prior to
such merger, consolidation or dissolution.
 
  1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
 
  A total of 150,000 shares of Common Stock have been reserved for issuance
under the Company's 1996 Outside Directors Stock Option Plan (the "Directors
Plan"). As of the date of this Prospectus, no options have been granted under
the Directors Plan. The Directors Plan provides for the automatic granting of
non-qualified stock options to directors of the Company who are not employees
of the Company ("Outside Directors"). Under the Directors Plan, each Outside
Director serving on the effective date of this Offering or elected after the
date of this offering will automatically be granted an option to purchase
5,000 shares of Common Stock on the effective date of this offering or on the
date of his or her election or appointment. In addition, each serving Outside
Director will thereafter automatically be granted an option to purchase 5,000
shares of Common Stock following each annual meeting of shareholders after
their election, provided that the Outside Director continues to serve in such
capacity and that the Outside Director has served continuously as a director
for at least six months. The exercise price of the options in all cases will
be equal to the fair market value of the Common Stock on the date of grant.
Options granted under the Directors Plan generally vest over a one-year period
in equal monthly installments and must be exercised within ten years from the
date of grant.
 
  1996 EMPLOYEE STOCK PURCHASE PLAN
 
  A total of 250,000 shares of the Company's Common Stock have been reserved
for issuance under the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have been issued. The Purchase Plan permits
eligible employees to purchase Common Stock at a discount through payroll
deductions, during sequential 24-month offering periods. Each offering period
is divided into four consecutive six-month purchase periods. Unless otherwise
provided by the Board of Directors prior to the commencement of an offering
period, the price at which stock is purchased under the Purchase Plan for such
offering period is equal to 85% of the lesser of the fair market value of the
Common Stock on the first day of such offering period or the last day of the
purchase period of such offering period. The initial offering period will
commence on the effective date of this offering.
 
SECTION 401(K) PLAN
 
  Effective January 1, 1994, the Company adopted the Aastrom Biosciences, Inc.
401(k) Plan (the "Plan"). The Plan is intended to be a qualified retirement
plan under the Internal Revenue Code. Employees of the Company are eligible to
participate in the Plan upon the completion of three consecutive months of
employment. Participants may make salary deferral contributions to the Plan of
up to 15% of compensation, subject to the limitations imposed under the
Internal Revenue Code. The Company may, but is not required to, make matching
contributions to the Plan based on the participants' salary-defined
contributions. Employer contributions are subject to a graduated vesting
schedule based upon an employee's years of service with the Company. It is not
anticipated that the Company will make any contributions to the Plan for the
1997 Plan Year. All contributions to the Plan are held in a trust which is
intended to be exempt from income tax under Section 501(a) of the Internal
Revenue Code. The Plan's trustees are R. Douglas Armstrong and Todd E.
Simpson. Participants may direct the investment of their contributions among
specified Merrill Lynch investment funds. The Plan may be amended or
terminated by the Company at any time, subject to certain restrictions imposed
by the Internal Revenue Code and the Employee Retirement Income Security Act
of 1974.
 
                                      48

<PAGE>
 
COMPENSATION OF DIRECTORS
 
  Directors of the Company do not receive cash for services provided as a
director, however, directors who are not employees of the Company will receive
annual grants of options to purchase Common Stock in accordance with the
Directors Plan. No stock options or any other form of non-cash compensation
were granted to directors of the Company during the Company's fiscal year
ending June 30, 1996. See "Stock Option and Employee Benefit Plans--1996
Outside Directors Stock Option Plan."
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
   
  During the fiscal year ended June 30, 1996, Robert J. Kunze, who served as
President and Chief Executive Officer of the Company until 1991 and currently
serves as its Chairman of the Board, R. Douglas Armstrong, President and Chief
Executive Officer of the Company, and G. Bradford Jones were the members of
the Compensation Committee of the Board of Directors. On April 30, 1996, a new
Compensation Committee was appointed by the Board of Directors, and the
members of such committee are Mr. Kunze and Albert B. Deisseroth, M.D., Ph.D.
    
                                      49

<PAGE>
 

                             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 this offering, each outstanding share of Series D Preferred Stock will be
converted into two-thirds of a share of Common Stock.
 
  In April 1995, Dr. Armstrong and Dr. Emerson agreed to grant to Brentwood an
option to purchase up to 28,000 shares and 14,667 shares of Common Stock,
respectively, and, together with two other shareholders of the Company, an
aggregate of up to 66,667 shares of Common Stock at a purchase price of
$100,000. Brentwood exercised this option in April, 1996 purchasing an
aggregate of 66,667 shares of Common Stock at a purchase price of $100,000
from such shareholders.
 
  In September 1995, the Company and RPR entered into a collaborative
relationship for use of the Aastrom CPS as a component of its lymphoid cell
therapy program. On September 6, 1996, RPR notified the Company that it would
not exercise its option to continue the collaboration. As a result, $3,500,000
of option payments previously paid to the Company by RPR were converted into
205,882 shares of the Company's Series E Preferred Stock.
 
  In October 1995, the Company repurchased 62,500 shares of Series D Preferred
Stock from Brentwood at the original purchase price of $250,000 and in
December 1995 resold these shares to Northwest Ohio Venture Fund, a
shareholder of the Company, for a total purchase price of $250,000.
 
  In January 1996, the Company sold 1,411,765 shares of Series E Preferred
Stock at a price per share of $4.25 to the following investors: (i) Michigan
purchased 470,588 shares for a total purchase price of $1,999,999, and (ii)
SBIC Partners, L.P. purchased 941,177 shares for a total purchase price of
$4,000,002. Upon the closing of this offering, each outstanding share of
Series E Preferred Stock will be converted into two-thirds of a share of
Common Stock.
 
  On November 18, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to R. Douglas Armstrong under the 1989 Stock
Option Plan, the Company loaned to Dr. Armstrong $120,000 at an interest rate
of 4% per annum pursuant to a full recourse promissory note. Interest on the
note is payable on an annual basis and principal and accrued but unpaid
interest is due on June 30, 1997. Dr. Armstrong is the President and Chief
Executive Officer and is a director of the Company.
 
  On October 20, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to Stephen G. Emerson under the 1989 Stock
Option Plan, the Company loaned to Dr. Emerson $47,303 at an interest rate of
6% per annum pursuant to a full recourse promissory note. Interest on the note
is payable on an annual basis and principal and accrued but unpaid interest is
due June 30, 1997. The loan is secured by 258,687 shares of Common Stock held
by Dr. Emerson. Dr. Emerson is a director of the Company.
 
  In October 1993, the Company issued and sold 10,000 shares of Series C
Preferred Stock to Cobe at a purchase price of $1,000 per share. Upon the
closing of this offering, each outstanding share of Series C Preferred Stock
will be converted into 166 and two-thirds shares of Common Stock.
 
  In October 1996, the Company executed a financing commitment with Cobe to
provide the Company with up to $5,000,000 (the "Equity Commitment") and up to
$5,000,000 in funding from Michigan under a convertible loan commitment
agreement ("Convertible Loan Commitment"). As of the date of this Prospectus,
the Company has not obtained any financing under these commitments. Both the
Equity Commitment and the Convertible Loan Commitment will terminate upon the
consummation of this offering.
 
                                      50

<PAGE>
 
  Under the terms of the Equity Commitment, the Company has an option to sell
up to $5,000,000 of Series F Preferred Stock at a price of $6.00 per share to
Cobe upon at least ninety days notice, which notice may be given at any time
until September 1, 1997. Cobe's obligation to purchase such shares will
terminate upon the closing of this offering. Although no shares of Series F
Preferred Stock are outstanding as of the date of this Prospectus, any
outstanding shares of Series F Preferred Stock would convert upon the closing
of this offering into Common Stock based upon a conversion price of 80% of the
price of two-thirds of a share of Common Stock sold in this offering. To the
extent shares are sold to Cobe under the Equity Commitment, Cobe's preemptive
right in the Company's next financing and the Company's Put Option to Cobe
would be reduced.
 
  On December 10, 1996, the Company issued to Cobe a notice to sell to Cobe
500,000 shares of Series F Preferred Stock for an aggregate purchase price of
$3,000,000 under the Equity Commitment. Such sale is scheduled to close on
March 19, 1997. In the event that this offering closes prior to March 19,
1997, Cobe's obligation to purchase Series F Preferred Stock under the Equity
Commitment will terminate. In the event that this offering closes after March
19, 1997, Cobe's participation in this offering will be reduced by $3,000,000,
the amount of its purchase of Series F Preferred Stock pursuant to the Equity
Commitment.
 
  Upon the sale of $5,000,000 of Series F Preferred Stock under the Equity
Commitment, the Company becomes entitled to borrow funds from Michigan under
the Convertible Loan Commitment. The Company may borrow such funds upon at
least 45 days notice, which notice may be given during a period commencing on
October 15, 1996 and ending on September 1, 1997. Upon the completion by the
Company of a Qualifying Financing (as defined in the Convertible Loan
Commitment), the Company has the option to repay outstanding principal and
interest under the Convertible Loan Commitment in cash or to convert such
borrowings into convertible Preferred Stock at a conversion price equivalent
to 90% of the price per share in such financing. Under certain circumstances,
the Convertible Loan Commitment converts or is convertible into Series G
Preferred Stock. Interest accrues at an annual rate of 10% under the
Convertible Loan Commitment, and the Company may repay such principal and
interest at any time without penalty.
 
  The Company has issued warrants to Michigan to purchase 69,444 shares of
Common Stock as consideration for securing the Convertible Loan Commitment and
has agreed to issue additional warrants to purchase 8,333 shares of Common
Stock for each $1,000,000 borrowed under the Convertible Loan Commitment, as
adjusted to the level of borrowing. The warrants become exercisable 90 days
after the closing of this offering. The warrants expire on October 15, 2000 if
not exercised, and may be exercised, in whole or in part, at a price equal to
the lesser of (a) $9.00 per share, which price increases by $3.00 per share
upon each anniversary of the closing of the offering made hereby; and (b) 85%
of the fair market value of the Company's Common Stock at the time of
exercise.
 
  Pursuant to its letter dated November 11, 1996, Cobe has elected to purchase
$5,000,000 of the Company's Common Stock in this offering at the initial
public offering price per share in satisfaction of its preemptive rights under
the Cobe Stock Agreement. In addition, the Company has elected not to exercise
its put option rights under the Cobe Stock Agreement with respect to this
offering. See "Description of Capital Stock--Rights of Cobe."
 
  The Company has entered into employment agreements with certain of its
executive officers. See "Management--Employment Agreements." The Company has
also entered into an Indemnification Agreement with certain of its directors,
officers and other key personnel. See "Management--Limitation of Liability and
Indemnification Matters."
 
                                      51

<PAGE>
 
                            PRINCIPAL SHAREHOLDERS
   
  The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of December 31, 1996,
and as adjusted to give effect to the sale of 3,250,000 shares of Common Stock
in this offering assuming (a) conversion of all of the Company's outstanding
shares of Preferred Stock into Common Stock and (b) no exercise of the
Underwriters' over-allotment option, and as adjusted to reflect the sale of
shares offered in this offering, (i) by each person the Company knows to be
the beneficial owner of 5% or more of the outstanding shares of Common Stock,
(ii) each named executive officer listed in the Summary Compensation Table,
(iii) each director of the Company, and (iv) all executive officers and
directors of the Company as a group.     
 

<TABLE>   
<CAPTION>
                                   SHARES BENEFICIALLY     SHARES BENEFICIALLY
                                      OWNED BEFORE             OWNED AFTER
                                     THE OFFERING(1)         THE OFFERING(1)
                                   ----------------------- -----------------------
BENEFICIAL OWNER                     NUMBER     PERCENT      NUMBER     PERCENT
- ----------------                   ------------ ---------- ------------ ----------
<S>                                <C>          <C>        <C>          <C>
H&Q Life Science(2)..............     1,061,334     10.6%     1,061,334      8.0%
 Technology Fund I
 One Bush Street, 18th Floor
 San Francisco, CA 94104
H&Q London Ventures..............       816,666      8.2%       816,666      6.2%
 One Bush Street, 18th Floor
 San Francisco, CA 94104
State Treasurer of the State of       1,338,724     13.4%     1,338,724     10.1%
 Michigan,(3)....................
 Custodian of certain retirement
 systems
 c/o Venture Capital Division
 430 West Allegan
 Lansing, MI 48992
SBIC Partners, L.P...............       627,451      6.3%       627,451      4.7%
 201 Main Street, Suite 2302
 Fort Worth, TX 76102
Brentwood Associates V, L.P.(4)..       745,831      7.5%       745,831      5.6%
 11150 Santa Monica Blvd., Suite
 1200
 Los Angeles, CA 90025
Wind Point Partners II, L.P......       559,500      5.6%       559,500      4.2%
 676 N. Michigan Ave., Suite 3300
 Chicago, IL 60611
Cobe Laboratories, Inc.(5).......     2,499,999     25.0%     3,055,555     23.1%
 1185 Oak Street
 Lakewood, CO 80215
R. Douglas Armstrong, Ph.D.(6)...       834,888      8.1%       834,888      6.2%
Albert B. Deisseroth, M.D.,              25,000        *         25,000        *
 Ph.D. ..........................
Stephen G. Emerson, M.D., Ph.D. .       256,789      2.6%       256,789      1.9%
G. Bradford Jones(7).............       745,831      7.5%       745,831      5.6%
Robert J. Kunze(8)...............     1,061,334     10.6%     1,061,334      8.0%
James Maluta(9)..................        83,333        *         83,333        *
Thomas E. Muller, Ph.D.(10)......        20,000        *         20,000        *
Walter C. Ogier(11)..............        24,583        *         24,583        *
Horst R. Witzel, Dr.-Ing.(12)....         9,077        *          9,077        *
Edward C. Wood, Jr.(13)..........     2,499,999     25.0%     3,055,555     23.1%
All officers and directors as a       5,583,334     53.7%     6,138,890     45.0%
 group (12 persons)(14)..........
</TABLE>
    
- --------
*  Represents less than 1% of outstanding Common Stock or voting power.
 
                                      52

<PAGE>
 
(1) Shares beneficially owned and percentage of ownership are based on
    9,985,734 shares of Common Stock outstanding before this offering and
    13,235,734 shares of Common Stock outstanding after the closing of this
    offering. Beneficial ownership is determined in accordance with the rules
    of the SEC and generally includes voting or disposition power with respect
    to securities.
(2) Robert J. Kunze, Chairman of the Board of the Company, is a general
    partner of H&Q Life Science Venture Partners. See footnote 8, below.
(3) Does not include 69,444 shares issuable upon exercise of warrants held by
    Michigan that are exercisable 90 days after the closing of this offering.
(4) G. Bradford Jones, a director of the Company, is a general partner of
    Brentwood Associates V Ventures, L.P., which is the general partner of
    Brentwood Associates V, L.P. See footnote 7, below.
(5) The shares attributed to Cobe in the "Shares Beneficially Owned After the
    Offering" column include 555,556 shares of Common Stock which Cobe has
    agreed to purchase in this offering, assuming the closing of this offering
    at an initial public offering price of $9.00 per share. In addition,
    pursuant to the Cobe Stock Agreement, Cobe has an option to purchase from
    the Company an amount of Common Stock equal to 30% of the Company's fully
    diluted shares after the exercise of such option, at a purchase price
    equal to 120% of the public market trading price of the Company's Common
    Stock for a three-year period following the closing of this offering. Cobe
    also has a "right of first negotiation" in the event the Company receives
    any proposal concerning, or otherwise decides to pursue, a merger,
    consolidation or other transaction in which all or a majority of the
    Company's equity securities or all or substantially all of the Company's
    assets, or any material portion of the assets of the Company used by the
    Company in performing its obligations under the Distribution Agreement
    would be acquired by a third party outside of the ordinary course of
    business. Edward C. Wood, Jr., a director of the Company, is the President
    of Cobe BCT, Inc., an affiliate of Cobe. See footnote 13, below.
   
(6) Includes 333,333 shares issuable upon exercise of options held by Dr.
    Armstrong that are exercisable upon the effective date of this offering.
        
(7) Consists of 745,831 shares held by Brentwood Associates V, L.P. See
    footnote 4, above. Mr. Jones, as a general partner of Brentwood Associates
    V Ventures, L.P., which is the general partner of Brentwood Associates V,
    L.P., may be deemed to beneficially own such shares, but Mr. Jones
    disclaims beneficial ownership of all such shares except to the extent of
    his pecuniary interest therein.
(8) Consists of 1,061,334 shares held by H&Q Life Science Technology Fund I.
    See footnote 2, above. Mr. Kunze, as a general partner of H&Q Life Science
    Venture Partners, may be deemed to beneficially own such shares, but Mr.
    Kunze disclaims beneficial ownership of all such shares except to the
    extent of his pecuniary interest therein.
   
(9) Includes 16,668 shares issuable upon exercise of options held by Mr.
    Maluta that are exercisable within the 60-day period following December
    31, 1996. Also includes 66,665 shares held of record by James Maluta and
    Deborah Vincent, as Trustees, with shared voting and investment power, of
    the James Maluta and Deborah Vincent Living Trust dated October 26, 1993.
           
(10) Consists of 20,000 shares issuable upon exercise of options held by Dr.
     Muller that are exercisable within the 60-day period following December
     31, 1996.     
   
(11) Includes 19,583 shares issuable upon exercise of options held by Mr.
     Ogier that are exercisable within the 60-day period following December
     31, 1996.     
   
(12) Includes 3,077 shares issuable upon exercise of options held by Dr.
     Witzel that are exercisable within the 60-day period following December
     31, 1996.     
(13) The shares attributed to Mr. Wood in the "Shares Beneficially Owned
     Before the Offering" column consist of 2,499,999 shares held by Cobe and
     the shares attributed to Mr. Wood in the "Shares Beneficially Owned After
     the Offering" column consist of such shares and an additional 555,556
     shares which Cobe has agreed to purchase in this offering, assuming the
     closing of this offering at an initial public offering price of $9.00 per
     share. See footnote 5, above. Mr. Wood, as the President of Cobe BCT,
     Inc., an affiliate of Cobe, may be deemed to beneficially own such
     shares, but Mr. Wood disclaims beneficial ownership of all such shares.
   
(14) Includes 415,161 shares issuable upon exercise of options that are
     exercisable within the 60-day period following December 31, 1996.     
 
                                      53

<PAGE>
 

                         DESCRIPTION OF CAPITAL STOCK
 
  Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, no par value per
share, and 5,000,000 shares of Preferred Stock, no par value per share.
 
COMMON STOCK
 
  As of September 30, 1996, without giving effect to the conversion of each
share of Preferred Stock into Common Stock upon the closing of this offering,
there were 1,887,312 shares of Common Stock outstanding held of record by 32
shareholders.
 
  The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to outstanding shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of holders of Preferred Stock
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are set forth in the Company's Restated Articles of
Incorporation, which Articles may 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 any Preferred Stock which the Company may
designate and issue in the future.
 
PREFERRED STOCK
 
  As of the closing of this offering, no shares of Preferred Stock will be
outstanding. Thereafter, the Board of Directors will be authorized, without
further shareholder approval, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted or imposed upon any unissued shares of Preferred Stock
and to fix the number of shares constituting any series and the designations
of such series.
 
  The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. The Company currently has no plans to issue any
shares of Preferred Stock.
 
MICHIGAN LAW AND CERTAIN CHARTER PROVISIONS
 
  The Company is a Michigan corporation and is subject to certain anti-
takeover provisions of the Michigan Business Corporation Act (the "MBCA")
which could delay or make more difficult a merger or tender offer involving
the Company. Chapter 7A of the MBCA prevents, in general, an "interested
shareholder" (defined generally as a person owning 10% or more of a
corporation's outstanding voting shares) from engaging in a "business
combination" (as defined therein) with a Michigan corporation unless: (a) the
Board of Directors issues an advisory statement, holders of 90% of the shares
of each class of stock entitled to vote approve the transaction, and holders
of two-thirds of the "disinterested" shares of each class of stock approve the
transaction; or (b) the interested shareholder has been an interested
shareholder for at least five years and has not acquired beneficial ownership
of any additional shares of the corporation subsequent to the transaction
which resulted in such shareholder being classified as an interested
shareholder, and meets certain requirements, including, but not limited to,
provisions relating to the fairness of the price and the form of consideration
paid; or (c) the Board of Directors, by resolution, exempts a particular
interested shareholder from these provisions prior to the interested
 
                                      54

<PAGE>
 
shareholder becoming an interested shareholder. The MBCA also contains certain
other provisions which could have anti-takeover effects, including, but not
limited to, Section 368, which pertains to "greenmail."
 
  The Company's Bylaws provide that the Board of Directors is divided into
three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for shareholders to replace
a majority of the directors. The Company's Restated Articles of Incorporation
eliminate the right of shareholders to act without a meeting and do not
provide for cumulative voting in the election of directors. The amendment of
any of these provisions would require approval by holders of at least two-
thirds of the shares of outstanding Common Stock.
 
  The foregoing and other statutory provisions and provisions of the Company's
Restated Articles of Incorporation could have the effect of deterring certain
takeovers or delaying or preventing certain changes in control or management
of the Company, including transactions in which shareholders might otherwise
receive a premium for their shares over then-current market prices.
 
REGISTRATION RIGHTS
 
  Pursuant to the Amended and Restated Investors Rights Agreement, dated as of
April 7, 1992, as amended (the "Investors Agreement"), certain holders of
outstanding shares of Common Stock, including shares of Common Stock issuable
upon conversion of the Preferred Stock (the "Registrable Securities"), are
entitled to certain demand and incidental registration rights with respect to
such shares, subject to certain customary limitations. Under the Investors
Agreement, subject to certain exceptions, the holders of at least 50% of the
Registrable Securities may require the Company to use its diligent best
efforts to register Registrable Securities for public resale on one occasion
(so long as such registration includes at least 20% of the Registrable
Securities or a lesser percentage if the anticipated aggregate offering price
net of underwriting discounts and commissions would exceed $2 million). In
addition, whenever the Company proposes to register any of its securities
under the Act, holders of Registrable Securities are entitled, subject to
certain restrictions (including customary underwriters "cut back"
limitations), to include their Registrable Securities in such registration.
Subject to certain limitations, the holders of Registrable Securities may also
require the Company to register such shares on Form S-3 no more than once
every twelve months, provided that the anticipated aggregate proceeds would
exceed $500,000. The Company is required to bear all registration and selling
expenses (other than underwriter's discounts and commissions and more than a
single special counsel to the selling shareholders) in connection with the
registration of Registrable Securities in one demand registration and two
piggy-back registrations. The participating investors are required to bear all
expenses in connection with the registration of Registrable Securities on Form
S-3.
 
  Registration rights may be transferred to an assignee or transferee provided
that such assignee or transferee acquires at least 66,667 shares of the
Registrable Securities held by the transferring holder (13,333 shares in the
case of a transfer from the holder of certain stock options). These
registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding.
 
  The registration rights granted under the Investors Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
 
  Pursuant to the 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 30 months following an initial public offering,
or earlier in the event of any termination of the Distribution Agreement.
Pursuant to Cobe's registration rights, Cobe is entitled to two demand
registration rights, and an unlimited number of piggyback registration rights.
Cobe's stock registration rights are subject to
 
                                      55

<PAGE>
 
customary underwriter's "cut back" requirements. The registration rights
granted to Cobe shall not be exercisable during the period in which Cobe has
the ability to sell all of its shares pursuant to Rule 144 during a single
ninety-day period. Subject to certain conditions, these registration rights
may be transferred with the transfer of stock to certain affiliates of the
transferor or to a transferee who acquires the greater of 66,667 shares or 20%
of the transferor's registrable stock.
 
RIGHTS OF COBE
 
  Pursuant to the Cobe Stock Agreement, Cobe purchased an aggregate of
$10,000,000 of shares of the Company's Series C Preferred Stock. Such shares
of Series C Preferred Stock will automatically convert into 1,666,666 shares
of Common Stock upon the closing of this offering.
 
  Pursuant to the Cobe Stock Agreement, Cobe also has certain preemptive
rights to purchase a portion of any new stock issued by the Company, subject
to certain exceptions, so as to enable Cobe to maintain its relative
percentage ownership and voting power interests in the Company. Pursuant to
such preemptive rights, Cobe has elected to purchase $5,000,000 of Common
Stock in this offering at the initial public offering price per share. Under
the terms of the Cobe Stock Agreement, the Company also has the right to
require Cobe to purchase stock issued by the Company in certain qualifying
offerings, under certain circumstances (the "Put Option"). The Put Option may
generally require Cobe to purchase up to 25% of the stock issued by the
Company in a qualifying offering upon the same terms and conditions as the
underwriters or other purchasers participating in the offering provided that
Cobe shall not be required to purchase stock having an aggregate purchase
price of more than $5,000,000. If the Company exercises the Put Option with
respect to any such qualifying offering, Cobe has the option to purchase the
greater of up to 40% of the number of shares to be offered in the qualifying
offering or the number of shares necessary to maintain its percentage
ownership interest in the Company. The Company has elected not to exercise the
Put Option with respect to this offering.
 
  Additionally, for a three-year period following the Company's completion of
its initial public offering of stock, Cobe will have an option to purchase
from the Company a quantity of new shares of the Company's Common Stock at a
price equal to 120% of the public market trading price for the Company's
Common Stock. The quantity of Common Stock to be purchased if Cobe exercises
this option shall be equal to 30% of the Company's fully diluted shares after
the exercise of this option.
 
  In the Cobe Stock Agreement, the Company also granted to Cobe a "right of
first negotiation" in the event the Company receives any proposal concerning,
or otherwise decides to pursue, a merger, consolidation or other transaction
in which all or a majority of the Company's equity securities or all or
substantially all of the Company's assets, or any material portion of the
assets of the Company used by the Company in performing its obligations under
the Distribution Agreement would be acquired by a third party outside of the
ordinary course of business.
 
  Pursuant to the Stock Purchase Commitment Agreement with Cobe, dated October
29, 1996, the Company agreed to use reasonable and good faith efforts to cause
a nominee of Cobe, who must be deemed by the Board of Directors to be
qualified to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding Common Stock.
 
                                      56

<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Upon completion of this offering, the Company will have 13,235,734 shares of
Common Stock outstanding, assuming no exercise of any outstanding options
under any of the Company's option plans after September 30, 1996. Of these
shares, the 3,250,000 shares of Common Stock sold in this offering will be
freely transferable without restriction under the Securities Act unless they
are held by the Company's affiliates as that term is used in Rule 144 under
the Securities Act.
 
  The remaining 9,985,734 shares of Common Stock outstanding are "restricted
securities" as the term is defined by Rule 144 promulgated under the
Securities Act (the "Restricted Shares"). Of the 9,985,734 Restricted Shares,
6,996,920 shares may be sold under Rule 144, subject in some cases to certain
volume restrictions and other conditions imposed thereby. An additional
152,056 shares will become eligible for sale 90 days after completion of this
offering pursuant to Rule 144 and 701. The remaining 2,836,758 shares will be
eligible for sale upon the expiration of their respective holding periods as
set forth in Rule 144. The Securities and Exchange Commission has proposed
certain amendments to Rule 144 that would reduce by one year the holding
periods required for shares subject to Rule 144 to become eligible for resale
in the public market. This proposal, if adopted, would permit earlier resale
of shares of Common Stock currently subject to holding periods under Rule 144.
No assurance can be given concerning whether or when the proposal will be
adopted by the Securities and Exchange Commission. Furthermore, 9,947,757 of
the Restricted Shares are subject to lock-up agreements expiring 180 days
following the date of this Prospectus. Such agreements provide that Cowen &
Company may, in its sole discretion and at any time without notice, release
all or a portion of the shares subject to these lock-up agreements. Upon the
expiration of the lock-up agreements, 7,148,976 of the 9,985,734 Restricted
Shares may be sold pursuant to Rule 144 or 701, subject in some cases to
certain volume restrictions imposed thereby. Certain existing shareholders
have rights to include shares of Common Stock owned by them in future
registrations by the Company for the sale of Common Stock or to request that
the Company register their shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Following the date of this Prospectus,
the Company intends to register on one or more registration statements on Form
S-8 approximately 1,837,160 shares of Common Stock issuable under its stock
option and stock purchase plan. Of the 1,837,160 shares issuable under the
Company's stock option and stock purchase plans, 336,254 shares are subject to
outstanding options as of September 30, 1996, all of which shares are subject
to lock-up agreements. Shares covered by such registration statements will
immediately be eligible for sale in the public market upon the filing of such
registration statements. The Company also has issued warrants to purchase
69,444 shares of Common Stock which become exercisable 90 days after the
closing of this offering and, upon the effective date of this offering, will
grant an immediately exercisable option to purchase 333,333 shares of Common
Stock. The shares issuable upon exercise of such warrants and the shares
issuable upon exercise of such option will be subject to lock-up agreements.
In addition, Cobe has agreed to purchase $5,000,000 of Common Stock in this
offering at the initial public offering price per share, all of which shares
will be subject to a lock-up agreement.
 
  In general, under Rule 144, a person (or persons whose shares are
aggregated), shareholders, including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell in broker transactions,
within any three-month period, commencing 90 days after this offering, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding Common Stock (approximately 132,357 shares immediately after this
offering assuming no exercise of the Underwriters' over-allotment option) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the sale, subject to the filing of a Form 144 with
respect to the sale and other limitations. In general, shares issued in
compliance with Rule 701 may be sold by non-affiliates subject to the manner
of sale requirements of Rule 144, but without compliance with the other
requirements of Rule 144. Affiliates may sell shares they acquired under Rule
701 in compliance with the provisions of Rule 144, except that there is no
required holding period. A person who is not an affiliate, has not been an
affiliate within three months prior to sale and has beneficially owned the
Restricted Shares for at least three years, is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
 
  The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the date of this Prospectus,
without the prior written consent of the Underwriters, subject to certain
limited exceptions (including exercises of stock options).
   
  Prior to this offering, there has been no public market for the Common Stock
of the Company. No prediction can be made regarding the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will
have on the market price of the Common Stock. Nevertheless, sales of
substantial numbers of shares by existing shareholders or by shareholders
purchasing in this offering could have a negative effect on the market price
of the Common Stock.     
 
                                      57

<PAGE>
 

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

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

 
  The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all of the Common Stock offered hereby if any of such shares are
purchased.
 
  The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $    per share. The Underwriters may allow, and such dealers may
reallot, a concession not in excess of $    per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
 
  The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 487,500
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 3,250,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on
the same terms as those on which the 3,250,000 shares are being offered.
 
  As part of this offering, Cobe has agreed with the Company to purchase from
the Underwriters $5,000,000 of Common Stock at the initial public offering
price per share.
 
  The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
 
  The Company and its directors and officers, and certain of its other
shareholders and optionholders, have entered into agreements providing that,
for a period of 180 days after the date of this Prospectus, they will not,
without the prior written consent of Cowen & Company, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into, or exchangeable for, or warrants to purchase, any shares of
Common Stock, or grant any option to purchase or right to acquire or acquire
any option to dispose of any shares of Common Stock, except in certain limited
circumstances. See "Shares Eligible for Future Sale."
 
  The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
 
 
                                      58

<PAGE>
 
  Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock has been determined by negotiations between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies that the Company and the Representatives of the
Underwriters believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, and other factors deemed relevant.
 
TRANSFER AGENT AND REGISTRAR
 
  The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company. Its telephone number in New York, New York is (212)
509-4000.
 

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

                                    EXPERTS
 
  The balance sheets of the Company as of June 30, 1995 and 1996, and the
statements of operations, shareholders' equity, and cash flows for the years
ended June 30, 1994, 1995 and 1996 and the cumulative period from March 24,
1989 (Inception) to June 30, 1996 included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given upon the authority of that firm as experts in
accounting and auditing.
 
  The statements in this Prospectus concerning the patents and patent
applications either owned or licensed by the Company under the captions "Risk
Factors--Uncertainty Regarding Patents and Proprietary Rights" and "Business--
Patents and Proprietary Rights" and the other references herein concerning the
patents and patent applications either owned or licensed by the Company have
been reviewed and approved by Oblon, Spivak, McClelland, Maier & Neustadt,
P.C., Arlington, Virginia, patent counsel to the Company, as experts on such
matters, and are included herein in reliance upon that review and approval.
 
                            ADDITIONAL INFORMATION
 
  The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, if such contract or document is filed as an exhibit,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from such office after payment of fees
prescribed by the Commission.
 
  The Company intends to furnish to its shareholders annual reports containing
financial statements audited by its independent certified public accountants
and make available to its shareholders quarterly reports containing unaudited
financial data for the first three quarters of each fiscal year.
 
                                      59

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

                         INDEX TO FINANCIAL STATEMENTS
 

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

</TABLE>

 
                                      F-1

<PAGE>
 

                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of
Aastrom Biosciences, Inc.:
 
  We have audited the accompanying balance sheets of Aastrom Biosciences, Inc.
(a Michigan corporation in the development stage) as of June 30, 1995 and
1996, and the related statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 1994, 1995 and 1996, and the cumulative
period from March 24, 1989 (inception) to June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aastrom Biosciences, Inc.
as of June 30, 1995 and 1996, and the results of its operations and its cash
flows for the years ended June 30, 1994, 1995 and 1996, and the cumulative
period from March 24, 1989 (inception) to June 30, 1996, in conformity with
generally accepted accounting principles.
 
Detroit, Michigan
August 9, 1996

 

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

 
                                      F-2

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

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

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

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

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

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

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

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.

                         (A DEVELOPMENT STAGE COMPANY)
 
                            STATEMENTS OF CASH FLOWS
 

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

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                         NOTES TO FINANCIAL STATEMENTS
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Overview--Aastrom Biosciences, Inc. (the "Company") was incorporated in
March 1989 ("Inception") under the name Ann Arbor Stromal, Inc. The Company
changed its name in 1991 concurrent with the commencement of employee-based
operations. The Company is in the development stage with its principal
business activities being research and product development, conducted both on
its own behalf and in connection with various collaborative research and
development agreements with other companies, involving the development of
processes and instrumentation for the ex-vivo production of human stem cells
and their progeny, and hematopoetic and other tissues. Successful future
operations are subject to several technical and business risks, including
satisfactory product development and obtaining regulatory approval and market
acceptance for its products.
 
  Significant Revenue Relationships--Two companies accounted for 49% and 28%
of total revenues for the year ended June 30, 1995 and one company accounted
for 83% of total revenues for the year ended June 30, 1996. One of these
companies accounted for 42% of total revenues for the period from Inception to
June 30, 1996. One company accounted for 82% and 87% of total revenues for the
three months ended September 30, 1995 and 1996, respectively, and accounted
for 45% of total revenues for the period from Inception to September 30, 1996.
Grant revenues consist of grants sponsored by the U.S. government.
 
  Cash and Cash Equivalents--Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.
 
  Short-Term Investments--Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
but less than one year. Short-term investments are classified as available-
for-sale, and are carried at market value, in accordance with Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which was adopted July 1, 1994.
Application of this pronouncement results in the inclusion of unrealized gains
and losses on investments in shareholders' equity. Application of this
accounting treatment in prior periods would not have materially changed the
amounts as presented.
 
  Diversity of Credit Risk--The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. The Company plans to
continue to invest its excess funds in short-term, investment grade, interest-
bearing instruments. These guidelines are periodically reviewed and modified
to take advantage of trends in yields and interest rates. The Company has not
experienced any significant losses on its cash equivalents or short-term
investments.
 
  Property--Property is recorded at cost and depreciated or amortized using
the straight-line method over the estimated useful life of the asset
(primarily five years) or the remaining lease term, if shorter, with respect
to leasehold improvements and certain capital lease assets.
 
  Revenue Recognition--Revenue from grants and research agreements is
recognized on a cost reimbursement basis consistent with the performance
requirements of the related agreement. Funding received in advance of costs
incurred is presented as deferred revenue in the accompanying financial
statements.
 
  Research and Development Costs--Research and development costs are expensed
as incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $49,000, $146,000 and $1,294,000 for
the years ended June 30, 1994, 1995 and 1996, respectively, and $1,489,000 for
the period from Inception to June 30, 1996 and $158,000, $117,000 and
$1,606,000 for the three months ended September 30, 1995 and 1996 and for the
period from Inception to September 30, 1996, respectively.
 
                                      F-7

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

might not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS 121 will become effective for the Company's fiscal year
beginning July 1, 1996. Management has studied the effect of implementing SFAS
121 and, based upon its evaluation, has determined that the impact on the
Company's financial condition and results of operations is not significant for
the period ended September 30, 1996.
 
  Unaudited Financial Information--The financial information as of September
30, 1996, and for the three-month periods ended September 30, 1995 and 1996,
and for the period from Inception to September 30, 1996, is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the
results of operations for the interim periods. The results of operations for
the three months ended September 30, 1996, are not necessarily indicative of
the results to be expected for the full year or for any other period.
 
2. SHORT-TERM INVESTMENTS
 
  All short-term investments are available-for-sale, and have maturities of
one year or less and are summarized as follows:
 

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

 
3. PROPERTY
 
  Property consists of the following:
 

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

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

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

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

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

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

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

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

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

 
                                      F-12

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

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

 
  Due to the historical losses incurred by the Company, a full valuation
allowance for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset income
taxes. The Company's net operating loss and tax credit carryforwards will
expire from 2004 through 2011, if not utilized.
 
  The Company's ability to utilize its net operating loss and tax credit
carryforwards would be limited in the event of a future change in ownership
for tax purposes. Such a change in ownership may likely occur upon the
completion of an initial public offering of the Company's Common Stock.
 
6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS
 
  University of Michigan--In March 1989, the Company entered into a research
agreement with the University of Michigan (the "University") for the
development of an adaptable, high-efficiency blood cell factory and to conduct
related research. Under the terms of this research agreement, as amended, the
Company agreed to reimburse the University for research costs in this regard
through the date of its expiration in December 1994. Payments made to the
University under the aforementioned agreements totaled $316,000, $121,000 and
$2,521,000 for the years ended June 30, 1994, 1995 and for the period from
Inception to June 30, 1996, 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, the Company
entered into a license agreement for the technology developed under the
research agreement. The license agreement, as amended, provides for a royalty
to be paid to the University equal to 2% of net sales of products containing
the licensed technology sold by the Company.
 
  Cobe BCT, Inc.--In connection with the issuance of the Series C Preferred
Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. ("Cobe BCT"), an
affiliate of Cobe, entered into an agreement which grants to Cobe BCT
exclusive worldwide distribution and marketing rights to the Company's Cell
Production System ("CPS") for stem cell therapy applications ("Distribution
Agreement"). The term of the Distribution Agreement is ten years, with an
option, exercisable by Cobe BCT, to extend the term for an additional ten
years. Pursuant to the Distribution Agreement, Cobe BCT will perform worldwide
marketing and distribution activities of the CPS for use in stem cell therapy
and will receive a share of the resulting net sales, as defined, ranging from
38% to 42%, subject to certain negotiated discounts and volume-based
adjustments.
 
                                     F-13

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

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

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

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

<PAGE>
 
                           AASTROM BIOSCIENCES, INC.
                         (A DEVELOPMENT STAGE COMPANY)
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
         (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
            PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

the Company may sell up to $5,000,000 of preferred stock at $6.00 per share
during a funding period that extends from January 1997 to December 1997. The
conversion rights of such preferred stock will be adjusted to provide for a
conversion at 80% of the per share price in the Company's next financing, as
adjusted for the Reverse Stock Split, and provided that such financing meets
certain minimum requirements ("Qualifying Financing"), such as the proposed
IPO in which these financial statements appear. If such a financing is not
completed by December 1997, then the conversion rights of this class of
preferred stock into Common Stock will be set at $6.98 per share of Common
Stock. To the extent shares are sold to Cobe under the Equity Commitment, its
preemptive right in the Company's next Qualifying Financing and the Company's
Put Option to Cobe is reduced to the extent of its purchase.
 
  Upon the sale of $5,000,000 in preferred stock under the Equity Commitment,
the Company becomes entitled to borrow funds under the Convertible Loan
Commitment. Such funds may be borrowed by the Company during a funding period
that extends from January 1997 to September 1997. Upon the completion of a
Qualifying Financing by the Company, the Company has the option to repay
outstanding borrowings under the Convertible Loan Commitment, in cash, or to
convert such borrowings into preferred stock. The conversion rights of such
class of preferred stock will be adjusted to provide for a conversion at 90%
of the per share price in the Company's next Qualifying Financing, as adjusted
for the Reverse Stock Split. If such financing is not completed by December
1997, then the conversion rights of this class of preferred stock will be set
at $6.98 per share of Common Stock. Interest accrues at 10% on amounts
borrowed under the Convertible Loan Commitment, which is due at maturity, and
may be retired in a manner consistent with principal. The Company may repay
borrowed amounts at anytime prior to the maturity date which is established
for all amounts borrowed as one year from the date of the first borrowing.
 
  In connection with the Convertible Loan Commitment, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The Company will issue additional warrants to purchase 8,333
shares of Common Stock for each $1,000,000 borrowed under the Convertible Loan
Commitment, with such additional warrants to be prorated to the level of
borrowing. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made in the Prospectus to which these financial
statements are included; or (b) 85% of the fair market value of the Company's
Common Stock at the time of exercise.
 
  On December 10, 1996, the Company issued to Cobe a notice to sell to Cobe
500,000 shares of Series F Preferred Stock for an aggregate purchase price of
$3,000,000 under the Equity Commitment. Such sale is scheduled to close on
March 19, 1997. In the event that the IPO closes prior to March 19, 1997,
Cobe's obligation to purchase Series F Preferred Stock under the Equity
Commitment will terminate. In the event that the IPO closes after March 19,
1997, Cobe's participation in this offering will be reduced by $3,000,000, the
amount of its purchase of Series F Preferred Stock pursuant to the Equity
Commitment. The Equity Commitment and the Convertible Loan Commitment expire
upon the closing of the IPO.
 
                                     F-16

<PAGE>
 

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












       








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

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

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Prospectus Summary........................................................    3
Risk Factors..............................................................    5
The Company...............................................................   15
Use of Proceeds...........................................................   15
Dividend Policy...........................................................   15
Capitalization............................................................   16
Dilution..................................................................   17
Selected Financial Data...................................................   18

Management's Discussion and Analysis of Financial Condition and Results of
 Operations...............................................................   19
Business..................................................................   23
Management................................................................   42
Certain Transactions......................................................   50
Principal Shareholders....................................................   52
Description of Capital Stock..............................................   54
Shares Eligible for Future Sale...........................................   57
Underwriting..............................................................   58
Legal Matters.............................................................   59
Experts...................................................................   59
Additional Information....................................................   59
Index to Financial Statements.............................................  F-1
</TABLE>

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

<PAGE>
 

                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 

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

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

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  Sections 1561 through 1565 of the Michigan Business Corporation Act (the
"MBCA") authorize a corporation to grant or a court to award, indemnity to
directors, officers, employees and agents in terms sufficiently broad to
permit such indemnification under certain circumstances for liabilities
(including reimbursement for expenses incurred) arising under the Securities
Act of 1933.
 
  The Bylaws of the Company (see Exhibit 3.3), provide that the Company shall,
to the fullest extent authorized or permitted by the MBCA, or other applicable
law, indemnify a director or officer who was or is a party or is threatened to
be made a party to any proceeding by or in the right of the Company to procure
a judgment in its favor by reason of the fact that such person is or was a
director, officer, employee or agent of the Company, against expenses,
including actual and reasonable attorneys' fees, and amounts paid in
settlement incurred in connection with the action or suit, if the indemnitee
acted in good faith and in a manner the person reasonably believed to be in,
or not opposed to, the best interests of the Company or its shareholders. This
section also authorizes the Company to advance expenses incurred by any agent
of the Company in defending any proceeding prior to the final disposition of
such proceeding upon receipt of an undertaking by or on behalf of the agent to
repay such amount unless it shall be determined ultimately that the agent is
entitled to be indemnified.
 
  The Bylaws also authorize the Company to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Company against any liability asserted against or incurred by such person
in such capacity or arising out of such person's status as such, regardless of
whether the Company would have the power to indemnify such person against such
liability under the provisions of the MBCA.
 
  The Company has entered into an indemnification agreement with certain of
its directors, officers and other key personnel, which contains provisions
that may in some respects be broader than the specific indemnification
provisions contained under applicable law. The indemnification agreement may
require the Company, among other things, to indemnify such directors, officers
and key personnel against certain liabilities that may arise by reason of
their status or service as directors, officers or employees of the Company, to
advance the expenses incurred by such parties as a result of any threatened
claims or proceedings brought against them as to which
 
                                     II-1

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

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
  (a)   ISSUANCES OF COMMON STOCK
 
  Since October 1, 1993, the Company has sold the following shares of Common
Stock:
 
  In October 1995, the registrant issued 37,500 shares of Common Stock to
Albert B. Deisseroth at a price of $.80 per share.
 
  (b)   ISSUANCES OF SHARES OF PREFERRED STOCK
 
  Since October 1, 1993, the Company has sold the following shares of
Preferred Stock:
 
  In October 1993, the registrant issued 10,000 shares of Series C Preferred
Stock to Cobe at a price of $1,000 per share.
 
  In April and May 1995, the registrant issued an aggregate of 2,500,001
shares of Series D Preferred Stock to 11 accredited investors at a price of
$4.00 per share.
 
  In December 1995, the registrant issued 62,500 shares of Series D Preferred
Stock to Northwest Ohio Venture Fund, L.P. at a purchase price of $4.00 per
share.
 
  In January 1996, the registrant issued an aggregate of 1,411,765 shares of
Series E Preferred Stock to SBIC Partners, L.P. and the State Treasurer of the
State of Michigan at a purchase price of $4.25 per share.
 
  Pursuant to a Governance Agreement between the Company and Rhone-Poulenc
Rorer Inc. ("RPR"), dated September 15,1995, RPR terminated its contractual
relationship with the Company on September 6, 1996. As a result of such
termination, the Company became obligated to issue 205,882 shares of Series E
Preferred Stock to RPR at a purchase price of $17.00 per share.
 
  In October 1996, the Company issued warrants to Michigan to purchase 69,444
shares of Common Stock as consideration for the Convertible Loan Commitment
and has agreed to issue additional warrants to purchase 8,333 shares of Common
Stock for each $1,000,000 borrowed under the Convertible Loan Commitment, as
adjusted to the level of borrowing.
 
  (c) OPTION ISSUANCES TO, AND EXERCISES BY, EMPLOYEES AND DIRECTORS
 
  From January 18, 1990 to the present, the registrant has granted options to
purchase a total of 2,945,174 shares of Common Stock at exercise prices
ranging from $.10 to $2.13 per share to 95 employees and one non-employee
director. No consideration was paid to the Registrant by any recipient of any
of the foregoing options for the grant of any such options. From October 30,
1992 to the present, the Registrant issued a total of 2,829,735 shares of
Common Stock to 26 employees and one non-employee director upon exercise of
stock options at exercise prices ranging from $.10 to $2.13 per share.
 
  There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
 
 
                                     II-2

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

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

<PAGE>
 
  10.15**   Lease Agreement dated May 18, 1992 between Domino's Farms
            Holding, L.P. and the Company and amendments thereto dated
            February 26, 1993, October 3, 1994, November 16, 1994 and July
            29, 1996.
 
  10.16**   Clinical Trial Agreement dated April 19, 1996 between the Company
            and the University of Texas M.D. Anderson Cancer Center.
     
  10.17     License Agreement dated March 13, 1992 between the Company and
            the University of Michigan and amendments thereto dated March 13,
            1992, October 8, 1993 and June 21, 1995.     
 
  10.18**   Employee Proprietary Information and Invention Agreement
            effective June 1, 1991 between the Company and R. Douglas
            Armstrong.
 
  10.19**   Employment Agreement dated June 19, 1992 between the Company and
            James Maluta.
 
  10.20**   Employment Agreement dated December 8, 1995 between the Company
            and Todd E. Simpson, C.P.A.
 
  10.21**   Employment Agreement dated February 10, 1994 between the Company
            and Walter C. Ogier.
 
  10.22**   Employment Agreement dated April 19, 1994 between the Company and
            Thomas E. Muller, Ph.D.
 
  10.23**   Employment Agreement dated October 26, 1995 between the Company
            and Alan K. Smith, Ph.D.
 
  10.24**   Promissory Note dated November 18, 1993 for $120,000 loan by the
            Company to R. Douglas Armstrong and amendment thereto dated
            October 30, 1996.
 
  10.25**   Promissory Note dated October 20, 1993 for $47,303 loan by the
            Company to Stephen G. Emerson, M.D., Ph.D and amendment thereto
            dated October 30, 1996.
 
  10.26**   Consulting Agreement dated June 1, 1995 between the Company and
            Stephen G. Emerson, M.D., Ph.D.
 
  10.27**   Clinical Trial Agreement dated August 28, 1996 between the
            Company and Loyola University Medical Center Cancer Center.
 
  10.28**   Stock Purchase Commitment Agreement dated October 29, 1996
            between Cobe Laboratories, Inc. and the Company.
 
  10.29**   Convertible Loan Commitment Agreement dated October 15, 1996
            between the State Treasurer of the State of Michigan and the
            Company.
 
  10.30**   Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Enterprise Development Fund L.P., Enterprise
            Development Fund II, L.P. and Northwest Ohio Venture Fund Limited
            Partnership).
 
  10.31**   Stock Purchase Agreement dated January 8, 1996 among the Company,
            SBIC Partners, L.P. and the State Treasurer of the State of
            Michigan.
       
  10.32**+  Governance Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.33**+  License Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.34**   Stock Purchase Agreement dated September 15, 1995 between the
            Company and Rhone-Poulenc Rorer Inc.
 
 
                                     II-4

<PAGE>
 
  10.35**   Letter Agreement dated November 11, 1996 between the Company and
            Cobe Laboratories, Inc.
 
  10.36**   Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Brentwood Associates V, L.P., Candice E.
            Appleton Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life
            Science Technology Fund, H&Q London Ventures, State Treasurer of
            the State of Michigan and Windpoint Partners II, Limited
            Partnership).
 
  10.37**   Subscription Agreement dated December 11, 1995 between the
            Company and Northwest Ohio Venture Fund Limited Partnership.
 
  10.38**   Subscription Agreement dated May 30, 1995 between the Company and
            Cobe Laboratories, Inc.
 
  10.39**   Termination Agreement dated November 14, 1996 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.40**   Stock Purchase Agreement dated November 14, 1996 between the
            Company and Rhone-Poulenc Rorer Inc.
     
  10.41**+  Collaborative Supply Agreement dated December 16, 1996 between
            the Company and Anchor Advanced Products, Inc., Mid-State
            Plastics Division.     
 
  11.1**    Statement re computation of pro forma net loss per share.
 
  23.1      The consent of Coopers & Lybrand, L.L.P.
     
  23.2**    The consent of Pepper, Hamilton & Scheetz is contained in their
            opinion filed as Exhibit 5.1 of the Registration Statement.     
 
  23.3**    The consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
 
  24.1**    Power of Attorney.
 
  27.1**    Financial Data Schedule.
 
  27.2**    Financial Data Schedule.
 
  27.3**    Financial Data Schedule.
 
  27.4**    Financial Data Schedule.
 
  27.5**    Financial Data Schedule.
 
  27.6**    Financial Data Schedule.
- --------
       
  **Previously filed.
  +The Company has applied for confidential treatment with respect to certain
  portions of these documents.
 
  (b)Financial Statement Schedules
 
  Schedules other than those referred to above have been omitted because they
are not applicable or not required under the instructions contained in
Regulation S-X or because the information is included elsewhere in the
Financial Statements or the notes thereto.
 

ITEM 17. UNDERTAKINGS
 
  Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that
 
                                     II-5

<PAGE>
 
a claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
 
  The undersigned Registrant hereby undertakes that:
 
  (1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
 
  (2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
 
  The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
 
                                     II-6

<PAGE>
 

                                  SIGNATURES
   
  Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Ann
Arbor, State of Michigan, on the 7th day of January, 1997.     
 
                                       AASTROM BIOSCIENCES, INC.
                                          
                                       By:    /s/ R. Douglas Armstrong     
                                           ___________________________________
                                           R. Douglas Armstrong, Ph.D.
                                           President and Chief Executive
                                           Officer
                                           (Principal Executive Officer)
 
  Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
 

<TABLE>   
<CAPTION>
             SIGNATURE                             TITLE                     DATE
             ---------                             -----                     ----
<S>                                  <C>                                <C>
                                     
      /s/ R. Douglas Armstrong       President, Chief Executive         January 7, 1997
____________________________________ Officer, and Director
    R. Douglas Armstrong, Ph.D.      (Principal Executive Officer)

          Todd E. Simpson*           Vice President, Finance &          January 7, 1997
____________________________________ Administration and Chief Financial
          Todd E. Simpson            Officer (Principal Financial and
                                     Accounting Officer)

          Robert J. Kunze*           Chairman of the Board              January 7, 1997
____________________________________ and Director
          Robert J. Kunze            

       Albert B. Deisseroth*
____________________________________ Director                           January 7, 1997
 Albert B. Deisseroth, M.D., Ph.D.

        Stephen G. Emerson*
____________________________________ Director                           January 7, 1997
  Stephen G. Emerson, M.D., Ph.D.

         G. Bradford Jones*
____________________________________ Director                           January 7, 1997
         G. Bradford Jones

          Horst R. Witzel*
____________________________________ Director                           January 7, 1997
     Horst R. Witzel, Dr.-Ing.

          Edward C. Wood*
____________________________________ Director                           January 7, 1997
        Edward C. Wood, Jr.
</TABLE>
    
    
  
*By: /s/ R. Douglas Armstrong      
     -----------------------------
         R. Douglas Armstrong
           Attorney-in-Fact
 
                                     II-7

<PAGE>
 

                                 EXHIBIT INDEX
     
  1.1      Form of Underwriting Agreement.     
 
  3.1**    Restated Articles of Incorporation.
     
  3.2**    Form of Restated Articles of Incorporation (to be filed with the
           Secretary of State of the State of Michigan prior to the closing
           of this offering).     
 
  3.3**    Bylaws, as amended.
     
  4.1**    Specimen Common Stock Certificate.     
 
  4.2**    Amended and Restated Investors' Rights Agreement dated April 7, 1992.
     
  5.1**    Opinion of Pepper, Hamilton & Scheetz, counsel to the Company,
           with respect to the legality of the securities being registered,
           including their consent to being named in the Registration
           Statement.     
 
  10.1**   Form of Indemnification Agreement.
 
  10.2**   1989 Stock Option Plan and form of agreement thereunder.
 
  10.3**   Ancillary Stock Option Plan and form of agreement thereunder.
 
  10.4**   401(k) Plan.
 
  10.5**   Amended and Restated 1992 Incentive and Non-Qualified Stock Option
           Plan and forms of agreements thereunder.
 
  10.6**   1996 Outside Directors Stock Option Plan and forms of agreements
           thereunder.
 
  10.7**   1996 Employee Stock Purchase Plan and form of agreement thereunder.
 
  10.8**   Form of Employment Agreement.
 
  10.9**   Stock Purchase Agreement dated October 22, 1993 between Cobe
           Laboratories, Inc. and the Company and amendment thereto dated
           October 29, 1996.
 
  10.10**+ Distribution Agreement dated October 22, 1993 between Cobe BCT,
           Inc. and the Company and amendments thereto dated March 29, 1995,
           September 11, 1995 and October 29, 1996.
     
  10.11    License Agreement dated July 17, 1992 between J.G. Cremonese and
           the Company and related addenda thereto dated July 14, 1992 and
           July 7, 1993.     
 
  10.12**+ Collaborative Product Development Agreement dated May 10, 1994
           between SeaMED Corporation and the Company.
 
  10.13**+ Collaborative Product Development Agreement dated November 8, 1994
           between Ethox Corporation and the Company.
 
  10.14**+ License and Supply Agreement dated April 1, 1996 between Immunex
           Corporation and the Company.
 
  10.15**  Lease Agreement dated May 18, 1992 between Domino's Farms Holding,
           L.P. and the Company and amendments thereto dated February 26,
           1993, October 3, 1994, November 16, 1994 and July 29, 1996.
 
  10.16**  Clinical Trial Agreement dated April 19, 1996 between the Company
           and the University of Texas M.D. Anderson Cancer Center.
     
  10.17    License Agreement dated March 13, 1992 between the Company and the
           University of Michigan and amendments thereto dated March 13,
           1992, October 8, 1993 and June 21, 1995.     

<PAGE>
 
  10.18**   Employee Proprietary Information and Invention Agreement
            effective June 1, 1991 between the Company and R. Douglas
            Armstrong.
 
  10.19**   Employment Agreement dated June 19, 1992 between the Company and
            James Maluta.
 
  10.20**   Employment Agreement dated December 8, 1995 between the Company
            and Todd E. Simpson, C.P.A.
 
  10.21**   Employment Agreement dated February 10, 1994 between the Company
            and Walter C. Ogier.
 
  10.22**   Employment Agreement dated April 19, 1994 between the Company and
            Thomas E. Muller, Ph.D.
 
  10.23**   Employment Agreement dated October 26, 1995 between the Company
            and Alan K. Smith, Ph.D.
 
  10.24**   Promissory Note dated November 18, 1993 for $120,000 loan by the
            Company to R. Douglas Armstrong and amendment thereto dated
            October 30, 1996.
 
  10.25**   Promissory Note dated October 20, 1993 for $47,303 loan by the
            Company to Stephen G. Emerson, M.D., Ph.D and amendment thereto
            dated October 30, 1996.
 
  10.26**   Consulting Agreement dated June 1, 1995 between the Company and
            Stephen G. Emerson, M.D., Ph.D.
 
  10.27**   Clinical Trial Agreement dated August 28, 1996 between the
            Company and Loyola University Medical Center Cancer Center.
 
  10.28**   Stock Purchase Commitment Agreement dated October 29, 1996
            between Cobe Laboratories, Inc. and the Company.
 
  10.29**   Convertible Loan Commitment Agreement dated October 15, 1996
            between the State Treasurer of the State of Michigan and the
            Company.
 
  10.30**   Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Enterprise Development Fund L.P., Enterprise
            Development Fund II, L.P. and Northwest Ohio Venture Fund Limited
            Partnership).
 
  10.31**   Stock Purchase Agreement dated January 8, 1996 among the Company,
            SBIC Partners, L.P. and the State Treasurer of the State of
            Michigan.
 
  10.32**+  Governance Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.33**+  License Agreement dated September 15, 1995 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.34**   Stock Purchase Agreement dated September 15, 1995 between the
            Company and Rhone-Poulenc Rorer Inc.
 
  10.35**   Letter Agreement dated November 11, 1996 between the Company and
            Cobe Laboratories, Inc.
 
  10.36**   Form of Subscription Agreement for the purchase of Series D
            Preferred Stock (Brentwood Associates V, L.P., Candice E.
            Appleton Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life
            Science Technology Fund, H&Q London Ventures, State Treasurer of
            the State of Michigan and Windpoint Partners II, Limited
            Partnership).
 
  10.37**   Subscription Agreement dated December 11, 1995 between the
            Company and Northwest Ohio Venture Fund Limited Partnership.

<PAGE>
 
  10.38**   Subscription Agreement dated May 30, 1995 between the Company and
            Cobe Laboratories, Inc.
 
  10.39**   Termination Agreement dated November 14, 1996 between the Company
            and Rhone-Poulenc Rorer Inc.
 
  10.40**   Stock Purchase Agreement dated November 14, 1996 between the
            Company and Rhone-Poulenc Rorer Inc.
     
  10.41**+  Collaborative Supply Agreement dated December 16, 1996 between
            the Company and Anchor Advanced Products, Inc., Mid-State
            Plastics Division.     
 
  11.1**    Statement re computation of pro forma net loss per share.
 
  23.1      The consent of Coopers & Lybrand, L.L.P.
     
  23.2**    The consent of Pepper, Hamilton & Scheetz is contained in their
            opinion filed as Exhibit 5.1 of the Registration Statement.     
 
  23.3**    The consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.
 
  24.1**    Power of Attorney.
 
  27.1**    Financial Data Schedule.
 
  27.2**    Financial Data Schedule.
 
  27.3**    Financial Data Schedule.
 
  27.4**    Financial Data Schedule.
 
  27.5**    Financial Data Schedule.
 
  27.6**    Financial Data Schedule.
- --------
       
  **Previously filed.
  +The Company has applied for confidential treatment with respect to certain
  portions of these documents.





<PAGE>
 
                                                                     EXHIBIT 1.1

                                                             SUBJECT TO APPROVAL
                                                             OF THE UNDERWRITERS



                               3,250,000 Shares
                           AASTROM BIOSCIENCES, INC.
                                 COMMON STOCK
                            UNDERWRITING AGREEMENT
                            ----------------------
                                                                          , 1997
COWEN & COMPANY
J.P. MORGAN & COMPANY
 As Representatives of the several Underwriters

c/o Cowen & Company
 Financial Square
 New York, New York 10005

Dear Sirs:

     1.  Introductory.  Aastrom Biosciences, Inc., a Michigan corporation (the
         ------------                                                         
"Company"), proposes to issue and sell, pursuant to the terms of this Agreement,
to the several underwriters named in Schedule A hereto (the "Underwriters," or,
each, an "Underwriter"), an aggregate of 3,250,000 shares of Common Stock, no
par value (the "Common Stock") of the Company.  The aggregate of 3,250,000
shares so proposed to be sold is hereinafter referred to as the "Firm Stock".
The Company also proposes to sell to the Underwriters, upon the terms and
conditions set forth in Section 3 hereof, up to an additional 487,500 shares of
Common Stock (the "Optional Stock").  The Firm Stock and the Optional Stock are
hereinafter collectively referred to as the "Stock."  Cowen & Company ("Cowen")
and J.P. Morgan & Company are acting as representatives of the several
Underwriters and in such capacity are hereinafter referred to as the
"Representatives."

     2.  Representations and Warranties
 of the Company.  The Company represents
         ---------------------------------------------                         
and warrants to, and agrees with, the several Underwriters that:

               (a)  A registration statement on Form S-1 (File No. 333-15415) in
          the form in which it became or becomes effective and also in such form
          as it may be when any post-effective amendment thereto shall become
          effective with respect


<PAGE>
 
          to the Stock, including any preeffective prospectuses included as part
          of the registration statement as originally filed or as part of any
          amendment or supplement thereto, or filed pursuant to Rule 424 under
          the Securities Act of 1933, as amended (the "Securities Act"), and the
          rules and regulations (the "Rules and Regulations") of the Securities
          and Exchange Commission (the "Commission") thereunder, copies of which
          have heretofore been delivered to you, has been carefully prepared by
          the Company in conformity with the requirements of the Securities Act
          and has been filed with the Commission under the Securities Act; one
          or more amendments to such registration statement, including in each
          case an amended preeffective prospectus, copies of which amendments
          have heretofore been delivered to you, have been so prepared and
          filed.  If it is contemplated, at the time this Agreement is executed,
          that a post-effective amendment to the registration statement will be
          filed and must be declared effective before the offering of the Stock
          may commence, the term "Registration Statement" as used in this
          Agreement means the registration statement as amended by said post-
          effective amendment.  [MATT--your fax was garbled here; what was your
          comment?]  The term "Registration Statement" as used in this Agreement
          shall also include any registration statement relating to the Stock
          that is filed and declared effective pursuant to Rule 462(b) under the
          Securities Act.  The term "Prospectus" as used in this Agreement means
          the prospectus in the form included in the Registration Statement, or,
          (A) if the prospectus included in the Registration Statement omits
          information in reliance on Rule 430A under the Securities Act and such
          information is included in a prospectus filed with the Commission
          pursuant to Rule 424(b) under the Securities Act, the term
          "Prospectus" as used in this Agreement means the prospectus in the
          form included in the Registration Statement as supplemented by the
          addition of the Rule 430A information contained in the prospectus
          filed with the Commission pursuant to Rule 424 (b) and (B) if
          prospectuses that meet the requirements of Section 10(a) of the
          Securities Act are delivered pursuant to Rule 434 under the Securities
          Act, then (i) the term "Prospectus" as used in this Agreement means
          the "prospectus subject to completion" (as such term is defined in
          Rule 434(g) under the Securities Act) as supplemented by (a) the
          addition of Rule 430A information or other information contained in
          the form of prospectus delivered pursuant to Rule 434(b)(2) under the
          Securities Act or (b) the information contained in the term sheets
          described in Rule 434(b)(3) under the Securities Act, and (ii) the
          date of such prospectuses shall be deemed to be the date of the term
          sheets.  The term "Preeffective Prospectus" as used in this Agreement
          means the prospectus subject to completion in the form included in the
          Registration Statement at the time of the initial filing of the
          Registration Statement with the Commission, and as such prospectus
          shall have been amended from time to time prior to the date of the
          Prospectus.

               (b)  The Commission has not issued or threatened to issue any
          order preventing or suspending the use of any Preeffective Prospectus,
          and, at its date of issue, each Preeffective Prospectus conformed in
          all material respects with the requirements of the Securities Act and
          did not include any untrue statement of a material fact or omit to
          state a material fact required to be stated therein or

                                       2

<PAGE>
 
          necessary to make the statements therein, in light of the
          circumstances under which they were made, not misleading; and, when
          the Registration Statement becomes effective and at all times
          subsequent thereto up to and including the Closing Dates, the
          Registration Statement and the Prospectus and any amendments or
          supplements thereto contained and will contain all material statements
          and information required to be included therein by the Securities Act
          and conformed and will conform in all material respects to the
          requirements of the Securities Act and neither the Registration
          Statement nor the Prospectus, nor any amendment or supplement thereto,
          included or will include any untrue statement of a material fact or
          omit to state any material fact required to be stated therein or
          necessary to make the statements therein, in light of the
          circumstances under which they were made, not misleading; provided,
          however, that the foregoing representations, warranties and agreements
          shall not apply to information contained in or omitted from any
          Preeffective Prospectus or the Registration Statement or the
          Prospectus or any such amendment or supplement thereto in reliance
          upon, and in conformity with, written information furnished to the
          Company by or on behalf of any Underwriter, directly or through you,
          specifically for use in the preparation thereof; there is no
          franchise, lease, contract, agreement or document required to be
          described in the Registration Statement or Prospectus or to be filed
          as an exhibit to the Registration Statement which is not described or
          filed therein as required; and all descriptions of any such
          franchises, leases, contracts, agreements or documents contained in
          the Registration Statement are accurate and complete descriptions of
          such documents in all material respects.

               (c)  Subsequent to the respective dates as of which information
          is given in the Registration Statement and Prospectus, and except as
          set forth or contemplated in the Prospectus, the Company has not
          incurred any material liabilities or obligations, direct or
          contingent, nor entered into any material transactions (in all cases
          other than in the ordinary course of business), and there has not been
          any material adverse change in the condition (financial or otherwise),
          properties, business, management, prospects, net worth or results of
          operations of the Company or any change in the capital stock, short-
          term or long-term debt of the Company.

               (d)  The financial statements, together with the related notes
          and schedules, set forth in the Prospectus and elsewhere in the
          Registration Statement fairly present, on the basis stated in the
          Registration Statement, the financial position and the results of
          operations and changes in financial position of the Company at the
          respective dates or for the respective periods therein specified.
          Such statements and related notes and schedules have been prepared in
          accordance with generally accepted accounting principles applied on a
          consistent basis except as may be set forth in the Prospectus.

               (e)  Coopers & Lybrand L.L.C., who have expressed their opinions
          on the audited financial statements and related schedules included in
          the Registration

                                       3

<PAGE>
 
          Statement and the Prospectus are independent public accountants as
          required by the Securities Act and the Rules and Regulations.

               (f)  The Company has been duly organized and is validly existing
          and in good standing as a corporation under the laws of the state of
          Michigan, with power and authority (corporate and other) to own or
          lease its properties and to conduct its business as described in the
          Prospectus; except as otherwise described in the Prospectus, the
          Company is in possession of and operating in compliance with all
          franchises, grants, authorizations, licenses, permits, easements,
          consents, certificates and orders required for the conduct of its
          business, all of which are valid and in full force and effect, expect
          for such franchises, grants, authorizations, licenses, permits,
          easements, consents, certificates or orders the absence of which,
          alone or in the aggregate, do not or would not have a material adverse
          effect on the Company; and the Company is duly qualified to do
          business and in good standing as a foreign corporation in all other
          jurisdictions where its ownership or leasing of properties or the
          conduct of its business requires such qualification.  The Company has
          all requisite power and authority, and all necessary consents,
          approvals, authorizations, orders, registrations, qualifications,
          licenses and permits of and from all public regulatory or governmental
          agencies and bodies to own, lease and operate its properties and
          conduct its business as now being conducted and as described in the
          Registration Statement and the Prospectus, and no such consent,
          approval, authorization, order, registration, qualification, license
          or permit contains a materially burdensome restriction not adequately
          disclosed in the Registration Statement and the Prospectus. The
          Company does not own or control, directly or indirectly, any other
          corporations, associations or other entities.

               (g)  The Company's authorized and outstanding capital stock is on
          the date hereof, and will be on the Closing Dates, as set forth under
          the caption "Capitalization" in the Prospectus (adjusted, in the case
          of the Option Closing Date, as set forth under the heading "Pro Forma
          As Adjusted" under such caption); the outstanding shares of common
          stock (including the outstanding shares of Stock) of the Company
          conform to the description thereof in the Prospectus and have been
          duly authorized and validly issued and are fully paid and
          nonassessable; and have been issued in compliance with all federal and
          state securities laws and were not issued in violation of or subject
          to any preemptive rights or similar rights to subscribe for or
          purchase securities.  Except as disclosed in and or contemplated by
          the Prospectus and the financial statements of the Company and related
          notes thereto included in the Prospectus, the Company does not have
          outstanding any options or warrants to purchase, or any preemptive
          rights or other rights to subscribe for or to purchase any securities
          or obligations convertible into, or any contracts or commitments to
          issue or sell, shares of its capital stock or any such options,
          rights, convertible securities or obligations, except for options
          granted subsequent to the date of information provided in the
          Prospectus pursuant to the Company's employee and stock option plans
          as disclosed in the Prospectus.  The description of the Company's
          stock option and other stock plans or arrangements, and the options or
          other rights

                                       4

<PAGE>
 
          granted or exercised thereunder, as set forth in the Prospectus,
          accurately and fairly presents in all material respects the
          information required to be shown with respect to such plans,
          arrangements, options and rights.

               (h)  The Stock to be issued and sold by the Company to the
          Underwriters hereunder has been duly and validly authorized and, when
          issued and delivered against payment therefor as provided herein, will
          be duly and validly issued, fully paid and nonassessable and free of
          any preemptive or similar rights and will conform to the description
          thereof in the Prospectus.

               (i)  Except as set forth in the Prospectus, there are no legal or
          governmental proceedings pending to which the Company is a party or of
          which any property of the Company is subject, which, if determined
          adversely to the Company might individually or in the aggregate (i)
          prevent or adversely affect the transactions contemplated by this
          Agreement, (ii) suspend the effectiveness of the Registration
          Statement, (iii) prevent or suspend the use of the Preeffective
          Prospectus in any jurisdiction or (iv) result in a material adverse
          change in the condition (financial or otherwise), properties,
          business, management, prospects, net worth or results of operations of
          the Company; and to the best of the Company's knowledge no such
          proceedings are threatened or contemplated against the Company by
          governmental authorities or others.  The Company is not a party nor
          subject to the provisions of any material injunction, judgment, decree
          or order of any court, regulatory body or other governmental agency or
          body.  The description of the Company's litigation under the heading
          "Legal Proceedings" in the Prospectus is true and correct and complies
          with the Rules and Regulations.

               (j)  The execution, delivery and performance of this Agreement
          and the consummation of the transactions herein contemplated will not
          result in a breach or violation of any of the terms or provisions of
          or constitute a default under any indenture, mortgage, deed of trust,
          note or other agreement or instrument to which the Company is a party
          or by which it or any of its properties is or may be bound other than
          any such indenture, mortgage, deed of trust, note or other agreement
          or instrument which, alone or in the aggregate, is material to the
          Company, the Articles of Incorporation, By-laws or other
          organizational documents of the Company, or any law, order, rule or
          regulation of any court or governmental agency or body having
          jurisdiction over the Company or any of its properties, other than any
          such law, order, rule or regulation which, alone or in the aggregate,
          is material to the Company, or will result in the creation of a lien.

               (k)  No consent, approval, authorization or order of any court or
          governmental agency or body is required for the consummation by the
          Company of the transactions contemplated by this Agreement, except
          such as may be required by the National Association of Securities
          Dealers, Inc. (the "NASD") or under the Securities Act or the
          securities or "Blue Sky" laws of any jurisdiction in connection with
          the purchase and distribution of the Stock by the Underwriters, all of
          which requirements have been satisfied in all material respects.

                                       5

<PAGE>
 
               (l)  The Company has the full corporate power and authority to
          enter into this Agreement and to perform its obligations hereunder
          (including to issue, sell and deliver the Stock), and this Agreement
          has been duly and validly authorized, executed and delivered by the
          Company and is a valid and binding obligation of the Company,
          enforceable against the Company in accordance with its terms, except
          to the extent that rights to indemnity and contribution hereunder may
          be limited by federal or state securities laws or the public policy
          underlying such laws and except as enforceability may be limited by
          bankruptcy, insolvency, reorganization, moratorium or similar laws
          relating to or affecting creditors' rights generally or by general
          equitable principles;

               (m)  The Company is in all material respects in compliance with,
          and conducts its businesses in conformity with, all applicable
          federal, state, local and foreign laws, rules and regulations or any
          court or governmental agency or body; to the knowledge of the Company,
          otherwise than as set forth in the Registration Statement and the
          Prospectus, no prospective change in any of such federal or state
          laws, rules or regulations has been adopted which, when made
          effective, would have a material adverse effect on the operations of
          the Company.

               (n)  The Company has filed all necessary federal, state, local
          and foreign income, payroll, franchise and other tax returns and has
          paid all taxes shown as due thereon or with respect to any of its
          properties, and there is no tax deficiency that has been, or to the
          knowledge of the Company is likely to be, asserted against the Company
          or any of its properties or assets that would materially adversely
          affect the financial position, business or operations of the Company.

               (o)  Except as disclosed in the Registration Statement, the
          Company is in compliance with all applicable existing federal, state,
          local and foreign laws and regulations relating to the protection of
          human health or the environment or imposing liability or requiring
          standards of conduct concerning any Hazardous Materials
          ("Environmental Laws"), except for such instances of noncompliance
          which, either singly or in the aggregate, would not have a material
          adverse effect.  The term "Hazardous Material" means (i) any
          "hazardous substance" as defined by the Comprehensive Environmental
          Response, Compensation and Liability Act of 1980, as amended, (ii) any
          "hazardous waste" as defined by the Resource Conservation and Recovery
          Act, as amended, (iii) any petroleum or petroleum product, (iv) any
          polychlorinated biphenyl and (v) any pollutant or contaminant or
          hazardous, dangerous or toxic chemical, material, waste or substance
          regulated under or within the meaning of any other Environment Law.

               (p)  No person or entity has the right to require registration,
          as part of the Registration Statement, of shares of Common Stock or
          other securities of the Company because of the filing or effectiveness
          of the Registration Statement or otherwise, except for persons and
          entities who have expressly waived such right or who have been given
          proper notice and have failed to exercise such right within the time
          or times required under the terms and conditions of such right.

                                       6

<PAGE>
 
               (q)  Neither the Company nor any of its officers, directors or
          affiliates has taken or will take, directly or indirectly, any action
          designed or intended to stabilize or manipulate the price of any
          security of the Company, or which caused or resulted in, or which
          might in the future reasonably be expected to cause or result in,
          stabilization or manipulation of the price of any security of the
          Company.

               (r)  The Company has provided you with all financial statements
          since June 30, 1992 to the date hereof that are available to the
          officers of the Company.

               (s)  The Company owns or possesses license rights to all patents,
          trademarks, trademark registrations, service marks, service mark
          registrations, tradenames, copyrights, licenses, inventions, trade
          secrets and rights as described in the Prospectus as being owned or
          licensed by it, as being proprietary to the Company or as necessary
          for the conduct of its business as presently conducted or contemplated
          by the Prospectus, and the Company is not aware of any claim to the
          contrary or any challenge by any other person to the rights of the
          Company with respect to the foregoing.  Without limiting the
          foregoing, each of the license agreement between the Company and
          Joseph G. Cremonese dated July [__], 1992 and relating to [Patent nos.
          __] and the license agreement between the Company and the University
          of Michigan dated March 13, 1992, as amended, and relating to U.S.
          Patent No. 4,839,292, is a valid and binding agreement of Joseph G.
          Cremonese and of the University of Michigan, respectively, enforceable
          in accordance with its terms; and the Company is not in material
          breach or violation of any of the terms or provisions of either such
          agreement, and no default exists under either such agreement.  The
          Company's business as now conducted and as proposed to be conducted
          does not and will not infringe or conflict with in any material
          respect patents, trademarks, service marks, trade names, copyrights,
          trade secrets, licenses or other intellectual property or franchise
          right of any person.  Except as described in the Prospectus, no claim
          has been made against the Company alleging the infringement by the
          Company of any patent, trademark, service mark, tradename, copyright,
          trade secret, license in or other intellectual property right or
          franchise right of any person.

               (t)  The Company has performed all material obligations currently
          required to be performed by it under all contracts required by Item
          601(b)(10) of Regulation S-K under the Securities Act to be filed as
          exhibits to the Registration Statement, and neither the Company nor,
          to the Company's knowledge, any other party to such contract is in
          default under or in breach of any such obligations. The Company has
          not received any notice of such default or breach.

               (u)  The Company is not involved in any labor dispute nor is any
          such dispute threatened.  The Company is not aware that (A) any
          executive, key employee or significant group of employees of the
          Company plans to terminate employment with the Company or (B) any such
          executive or key employee is subject to any noncompete, nondisclosure,
          confidentiality, employment, consulting or similar agreement that
          would be violated by the present or proposed business

                                       7

<PAGE>
 
          activities of the Company.  The Company does not have or expect to
          have any liability for any prohibited transaction or funding
          deficiency or any complete or partial withdrawal liability with
          respect to any pension, profit sharing or other plan which is subject
          to the "Employee Retirement Income Security Act of 1974, as amended
          ("ERISA"), to which the Company makes or ever has made a contribution
          and in which any employee of the Company is or has ever been a
          participant.  With respect to such plans, the Company is in compliance
          in all material respects with all applicable provisions of ERISA.

               (v)  The Company has obtained the written agreement described in
          Section 8(o) of this Agreement from each of its officers and
          directors.

               (w)  The Company has and the Company as of the Closing Dates will
          have, good and marketable title in fee simple to all real property and
          good and marketable title to all personal property owned or proposed
          to be owned by it which is material to the business of the Company, in
          each case free and clear of all liens, encumbrances and defects except
          such as are described the Prospectus or such as would not have a
          material adverse effect on the Company; and any real property and
          buildings held under lease by the Company or proposed to be held after
          giving effect to the transactions described in the Prospectus are, or
          will be as of the Closing Dates, held by it under valid, subsisting
          and enforceable leases with such exceptions as would not have a
          material adverse effect on the Company, in each case except as
          described in or contemplated by the Prospectus.

               (x)  The Company is insured by insurers of recognized financial
          responsibility against such losses and risks and in such amounts as
          are customary in the businesses in which it is engaged or proposes to
          engage after giving effect to the transactions described in the
          Prospectus; and the Company does not have any reason to believe that
          it will not be able to renew its existing insurance coverage as and
          when such coverage expires or to obtain similar coverage from similar
          insurers as may be necessary to continue its business at a cost that
          would not materially and adversely affect the condition, financial or
          otherwise, or the earnings, business or operations of the Company
          except as described in or contemplated by the Prospectus.

               (y)  Other than as contemplated by this Agreement, there is no
          broker, finder or other party that is entitled to receive from the
          Company any brokerage or finder's fee or other fee or commission as a
          result of any of the transactions contemplated by this Agreement.

               (z)  The Company has complied with all provisions of Section
          517.075 Florida Statutes (Chapter 92-198; Laws of Florida).

               (aa)  The Company maintains a system of internal accounting
          controls sufficient to provide reasonable assurances that (i)
          transactions are executed in accordance with management's general or
          specific authorization; (ii) transactions are recorded as necessary to
          permit preparation of financial statements in

                                       8

<PAGE>
 
          conformity with generally accepted accounting principles and to
          maintain accountability for assets; (iii) access to assets is
          permitted only in accordance with management's general or specific
          authorization; and (iv) the recorded accountability for assets is
          compared with existing assets at reasonable intervals and appropriate
          action is taken with respect to any differences.

               (ab)  To the Company's knowledge, neither the Company nor any
          employee or agent of the Company has made any payment of funds of the
          Company or received or retained any funds in violation of any law,
          rule or regulation, which payment, receipt or retention of funds is of
          a character required to be disclosed in the Prospectus.

               (ac)  The Company is not an "investment company" or an entity
          "controlled" by an "investment company" as such terms are defined in
          the Investment Company Act of 1940, as amended.

               (ad)  Each certificate signed by any officer of the Company and
          delivered to the Underwriters or counsel for the Underwriters shall be
          deemed to be a representation and warranty by the Company as to the
          matters covered thereby.

          3.   Purchase by, and Sale and Delivery to, Underwriters -- Closing
               --------------------------------------------------------------
Dates. The Company agrees to sell to the Underwriters the Firm Stock, and on the
- -----                                                                           
basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock from
the Company, the number of shares of Firm Stock to be purchased by each
Underwriter being set opposite its name in Schedule A, subject to adjustment in
accordance with Section 12 hereof.

          The purchase price per share to be paid by the Underwriters to the
Company will be $ [_____] per share (the "Purchase Price").

          The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York Time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective Underwriters or in such other names as Cowen may
designate (solely for the purpose of administrative convenience) and in such
denominations as Cowen may determine, against payment of the aggregate Purchase
Price therefor by certified or official bank check or checks in Clearing House
funds (next day funds), payable to the order of the Company, all at the offices
of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New York, New York 10019.
The time and date of the delivery and closing shall be at 10:00 A.M., New York
Time, on [__________], 1997, in accordance with Rule 15c6-1 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").  The time and date of
such payment and delivery are herein referred to as the "First Closing Date."
The First Closing Date and the location of delivery of, and the form of payment
for, the Firm Stock may be varied by agreement between the Company and Cowen.
The First Closing Date may be postponed pursuant to the provisions of Section
12.

                                       9

<PAGE>
 
          The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York Time, on the business day preceding the First Closing Date
at the offices of [Cowen & Company, Financial Square,] New York, New York 10005.

          It is understood that Cowen, individually and not as a Representative
of the several Underwriters, may (but shall not be obligated to) make payment to
the Company on behalf of any Underwriter or Underwriters, for the Stock to be
purchased by such Underwriter or Underwriters. Any such payment by Cowen shall
not relieve such Underwriter or Underwriters from any of its or their other
obligations hereunder.

          The several Underwriters agree to make an initial public offering of
the Firm Stock at the initial public offering price as soon after the
effectiveness of the Registration Statement as in their judgment is advisable.
The Representatives shall promptly advise the Company of the making of the
initial public offering.

          For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase up to 487,500
shares of Optional Stock.  The price per share to be paid for the Optional Stock
shall be the Purchase Price.  The option granted hereby may be exercised as to
all or any part of the Optional Stock at any time, and from time to time, not
more than thirty (30) days subsequent to the effective date of this Agreement.
No Optional Stock shall be sold and delivered unless the Firm Stock previously
has been, or simultaneously is, sold and delivered.  The right to purchase the
Optional Stock or any portion thereof may be surrendered and terminated at any
time upon notice by the Underwriters to the Company.

          The option granted hereby may be exercised by the Underwriters by
giving written notice from Cowen to the Company setting forth the number of
shares of the Optional Stock to be purchased by them and the date and time for
delivery of and payment for the Optional Stock. Each date and time for delivery
of and payment for the Optional Stock (which may be the First Closing Date, but
not earlier) is herein called the "Option Closing Date," and shall in no event
be earlier than two (2) business days nor later than ten (10) business days
after written notice is given. The Option Closing Date and the First Closing
Date are herein called the "Closing Dates." All purchases of Optional Stock from
the Company shall be made on a pro rata basis. Optional Stock shall be purchased
for the account of each Underwriter in the same proportion as the number of
shares of Firm Stock set forth opposite such Underwriter's name in Schedule A
hereto bears to the total number of shares of Firm Stock (subject to adjustment
by the Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Company agrees to sell to the Underwriters the number of
shares of Optional Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such shares determined as
aforesaid.

          The Company will deliver the Optional Stock to the Underwriters (in
the form of definitive certificates, issued in such names and in such
denominations as the Representatives

                                       10

<PAGE>
 
may direct by notice in writing to the Company given at or prior to 12:00 Noon,
New York Time, on the second full business day preceding the Option Closing Date
or, if no such direction is received, in the names of the respective
Underwriters or in such other names as Cowen may designate (solely for the
purpose of administrative convenience) and in such denominations as Cowen may
determine, against payment of the aggregate Purchase Price therefor by certified
or official bank check-or checks in Clearing House funds (next day funds),
payable to the order of the Company all at the offices of Brobeck, Phleger &
Harrison LLP, 1633 Broadway, New York, New York 10019.  The Company shall make
the certificates for the Optional Stock available to the Underwriters for
examination not later than 10:00 A.M., New York Time, on the business day
preceding the Option Closing Date at the offices of Cowen & Company, Financial
Square, New York, New York 10005.  The Option Closing Date and the location of
delivery of, and the form of payment for, the Option Stock may be varied by
agreement between the Company and Cowen.  The Option Closing Date may be
postponed pursuant to the provisions of Section 12.

          4.  Covenants and Agreements of the Company.  The Company covenants 
              ---------------------------------------
and agrees with the several Underwriters that:

               (a) The Company will (i) if the Company and the Representatives
          have determined not to proceed pursuant to Rule 430A, use its best
          efforts to cause the Registration Statement to become effective, (ii)
          if the Company and the Representatives have determined to proceed
          pursuant to Rule 430A, use its best efforts to comply with the
          provisions of and make all requisite filings with the Commission
          pursuant to Rule 430A and Rule 424 of the Rules and Regulations and
          (iii) if the Company and the Representatives have determined to
          deliver Prospectuses pursuant to Rule 434 of the Rules and
          Regulations, to use its best efforts to comply with all the applicable
          provisions thereof.  The Company will advise the Representatives
          promptly as to the time at which the Registration Statement becomes
          effective, will advise the Representatives promptly of the issuance by
          the Commission of any stop order suspending the effectiveness of the
          Registration Statement or of the institution of any proceedings for
          that purpose, and will use its best efforts to prevent the issuance of
          any such stop order and to obtain as soon as possible the lifting
          thereof, if issued.  The Company will advise the Representatives
          promptly of the receipt of any comments of the Commission or any
          request by the Commission for any amendment of or supplement to the
          Registration Statement or the Prospectus or for additional information
          and will not at any time file any amendment to the Registration
          Statement or supplement to the Prospectus which shall not previously
          have been submitted to the Representatives a reasonable time prior to
          the proposed filing thereof or to which the Representatives shall
          reasonably object in writing or which is not in compliance with the
          Securities Act and the Rules and Regulations.

               (b) The Company will prepare and file with the Commission,
          promptly upon the request of the Representatives, any amendments or
          supplements to the Registration Statement or the Prospectus which in
          the reasonable opinion of the Representatives may be necessary to
          enable the several Underwriters to continue

                                       11

<PAGE>
 
          the distribution of the Stock and will use its best efforts to cause
          the same to become effective as promptly as possible.

               (c) If at any time after the effective date of the Registration
          Statement when a prospectus relating to the Stock is required to be
          delivered under the Securities Act, including under the Rules and
          Regulations, any event relating to or affecting the Company occurs as
          a result of which the Prospectus or any other prospectus as then in
          effect would include an untrue statement of a material fact, or omit
          to state any material fact necessary to make the statements therein,
          in light of the circumstances under which they were made, not
          misleading, or if it is necessary at any time to amend the Prospectus
          to comply with the Securities Act, the Company will promptly notify
          the Representatives thereof and will prepare an amended or
          supplemented prospectus which will correct such statement or omission;
          and in case any Underwriter is required to deliver a prospectus
          relating to the Stock nine (9) months or more after the effective date
          of the Registration Statement, the Company upon the request of the
          Representatives and at the expense of such Underwriter will prepare
          promptly such prospectus or prospectuses as may be necessary to permit
          compliance with the requirements of Section 10(a)(3) of the Securities
          Act.

               (d) The Company will deliver to the Representatives, at or before
          the Closing Dates, signed copies of the Registration Statement, as
          originally filed with the Commission, and all amendments thereto
          including all financial statements and exhibits thereto and will
          deliver to the Representatives such number of copies of the
          Registration Statement, including such financial statements but
          without exhibits, and all amendments thereto, as the Representatives
          may reasonably request.  The Company will deliver or mail to or upon
          the order of the Representatives, from time to time until the
          effective date of the Registration Statement, as many copies of the
          Preeffective Prospectus as the Representative(s) may reasonably
          request.  The Company will deliver or mail to or upon the order of the
          Representatives on the date of the initial public offering, and
          thereafter from time to time during the period when delivery of a
          prospectus relating to the Stock is required under the Securities Act,
          including under the Rules and Regulations, as many copies of the
          Prospectus, in final form or as thereafter amended or supplemented as
          the Representatives may reasonably request; provided, however, that
          the expense of the preparation and delivery of any prospectus required
          for use nine (9) months or more after the effective date of the
          Registration Statement shall be borne by the Underwriters required to
          deliver such prospectus.

               (e) The Company will make generally available to its shareholders
          as soon as practicable, but not later than fifteen (15) months after
          the effective date of the Registration Statement, an earnings
          statement which will be in reasonable detail (but which need not be
          audited) and which will comply with Section 11(a) of the Securities
          Act, covering a period of at least twelve (12) months beginning after
          the "effective date" (as defined in Rule 158 under the Securities Act)
          of the Registration Statement.

                                       12

<PAGE>
 
               (f)  The Company will cooperate with the Representatives to
          enable the Stock to be registered or qualified for offering and sale
          by the Underwriters and by dealers under the securities laws of such
          jurisdictions as the Representatives may reasonably designate and at
          the request of the Representatives will make such applications and
          furnish such consents to service of process or other documents as may
          be required of it as the issuer of the Stock for that purpose;
          provided, however, that the Company shall not be required to qualify
          to do business or to file a general consent (other than that arising
          out of the offering or sale of the Stock) to service of process in any
          such jurisdiction where it is not now so subject. The Company will,
          from time to time, prepare and file such statements and reports as are
          or may be required of it as the issuer of the Stock to continue such
          qualifications in effect for so long a period as the Representative(s)
          may reasonably request for the distribution of the Stock. The Company
          will advise the Representatives promptly after the Company becomes
          aware of the suspension of the qualifications or registration of (or
          any such exception relating to) the Common Stock of the Company for
          offering, sale or trading in any jurisdiction or of any initiation or
          threat of any proceeding for any such purpose, and in the event of the
          issuance of any orders suspending such qualifications, registration or
          exception, the Company will, with the cooperation of the
          Representatives use its best efforts to obtain the withdrawal thereof.

               (g) The Company will furnish to its shareholders annual reports
          containing financial statements certified by independent public
          accountants and will make available to its shareholders quarterly
          summary financial information in reasonable detail which may be
          unaudited.  During the period of five (5) years from the date hereof,
          the Company will deliver to the Representatives and, upon request, to
          each of the other Underwriters, as soon as they are available, copies
          of each annual report of the Company and each other report furnished
          by the Company to its shareholders and will deliver to the
          Representatives, (i) as soon as they are available, copies of any
          other reports (financial or other) which the Company shall publish or
          otherwise make available to any of its shareholders generally, (ii) as
          soon as they are available, copies of any reports and financial
          statements furnished to or filed with the Commission or any national
          securities exchange and (iii) from time to time such other information
          concerning the Company as you may reasonably request.

               (h) The Company will use its best efforts to list the Stock,
          subject to official notice of issuance, on the NASDAQ National Market
          System ("NASDAQ").

               (i) The Company will maintain a transfer agent and registrar for
          its Common Stock.

               (j) Prior to filing its quarterly statements on Form 10-Q, the
          Company will have its independent auditors perform a limited quarterly
          review of its quarterly numbers.

                                       13

<PAGE>
 
               (k) Without the prior written consent of Cowen, the Company will
          not offer, sell, assign, transfer, encumber, contract to sell, grant
          an option to  purchase or otherwise dispose of, directly or
          indirectly, any shares of Common Stock or securities convertible into
          or exercisable or exchangeable for Common Stock or warrants or other
          rights to purchase Common Stock (including, without limitation, Common
          Stock of the Company which may be deemed to be beneficially owned by
          the undersigned in accordance with the Rules and Regulations) during
          the 180 days following the date on which the price of the Common Stock
          to be purchased by the Underwriters is set, other than the Company's
          sale of Common Stock hereunder and the Company's issuance of Common
          Stock upon the exercise of warrants or stock options, or pursuant to
          contractual rights, in each case which are presently outstanding and
          described in the Prospectus or subsequently granted as contemplated by
          the Prospectus.

               (l) The Company will apply the net proceeds from the sale of the
          Stock as set forth in the description under "Use of Proceeds" in the
          Prospectus, which description complies in all respects with the
          requirements of Item 504 of Regulation S-K.

               (m) The Company will supply you with copies of all correspondence
          to and from, and all documents issued to and by, the Commission in
          connection with the registration of the Stock under the Securities
          Act.

               (n) Prior to the Closing Dates the Company will furnish to you,
          as soon as they have been prepared, copies of any unaudited interim
          consolidated financial statements of the Company for any periods
          subsequent to the periods covered by the financial statements
          appearing in the Registration Statement and the Prospectus.

               (o) Prior to the Closing Date the Company will issue no press
          release or other communications directly or indirectly and hold no
          press conference with respect to the Company, the financial condition,
          results of operation, business, prospects, assets or liabilities of
          the Company, or the offering of the Stock, without your prior written
          consent.

          5.  Payment of Expenses. (a) The Company will pay (directly or by
              -------------------                                          
reimbursement) all costs, fees and expenses incurred in connection with expenses
incident to the performance of its obligations under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to (i) all expenses and taxes incident to the issuance and delivery of the Stock
to the Representatives; (ii) all expenses incident to the registration of the
Stock under the Securities Act; (iii) the costs of preparing stock certificates
(including printing and engraving costs); (iv) all fees and expenses of the
registrar and transfer agent of the Stock; (v) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Stock to the
Underwriters; (vi) fees and expenses of the Company's counsel and the Company's
independent accountants; (vii) all costs and expenses incurred in connection
with the preparation, printing, filing, shipping and distribution of the
Registration Statement, each Preeffective Prospectus and the Prospectus
(including all exhibits and financial

                                       14

<PAGE>
 
statements) and all amendments and supplements provided for herein, or in
connection with the printing, filing, shipping and distribution of the
"Agreement Among Underwriters" between the Representatives and the Underwriters,
the Master Selected Dealers, Agreement, the Underwriters Questionnaire and the
Blue Sky memoranda and this Agreement; (viii) all filing fees, attorneys fees,
and expenses incurred by the Company or the Underwriters in connection with
exemptions from the qualifying or registering (or obtaining qualification or
registration of) all or any part of the Stock for offer and sale and
determination of its eligibility for investment under the Blue Sky or other
securities laws of such jurisdictions as the Representatives may reasonably
designate; (ix) all fees and expenses paid or incurred in connection with
filings made with the NASD; and (x) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.

               (b)  In addition to its other obligations under Section 6(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of, or
based upon, (i) any statement or omission or any alleged statement or omission
or (ii) any breach or inaccuracy in its representations and warranties, it will
reimburse each Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse each Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, each Underwriter shall
promptly return it to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to timed by The
Chase Manhattan Bank, New York, New York (the "Prime Rate"). Any such interim
reimbursement payments which are not made to an Underwriter in a timely manner
as provided below shall bear interest at the Prime Rate from the due date for
such reimbursement. This expense reimbursement agreement will be in addition to
any other liability which the Company may otherwise have. The request for
reimbursement will be sent to the Company.

               (c)  In addition to its other obligations under Section 6(b)
hereof, each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in Section 6(b) hereof which relates to information
furnished to the Company pursuant to Section 6(d) hereof, it will reimburse the
Company (and, to the extent applicable, each officer, director or controlling
person) on a quarterly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters, obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the

                                       15

<PAGE>
 
Prime Rate.  Any such interim reimbursement payments which are not made to the
Company within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such  request.  This indemnity
agreement will be in addition to any  liability which such Underwriter may
otherwise have.

               (d)  It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in paragraph (b)
and/or (c) of this Section 5, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Such an arbitration would be limited to the
operation of the interim reimbursement provisions contained in paragraph (b)
and/or (c) of this Section 5, as the case may be, and would not resolve the
ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of Section 6.

     6.  Indemnification and Contribution. (a) The Company agrees to indemnify
         --------------------------------                                     
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the Securities Act, or any
other statute or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus as from
time to time amended or supplemented) includes or allegedly includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, unless such
statement or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof and, provided,
                                                                      -------- 
that the indemnity agreement provided in this Section 6(a) with respect to any
Preeffective Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or expenses
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Common
Stock, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Securities Act and the
Rules and Regulations, unless such failure is the result of noncompliance by the
Company with Section 4(d) hereof.  The Company will be entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Company elects to
assume the defense, such defense shall be conducted by counsel chosen by it.  In
the event the Company elects to assume the defense of any such suit and retain
such counsel, any Underwriter

                                       16

<PAGE>
 
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company shall have specifically authorized the retaining of such counsel or (ii)
the parties to such suit include any such Underwriter Indemnified Parties, and
the Company and such Underwriter Indemnified Parties at law or in equity have
been advised by counsel to the Underwriters that one or more legal defenses may
be available to it or them which may not be available to the Company, in which
case the Company shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel.
This indemnity agreement is not exclusive and will be in addition to any
liability which the Company might otherwise have and shall not limit any rights
or remedies which may otherwise be available at law or in equity to each
Underwriter Indemnified Party.

               (b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the "Company
Indemnified Parties"), against any losses, claims, damages, liabilities or
expenses (including, unless the Underwriter or Underwriters elect to assume the
defense, the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in connection therewith), joint or several,
which arise out of or are based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Preeffective Prospectus, the Registration Statement or the Prospectus (or any
Preeffective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof; provided,
however, that in no case is such Underwriter to be liable with respect to any
claims made against any Company Indemnified Party against whom the action is
brought unless such Company Indemnified Party shall have notified such
Underwriter in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Company Indemnified Party, but failure to notify such
Underwriter of such claim shall not relieve it from any liability which it may
have to any Company Indemnified Party otherwise than on account of its indemnity
agreement contained in this paragraph. Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, respectively, unless (i) the
Underwriters shall have specifically authorized the retaining of such counsel or
(ii) the parties to such suit include any such Company Indemnified Parties, and
the Underwriters and such Company Indemnified Parties at law or in equity have
been advised by counsel to the Company that one or more legal defenses may be
available to it or them which conflict with the defenses of the Underwriters, in
which case the indemnified party

                                       17

<PAGE>
 
or parties shall have the right to select a single separate counsel to assume
such legal defenses and to otherwise participate in the defense of such action
on behalf of such indemnified party or parties.  The Underwriter against whom
indemnity may be sought shall not be liable to indemnify any person for any
settlement of any such claim effected without such Underwriter's consent.  This
indemnity agreement is not exclusive and will be in addition to any liability
which such Underwriter might otherwise have and shall not limit any rights or
remedies which may otherwise be available at law or in equity to any Company
Indemnified Party.

               (c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Stock. If however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising any
such claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the shares of the Stock underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. The
Underwriters' obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.

                                       18

<PAGE>
 
               (d) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and under the third and eighth paragraphs under the caption
"Underwriting" in any Preeffective Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preeffective Prospectus, the Prospectus or the Registration Statement.

               (e) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnification could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on all claims that are the subject
matter of such proceeding.

     7.  Survival of Indemnities, Representations, Warranties, etc.  The
         ----------------------------------------------------------     
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for the Stock.

     8.  Conditions of Underwriters, Obligations. The respective obligations of
         ---------------------------------------                               
the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the Company with its covenants
and agreements herein contained and other provisions hereof to be satisfied at
or prior to the Closing Dates, and to the following additional conditions:

               (a) The Registration Statement shall have become effective and no
          stop order suspending the effectiveness thereof shall have been issued
          and no proceedings for that purpose shall have been initiated or, to
          the knowledge of the Company or the Representatives, shall be
          threatened by the Commission, and any request for additional
          information on the part of the Commission (to be included in the
          Registration Statement or the Prospectus or otherwise) shall have been
          complied with to the reasonable satisfaction of the Representatives.
          Any filings of the Prospectus, or any supplement thereto, required
          pursuant to Rule 424 (b) or Rule 434 of the Rules and Regulations,
          shall have been made in the manner and within the time period required
          by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case
          may be.

               (b) The Representatives shall have been satisfied that there
          shall not have occurred any change prior to the Closing Dates in the
          condition (financial or otherwise) properties, business, management,
          prospects, net worth or results of operations of the Company or any
          change in the capital stock, short-term or long-term debt of the
          Company, such that (i) the Registration Statement or the Prospectus,
          or any amendment or supplement thereto, contains an untrue statement
          of fact which, in the opinion of the Representatives, is material, or

                                       19

<PAGE>
 
          omits to state a fact which, in the opinion of the Representatives is
          required to be stated therein or is necessary to make the statements
          therein not misleading, or (ii) it is impracticable in the reasonable
          judgment of the Representatives to proceed with the public offering or
          purchase the Stock as contemplated hereby.

               (c) The Representatives shall be satisfied that no legal or
          governmental action, suit or proceeding affecting the Company which is
          material and adverse to the Company or which affects or may affect the
          Company's ability to perform its obligations under this Agreement
          shall have been instituted or threatened and there shall have occurred
          no material adverse development in any existing such action, suit or
          proceeding.

               (d) At the time of execution of this Agreement, the
          Representatives shall have received from Coopers & Lybrand L.L.P.,
          independent certified public accountants, a letter, dated the date
          hereof, in form and substance satisfactory to the Underwriters.

               (e) The Representatives shall have received from Coopers &
          Lybrand L.L.P., independent certified public accountants, a letter,
          dated the Closing Dates, to the effect that such accountants reaffirm,
          as of the Closing Dates, and as though made on the Closing Dates, the
          statements made in the letter furnished by such accountants pursuant
          to paragraph (d) of this Section 8.

               (f) The Representatives shall have received from Gray Cary Ware &
          Freidenrich, counsel for the Company, an opinion, dated the Closing
          Dates, to the effect set forth in Exhibit I hereto.

               (g) The Representatives shall have received from Pepper, Hamilton
          & Scheetz, counsel for the Company, an opinion, dated the Closing
          Dates, to the effect set forth in Exhibit II hereto.

               (h) The Representatives shall have received from Oblon, Spivak,
          McClelland, Maier & Neustadt, P.C., patent counsel for the Company, an
          opinion, dated the Closing Dates, to the effect set forth in Exhibit
          III hereto.

               (i) The Representatives shall have received from Pretty,
          Schroeder, Brueggemann & Clark, P.C., patent counsel for the Company,
          an opinion, dated the Closing Dates, to the effect set forth in
          Exhibit IV hereto.

               (j) The Representatives shall have received from Campbell &
          Flores, patent counsel for the Company, an opinion, dated the Closing
          Dates, to the effect set forth in Exhibit V hereto.

               (k) The Representatives shall have received from Hyman, Phelps &
          McNamara, regulatory counsel for the Company, an opinion, dated the
          Closing Dates, to the effect set forth in Exhibit VI hereto.

                                       20

<PAGE>
 
               (l) The Representatives shall have received from Brobeck, Phleger
          & Harrison LLP, counsel for the Underwriters, their opinion or
          opinions dated the Closing Dates with respect to the incorporation of
          the Company, the validity of the Stock, the Registration Statement and
          the Prospectus and such other related matters as it may reasonably
          request, and the Company shall have furnished to such counsel such
          documents as they may request for the purpose of enabling them to pass
          upon such matters.

               (m) The Representatives shall have received a certificate, dated
          the Closing Dates, signed on behalf of the Company by its chief
          executive officer or the President and the chief financial or
          accounting officer of the Company to the effect that:

                    (i) No stop order suspending the effectiveness of the
               Registration Statement has been issued, and, to the best of the
               knowledge of the signers, no proceedings for that purpose have
               been instituted or are pending or contemplated under the
               Securities Act;

                    (ii) Neither any Preeffective Prospectus, as of its date,
               nor the Registration Statement nor the Prospectus, nor any
               amendment or supplement thereto, as of the time when the
               Registration Statement became effective and at all times
               subsequent thereto up to the delivery of such certificate,
               included any untrue statement of a material fact or omitted to
               state any material fact required to be stated therein or
               necessary to make the statements therein, in light of the
               circumstances under which they were made, not misleading;

                    (iii)  Subsequent to the respective dates as of which
               information is given in the Registration Statement and the
               Prospectus, and except as set forth or contemplated in the
               Prospectus, the Company has not incurred any material liabilities
               or obligations, direct or contingent, nor entered into any
               material transactions not in the ordinary course of business and
               there has not been any material adverse change in the condition
               (financial or otherwise), properties, business, management,
               prospects, net worth or results of operations of the Company, or
               any change in the capital stock (other than through the exercise
               of stock options), short-term or long-term debt of the Company;

                    (iv) The representations and warranties of the Company in
               this Agreement are true and correct at and as of the Closing
               Dates, and the Company has complied with all the agreements and
               performed or satisfied all the conditions on its part to be
               performed or satisfied at or prior to the Closing Dates; and

                    (v) Since the respective dates as of which information is
               given in the Registration Statement and the Prospectus, and
               except as disclosed in or contemplated by the Prospectus, (i)
               there has not been any material

                                       21

<PAGE>
 
               adverse change or a development involving a material adverse
               change in the condition (financial or otherwise), properties,
               business, management, prospects, net worth or results of
               operations of the Company; (ii) the business and operations
               conducted by the Company have not sustained a loss by strike,
               fire, flood, accident or other calamity (whether or not insured)
               of such a character as to interfere materially with the conduct
               of the business and operations of the Company; (iii) no legal or
               governmental action, suit or proceeding is pending or threatened
               against the Company which is material to the Company, whether or
               not arising from transactions in the ordinary course of business,
               or which may materially and adversely affect the transactions
               contemplated by this Agreement; (iv) since such dates and except
               as so disclosed, the Company has not incurred any material
               liability or obligation, direct, contingent or indirect, made any
               change in its capital stock (except pursuant to its stock plans),
               made any material change in its short-term or funded debt or
               repurchased or otherwise acquired any of the Company's capital
               stock; and (v) the Company has not declared or paid any dividend,
               or made any other distribution, upon its outstanding capital
               stock payable to stockholders of record on a date prior to the
               Closing Date.

               (n) The Company shall have furnished to the Representatives such
          additional certificates as the Representatives may have reasonably
          requested as to the accuracy, at and as of the Closing Dates, of the
          representations and warranties made herein by it and as to compliance
          at and as of the Closing Dates by it with its covenants and agreements
          herein contained and other provisions hereof to be satisfied at or
          prior to the Closing Dates, and as to satisfaction of the other
          conditions to the obligations of the Underwriters hereunder.

               (o) Cowen shall have received the written agreements of the
          officers, directors and holders of Common Stock listed in Schedule B
          that each will not offer, sell, assign, transfer, encumber, contract
          to sell, grant an option to purchase or otherwise dispose of, directly
          or indirectly, any shares of Common Stock or securities convertible
          into or exchangeable for Common Stock or warrants or other rights to
          purchase Common Stock (including, without limitation, Common Stock of
          the Company which may be deemed to be beneficially owned by the
          undersigned in accordance with the Rules and Regulations) during the
          180 days following the date of the final Prospectus, other than (i) by
          operation of law, (ii) as a bona fide gift or gifts, provided the
          donee or donees thereof agree in writing to be bound by this
          restriction or (iii) as a distribution to partners or stockholders of
          such person provided that the distributees thereof agree in writing to
          be bound by the terms of this restriction.

     All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in form
and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters and
other documents as the Representatives shall reasonably request.  If any of the
conditions hereinabove provided for in this Section shall not have been

                                       22

<PAGE>
 
satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to the Closing Dates, but Cowen shall be
entitled to waive any of such conditions.

     9.  Effective Date.  This Agreement shall become effective immediately as
         --------------                                                       
to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business day
following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.

     10.  Termination. This Agreement (except for the provisions of Section 5)
          -----------                                                         
may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there shall be no
liability of any party to this Agreement to any other party, other than as
provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to
the liability of defaulting Underwriters.

     This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company if (i) at or prior to the First Closing
Date (or the Option Closing Date) trading in securities on any of the New York
Stock Exchange, the American Stock Exchange, the NASDAQ, the Chicago Board of
Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market, or a banking moratorium shall have
been declared by New York or United States authorities; (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market; (iii) at or prior to the First Closing Date or the
Option Closing Date there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the judgment of the
Representatives, makes it impractical or inadvisable to offer or sell the Firm
Stock or Optional Stock, as applicable, on the terms contemplated by the
Prospectus; (iv) there shall have been any development or prospective
development involving particularly the business or properties or securities of
the Company or the transactions contemplated by this Agreement, which, in the
judgment of the Representatives, makes it impracticable or inadvisable to offer
or deliver the Firm Stock or the Optional Stock, as applicable on the terms
contemplated by the Prospectus; (v) there shall be any litigation or proceeding,
pending or threatened, which, in the judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Firm Stock or Optional
Stock, as applicable, on the terms contemplated by the Prospectus; or (vi) there
shall have occurred any other event that makes it, in the judgment of the
Representatives, impractical

                                       23

<PAGE>
 
or inadvisable to offer or deliver the Firm Stock or Optional Stock, as
applicable on the terms contemplated by the Prospectus.

     11.  Reimbursement of Underwriters. Notwithstanding any other provisions
          -----------------------------                                      
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to the first paragraph of Section 10 or shall be
terminated by the Representatives under Section 8 or Section 10, the Company
will bear and pay the expenses specified in Section 5 hereof and, in addition to
its obligations pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Stock, and
promptly upon demand the Company will pay such amounts to you as
Representatives.

     12.  Substitution of Underwriters. If any Underwriter or Underwriters shall
          ----------------------------                                          
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.

     If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.

     13.  Notices. All communications hereunder shall be in writing and, if sent
          -------                                                               
to the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representatives c/o Cowen & Company at Financial Square, New York,
New York 10005 except that notices given to an Underwriter pursuant to Section 6
hereof shall be sent to such Underwriter at the address furnished by the
Representatives or, if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed c/o Douglas Armstrong.

                                       24

<PAGE>
 
     14.  Successors. This Agreement shall inure to the benefit of and be
          ----------                                                     
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.

     15.  Applicable Law. This Agreement shall be governed by and construed in
          --------------                                                      
accordance with the laws of the State of New York.

     16.  Authority of the Representatives. In connection with this Agreement,
          --------------------------------                                    
you will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by Cowen, as Representative, will be binding on all the
Underwriters.

     17.  Partial Unenforceability. The invalidity or unenforceability of any
          ------------------------                                           
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.

     18.  General. This Agreement constitutes the entire agreement of the
          -------                                                        
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.

     In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.

     19.  Counterparts. This Agreement may be signed in two (2) or more
          ------------                                                 
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.

                                       25

<PAGE>
 
     If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.

                                   Very truly yours,

                                   AASTROM BIOSCIENCES, INC.

                                   By:
                                      ----------------------
                                      President


Accepted and delivered in
 New York, New York as of
 the date first above written.

COWEN & COMPANY
J.P. MORGAN & COMPANY
 Acting on their own behalf
 and as Representatives of several 
 Underwriters referred to in the
 foregoing Agreement.

By:  Cowen Incorporated,
     its general partner
 
By:
   -------------------------------
    Title:

                                       26

<PAGE>
 
                                   SCHEDULE A


<TABLE>
<CAPTION>
 
 
 
          
                                      Number     Number of
                                     of Firm    Optional
                                      Shares      Shares
                                       to be       to be
Name                                 Purchased   Purchased
- ----                                 ---------   ---------
<S>                                  <C>         <C>
 
Cowen & Company.....................
 
J.P. Morgan & Company...............
 
 
 
 
                                     ---------   ---------
     Total.......................... 3,250,000     487,500
                                     =========   =========
</TABLE>



<PAGE>
 
                                   SCHEDULE B

<TABLE> 
<CAPTION> 

<S>                               <C>                          <C> 
V. Albee                          B. Hampson                   C. Parrish
R.D. Armstrong                    W. Hassel                    L. Paul 
J. Arnett                         M. Heidmous                  P. Powell
A. Ausmus                         J. Herbst                    D. Richardson
Brentwood Associates V, L.P.      R. Herman                    W. Robertson-Woerner
D. Brott                          M. Hillman                   F. Rogers
S. Brown                          G. Huang                     R. Rossi
S. Boff                           S. Jankins                   S. Rummel 
S. Burhop                         S. Jarose                    SBIC Partners, L.P.
J. Caldwell                       T. Jensen                    T. Schultz
Candice E. Appleton Family        C. Jordan                    R. Schwartz
 Trust                            J. Karaisz                   S. Scott
J. Caudill                        R. Kelch                     T. Simpson 
M. Clarke                         M. Koller                    A. Smith
COBE Laboratories                 M. Laforest                  D. Smith
T. Deaver                         D. Larson                    M. Staebler
A. Deisseroth                     E. Letourneau                E. Stawiarski
J. Douville                       M.D. Anderson Cancer Center  H. Stern
N. Eades                          B. Lundell                   C. Stern
T. Eisfeld                        R. Maher                     A. Tasich 
S. Emerson                        J. Maluta                    E. Thomas
Enterprise Development            I. Manchel                   Treasurer of State of Michigan   
 Fund II, L.P.                    R. Mandalam                  S. Tucker
Enterprise Development            T. Muller                    University of Michigan
 Fund, L.P.                       E. Mussi                     G. Van Zant
R. Fish                           S. Neering                   C. Vento
GC&H Partners                     B. Newsom                    N. Venturi
S. Giudici                        Northwest Ohio Venture       S. Weber 
K. Goltry                          Fund, L.P.                  Rhone-Poulenc Rorer, Inc.
L. Gonzalez                       W. Ogier                     J. Williams 
G. Gorgas                         M. Orrico                    Wind Point II, L.P. 
A. Grims                          M. Oxender                   S. Winkler
H&Q Life Science Technology       B. Palsson                   H. Witzel
H&Q London Ventures               M. Palsson                   K. Zawaski
</TABLE>
 


<PAGE>
 
                                   EXHIBIT I
                    OPINION OF GRAY CARY WARE & FREIDENRICH



               (a) The Company is duly qualified to do business as a foreign
     corporation and is in good standing in each jurisdiction in which the
     ownership or leasing of its properties or the conduct of its business
     requires such qualification, except where the failure to be so qualified or
     be in good standing would not have a material adverse effect on the
     condition (financial or otherwise), earnings, operations or business of the
     Company and its subsidiaries considered as one enterprise.  To such
     counsel's knowledge, the Company does not own or control, directly or
     indirectly, any corporation, association or other entity;

               (b) To such counsel's knowledge, the Firm Stock or the Optional
     Stock, as the case may be, to be issued by the Company pursuant to the
     terms of this Agreement will not have been issued in violation of or
     subject to any co-sale right, registration right, right of first refusal or
     other similar right.

               (c) The license agreement between the Company and Joseph G.
     Cremonese dated July [__], 1992 and relating to [Patent nos. __] is a valid
     and binding agreement of the Company, enforceable in accordance with its
     terms; and to such counsel's knowledge, the Company is not in material
     breach or violation of any of the terms or provisions of such agreement,
     and no default exists under such agreement;

               (d) The license agreement between the Company and the University
     of Michigan dated March 13, 1992, as amended, and relating to U.S. Patent
     No. 4,839,292 is a valid and binding agreement of the Company, enforceable
     in accordance with its terms; and to such counsel's knowledge, the Company
     is not in material breach or violation of any of the terms or provisions of
     such agreement and no default exists under such agreement;

               (e) This Agreement, assuming due authorization, execution and
     delivery by the Company and you, is a valid and binding agreement of the
     Company, enforceable in accordance with its terms, except insofar as
     indemnification and contribution provisions may be limited by applicable
     law and except as enforceability may be limited by bankruptcy, insolvency,
     reorganization, moratorium or similar laws relating to or affecting
     creditors' rights generally or by general equitable principles;

               (f) The Registration Statement has become effective under the Act
     and, to such counsel's knowledge, no stop order suspending the
     effectiveness of the Registration Statement has been issued and no
     proceedings for that purpose have been instituted or are pending or
     threatened under the Act;

               (g) The Registration Statement and the Prospectus, and each
     amendment or supplement thereto (other than the financial statements
     (including supporting schedules) and financial data derived therefrom as to
     which such counsel need express no

                                       1

<PAGE>
 
     opinion), as of the effective date of the Registration Statement, complied
     as to form in all material respects with the requirements of the Act and
     the applicable Rules and Regulations;

               (h) The description in the Registration Statement and the
     Prospectus of statutes other than Michigan Law are accurate and fairly
     present the information required to be presented by the Act and the
     applicable Rules and Regulations;

               (i) To such counsel's knowledge, there are no agreements,
     contracts, leases or documents to which the Company is a party of a
     character required to be described or referred to in the Registration
     Statement or Prospectus or to be filed as an exhibit to the Registration
     Statement which are not described or referred to therein or filed as
     required;

               (j) The performance of this Agreement and the consummation of the
     transactions herein contemplated (other than performance of the Company's
     indemnification and contribution obligations hereunder, concerning which no
     opinion need be expressed) will not, to such counsel's knowledge, result in
     a material breach or violation of any of the terms and provisions of, or
     constitute a default under, any bond, debenture, note or other evidence of
     indebtedness, or any lease, contract, indenture, mortgage, deed of trust,
     loan agreement, joint venture or other agreement or instrument known to
     such counsel to which the Company is a party or by which its properties are
     bound, or any applicable statute, rule or regulation known to such counsel
     or, to such counsel's knowledge, any order, writ or decree of any court,
     government or governmental agency or body having jurisdiction over the
     Company or over any of its properties or operations;

               (k) No consent, approval, authorization or order of or
     qualification with any court, government or governmental agency or body
     having jurisdiction over the Company, or over any of its properties or
     operations is necessary in connection with the consummation by the Company
     of the transactions herein contemplated, except such as have been obtained
     under the Act or such as may be required under state or other securities or
     Blue Sky laws in connection with the purchase and the distribution of the
     Stock by the Underwriters;

               (l) To such counsel's knowledge, there are no legal or
     governmental proceedings pending or threatened against the Company of a
     character required to be disclosed in the Registration Statement or the
     Prospectus by the Act or the Rules and Regulations, other than those
     described therein;

               (m) To such counsel's knowledge, the Company is not presently (a)
     in material violation of its charter or bylaws, or (b) in material breach
     of any applicable statute, rule or regulation known to such counsel or, to
     such counsel's knowledge, any order, writ or decree of any court or
     governmental agency or body having jurisdiction over the Company or over
     any of its properties or operations; and

               (n) To such counsel's knowledge, except as set forth in the
     Registration Statement and Prospectus, no holders of Common Stock or other
     securities of the Company have registration rights with respect to
     securities of the Company and, except as set forth in the Registration
     Statement and Prospectus, all holders of securities of the Company having
     rights known to such counsel to registration of such shares of Common Stock
     or other securities as part

                                       2

<PAGE>
 
     of the offering contemplated by the Registration Statement have, with
     respect to the offering contemplated thereby, waived such rights or such
     rights have expired by reason of lapse of time following notification of
     the Company's intent to file the Registration Statement.

          In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not independently checked or verified the
accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
which leads them to believe that, (i) at the time the Registration Statement
became effective, the Registration Statement and any amendment or supplement
thereto (other than the financial statements including supporting schedules and
other financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) at the Closing
Date or any later date on which the Optional Stock are to be purchased, as the
case may be, the Prospectus and any amendment or supplement thereto (except as
aforesaid) contained any untrue statement of a material fact or omitted to state
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  Such counsel may
state that they do not assume any responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or
Prospectus.

          Counsel rendering the foregoing opinion may rely as to questions of
fact upon representations or certificates of officers of the Company and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in any such opinion, representation or certificate.  Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.

                                       3

<PAGE>
 
                                  EXHIBIT II
                     OPINION OF PEPPER, HAMILTON & SCHEETZ


               (a) The Company has been duly incorporated and is validly
     existing as a corporation in good standing under the laws of the state of
     Michigan;

               (b) The Company has the corporate power and authority to own,
     lease and operate its properties and to conduct its business as described
     in the Prospectus;

               (c) The Company is duly qualified to do business as a foreign
     corporation and is in good standing in each jurisdiction in which the
     ownership or leasing of its properties or the conduct of its business
     requires such qualification, except where the failure to be so qualified or
     be in good standing would not have a material adverse effect on the
     condition (financial or otherwise), earnings, operations or business of the
     Company and its subsidiaries considered as one enterprise.  To such
     counsel's knowledge, the Company does not own or control, directly or
     indirectly, any corporation, association or other entity;

               (d) The Firm Stock or the Optional Stock, as the case may be, to
     be issued by the Company pursuant to the terms of this Agreement have been
     duly authorized and, upon issuance and delivery against payment therefor in
     accordance with the terms hereof, will be duly and validly issued and fully
     paid and nonassessable, and will not have been issued in violation of or
     subject to any preemptive right, co-sale right, registration right, right
     of first refusal or other similar right.

               (e) The Company has the corporate power and authority to enter
     into this Agreement and to issue, sell and deliver to the Underwriters the
     Stock to be issued and sold by it hereunder;

               (f) The authorized, issued and outstanding capital stock of the
     Company is as set forth in the Prospectus under the caption
     "Capitalization" as of the dates stated therein, the issued and outstanding
     shares of capital stock of the Company have been duly and validly issued
     and are fully paid and nonassessable, and, to such counsel's knowledge,
     will not have been issued in violation of or subject to any preemptive
     right, co-sale right, registration right, right of first refusal or other
     similar right;

               (g) This Agreement has been duly authorized by all necessary
     corporate action on the part of the Company and has been duly executed and
     delivered by the Company and, assuming due authorization, execution and
     delivery by you, is a valid and binding agreement of the Company,
     enforceable in accordance with its terms, except insofar as indemnification
     provisions may be limited by applicable law and except as enforceability
     may be limited by bankruptcy, insolvency, reorganization, moratorium or
     similar laws relating to or affecting creditors' rights generally or by
     general equitable principles;

               [(h) The license agreement between the Company and Joseph G.
     Cremonese dated July [__], 1992 and relating to [Patent nos. __] is a valid
     and binding agreement of the Company, enforceable in accordance with its
     terms; and to such counsel's

                                       1

<PAGE>
 
     knowledge, the Company is not in material breach or violation of any of the
     terms or provisions of such agreement, and no default exists under such
     agreement;]

               [(i) The license agreement between the Company and the University
     of Michigan dated March 13, 1992, as amended, and relating to U.S. Patent
     No. 4,839,292 is a valid and binding agreement of the Company, enforceable
     in accordance with its terms; and to such counsel's knowledge, the Company
     is not in material breach or violation of any of the terms or provisions of
     such agreement and no default exists under such agreement;]

               (j) The information in the Prospectus under the caption
     "Description of Capital Stock," to the extent that it constitutes matters
     of law or legal conclusions, has been reviewed by such counsel and is a
     fair summary of such matters and conclusions; and the forms of certificates
     evidencing the Common Stock and filed as exhibits to the Registration
     Statement comply with Michigan law;

               (k) The description in the Registration Statement and the
     Prospectus of the charter and bylaws of the Company and of statutes are
     accurate and fairly present the information required to be presented by the
     Act and the applicable Rules and Regulations;

               [(l) To such counsel's knowledge, there are no agreements,
     contracts, leases or documents to which the Company is a party of a
     character required to be described or referred to in the Registration
     Statement or Prospectus or to be filed as an exhibit to the Registration
     Statement which are not described or referred to therein or filed as
     required;]

               (m) The performance of this Agreement and the consummation of the
     transactions herein contemplated (other than performance of the Company's
     indemnification obligations hereunder, concerning which no opinion need be
     expressed) will not (a) result in any violation of the Company's charter or
     bylaws or (b) to such counsel's knowledge, result in a material breach or
     violation of any of the terms and provisions of, or constitute a default
     under, any bond, debenture, note or other evidence of indebtedness, or any
     lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
     venture or other agreement or instrument known to such counsel to which the
     Company is a party or by which its properties are bound, or any applicable
     statute, rule or regulation known to such counsel or, to such counsel's
     knowledge, any order, writ or decree of any court, government or
     governmental agency or body having jurisdiction over the Company or over
     any of its properties or operations;

               (n) No consent, approval, authorization or order of or
     qualification with any court, government or governmental agency or body
     having jurisdiction over the Company, or over any of its properties or
     operations is necessary in connection with the consummation by the Company
     of the transactions herein contemplated, except such as have been obtained
     under the Act or such as may be required under state or other securities or
     Blue Sky laws in connection with the purchase and the distribution of the
     Stock by the Underwriters;

               (o) To such counsel's knowledge, there are no legal or
     governmental proceedings pending or threatened against the Company of a
     character required to be disclosed in the Registration Statement or the
     Prospectus by the Act or the Rules and Regulations, other than those
     described therein;

                                       2

<PAGE>
 
               (p) To such counsel's knowledge, the Company is not presently (a)
     in material violation of its charter or bylaws, or (b) in material breach
     of any applicable statute, rule or regulation known to such counsel or, to
     such counsel's knowledge, any order, writ or decree of any court or
     governmental agency or body having jurisdiction over the Company or over
     any of its properties or operations; and

               (q) To such counsel's knowledge, except as set forth in the
     Registration Statement and Prospectus, no holders of Common Stock or other
     securities of the Company have registration rights with respect to
     securities of the Company and, except as set forth in the Registration
     Statement and Prospectus, all holders of securities of the Company having
     rights known to such counsel to registration of such shares of Common Stock
     or other securities, because of the filing of the Registration Statement by
     the Company have, with respect to the offering contemplated thereby, waived
     such rights or such rights have expired by reason of lapse of time
     following notification of the Company's intent to file the Registration
     Statement or have included securities in the Registration Statement
     pursuant to the exercise of and in full satisfaction of such rights.

          In addition, such counsel shall state that although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Optional Stock are to be purchased,
the Registration Statement and any amendment or supplement thereto (other than
the financial statements including supporting schedules and other financial and
statistical information derived therefrom, as to which such counsel need express
no comment) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Optional Stock are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.

          Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Michigan upon
opinions of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate.  Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.

                                       3

<PAGE>
 
                                  EXHIBIT III
          OPINION OF OBLON, SPIVAK, MCCLELLAND, MAIER & NEUSTADT, P.C.




                                       1

<PAGE>
 
                                   EXHIBIT IV
            OPINION OF PRETTY, SCHROEDER, BRUEGGEMANN & CLARK, P.C.




                                       1

<PAGE>
 
                                   EXHIBIT V
                          OPINION OF CAMPBELL & FLORES




                                       1


<PAGE>
 
                                   EXHIBIT VI
                      OPINION OF HYMAN, PHELPS & MCNAMARA



               a.     The statements in the Registration Statement and
     Prospectus under the captions "Risk Factors -- Uncertainty of Regulatory
     Approval; Extensive Government Regulation" and "Business -- Government
     Regulation," insofar as such statements purport to summarize applicable
     provisions of the United Stated food and drug laws (the "Food and Drug
     Laws"), have been reviewed by such counsel and are accurate as to, and
     fairly describe, the regulatory status of the Company under the Food and
     Drug Laws; and to such counsel's knowledge, there are no presently existing
     Food and Drug Laws applicable to the Company and/or the Company's products
     that are required to be described or referred to in the Registration
     Statement and Prospectus that are not so described or referred to therein.

               b.     To such counsel's knowledge, the Company is currently
     conducting its business in material compliance with all applicable
     provisions of the Food and Drug Laws.

               c.     There are no judicial or administrative proceedings
     pending or, to such counsel's knowledge, threatened against the Company
     that may cause any regulatory permit that is material to the business of
     the Company, to be revoked, withdrawn, cancelled, suspended or not renewed.

          In rendering the foregoing opinions, such counsel may state that they
have not independently verified nor do they take any responsibility for nor are
they addressing in any way any statements of fact or statements of belief
attributable to the Company.

          In addition to the foregoing opinions, counsel shall state that:

          During the course of preparation of the Registration Statement, such
counsel participated in certain discussions with officers of the Company as to
the regulatory matters dealt with under the captions "Risk Factors --
Uncertainty of Regulatory Approval; Extensive Government Regulation" and
"Business -- Government Regulation" in the Prospectus.  While such counsel has
not undertaken to determine independently and such counsel does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
under such captions in the Prospectus, such counsel shall state on the basis of
these discussions that no facts have come to their attention which cause them to
believe that the statements in the Prospectus under the captions "Risk Factors -
- - Uncertainty of Regulatory Approval; Extensive Government Regulation" and
"Business -- Government Regulation," insofar as such statements relate to
regulatory matters, at the time the Registration Statement became effective, or
at the Closing Date or at any later date on which Optional Stock are purchased,
as the case may be, the Prospectus contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or as of the date
hereof contains an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.

                                       1



<PAGE>
 
                                                                   EXHIBIT 10.11


                               LICENSE AGREEMENT


                                 by and between


                           AASTROM BIOSCIENCES, INC.,
                             a Michigan corporation

                                      and

                              JOSEPH G. CREMONESE

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

                                                                       Page
                                                                       ----

1.   Definitions.....................................................     1

2.   License Terms and Conditions....................................     3

     2.1  Grant of License...........................................     3
     2.2  Reimbursement of Patent Costs..............................     3
     2.3  Royalties..................................................     4
          2.3.1  Percentage Royalty..................................     4
          2.3.2  Credits Against Royalties...........................     4
          2.3.3  Minimum Annual Royalty..............................     4
          2.3.4  Most Favored Licensee...............................     4
     2.4  Combination Product........................................     5
          2.4.1  Definition of Combination Product...................     5
          2.4.2  Net Sales of Combination Product....................     5
     2.5  Component Product..........................................     5
          2.5.1  Definition of Component Product.....................     5
          2.5.2  Net Sales of Component Product......................     6
     2.6  Quarterly Payments.........................................     6
     2.7  Term.......................................................     6
     2.8  Sublicense Rights..........................................     7
     2.9  Duration of Royalty Obligations............................     7
     2.10  Reports...................................................     7
     2.11  Records...................................................     7
     2.12  Foreign Taxes.............................................     8

3.   Patent Matters..................................................     8
     3.1  Validity of Licensed Patents...............................     8
     3.2  Patent Prosecution and Maintenance.........................     8
     3.3  Information to Licensor....................................     9
     3.4  Patent Costs...............................................     9
     3.5  Ownership..................................................     9
     3.6  Infringement Actions.......................................     9
          3.6.1  Prosecution and Defense of Infringements............     9
          3.6.2  Allocation of Recovery..............................     9

4.   Obligations Related to Commercialization........................    10
     4.1  Commercial Development Obligation..........................    10
     4.2  Milestone..................................................    10
     4.3  Governmental Approvals and Marketing of Licensed
          Products...................................................    10
     4.4  Product Liability Indemnity................................    10
5.   Representations
 and Warranties..................................    11

6.   Interests in Intellectual Property Rights.......................    11
     6.1  Preservation of Title......................................    11
     6.2  Ownership of Improvements..................................    11
          6.2.1  Developed by Licensee...............................    11
          6.2.2  Developed by Licensor...............................    11

                                      -i-

<PAGE>
 
7.   Confidentiality and Publication.................................    11
     7.1  Treatment of Confidential Information......................    11
     7.2  Publications...............................................    11

8.   Termination.....................................................    12

     8.1  Termination Upon Default...................................    12
     8.2  Transfer Upon Bankruptcy or Insolvency.....................    12
     8.3  Rights Upon Expiration.....................................    12
     8.4  Rights Upon Termination....................................    12
     8.5  WorkinProgress.............................................    13

9.   Binding Upon Successors and Assigns.............................    13

10.  General Provisions..............................................    13
     10.1  Independent Contractors...................................    13
     10.2  Arbitration...............................................    13
     10.3  Entire Agreement; Modification............................    13
     10.4  Governing Law.............................................    14
     10.5  Severability..............................................    14
     10.6  No Waiver.................................................    14
     10.7  Attorneys' Fees...........................................    14
     10.8  Notices...................................................    14

                                     -ii-

<PAGE>
 
                               LICENSE AGREEMENT


         This License Agreement is entered into and made effective as of July 17
, 1992, by and between AASTROM BIOSCIENCES, INC., a Michigan corporation
("Licensee") whose address is Post Office Box 376, Ann Arbor, Michigan 48106,
and JOSEPH G. CREMONESE, an individual ("Licensor") whose address is 227 Maple
Drive, Greensburg, Pennsylvania 15601, with respect to the facts set forth
below.


                                    RECITALS
                                    --------

     A.  Licensee is engaged in development of cell culture technology,
including products which are automated culture systems or bioreactors.

     B.  Licensor has disclosed to Licensee certain technology described in
Patent '292 (defined below), a copy of which has been delivered to Licensee.

     C.  Licensor has the exclusive right to grant a license to the technology
described in Patent '292 and the Licensed Patents and Licensed Technology
(defined below).

     D.  Licensor desires to grant to Licensee, and Licensee wishes to acquire,
an exclusive worldwide right and license to the technology described in Recital
C, subject to the terms and conditions set forth herein.


                                   AGREEMENT
                                   ---------

         NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, Licensor and Licensee hereby agree as follows:

          1. Definitions.  Capitalized terms shall have the meaning set forth
             -----------
below.

             Affiliate.  The term "Affiliate" shall mean any entity which
             ---------                                                   
directly or indirectly controls, is controlled by or is under common control
with Licensee.  The term "control" as used herein means the possession of the
power to direct or cause the direction of the management and the policies of an
entity, whether through the ownership of a majority of the outstanding voting
securities or by contract or otherwise.

             Combination Product.  The term "Combination Product" shall have the
             -------------------                                                
meaning as defined in Section 2.4.1 below.

                                      -1-

<PAGE>
 
             Component Product.  The term "Component Product" shall have the
             -----------------                                              
meaning as defined in Section 2.5.1 below.

             Confidential Information. The term "Confidential Information" shall
             ------------------------    
mean any and all proprietary or confidential information of Licensor or Licensee
which may be exchanged between the parties at any time and from time to time
during the term of this Agreement. Information shall not be considered
confidential to the extent that it:

                  a.  Is publicly disclosed through no fault of any party
hereto, either before or after it becomes known to the receiving party; or

                  b.  Was known to the receiving party prior to the date of
this Agreement, which knowledge was acquired independently and not from the
other party hereto (or such party's employees or agents); or

                  c.  Is subsequently disclosed to the receiving party in good
faith by a third party who has a right to make such disclosure; or

                  d.  Has been published by a third party as a matter of right.

             Licensed Patents.  The term "Licensed Patents" shall mean Patent
             ----------------                                                 
'292, plus all patents issued based on divisionals, continuations, 
continuations-in-part, reissues, re-examinations and extensions of Patent '292,
together with all corresponding foreign patents, and together with all related
pending patent applications and inventor's certificates, and together with all
patents and patent applications covering improvements to the inventions
described in the foregoing. Without limiting the generality of the foregoing,
Licensed Patents shall include U.S. Patent No. 4,839,292; Canadian Patent
Application Serial No. 577,082, filed September 7, 1988; European Patent
Application Serial No. 88,201,922.7, filed September 6, 1988, designating the
following countries: Austria, Belgium, France, Greece, Italy, Luxembourg,
Netherlands, Spain, Sweden, Switzerland, Liechtenstein, United Kingdom, and West
Germany; and a new patent application which is being prepared and is entitled
"Cell Growth and Perfusion Bag".

             Licensed Product.  The term "Licensed Product" shall mean any
             ----------------                                                 
product or process which cannot be developed, manufactured, used or sold without
infringing on the valid claims of the Licensed Patents.

             Licensed Technology.  The term "Licensed Technology" shall mean the
             -------------------                                                
Licensed Patents, plus all improvements thereto developed by Licensor, and all
related data, know-how and technology.

                                      -2-

<PAGE>
 
             Net Sales.  The term "Net Sales" shall mean the gross amount
             ---------
received by Licensee, or its Affiliates and sublicensees, or any of them, on
sales of Licensed Products, net of (i) discounts actually given, (ii) credits
for claims, allowances, retroactive price reductions or returned goods, (iii)
prepaid freight (iv) sales taxes or other governmental charges paid in
connection with sales of Licensed Products (but excluding what is commonly known
as income taxes), and (v) the patent protection expenses described in the last
sentence of this paragraph. For purposes of determining Net Sales, a sale shall
be deemed to have occurred when a Licensed Product is shipped for delivery and
paid for. Sales of Licensed Products by Licensee or its Affiliates or a
sublicensee thereof to any Affiliate or sublicensee which is a reseller thereof
shall be excluded, and only the subsequent sales of such Licensed Products by
Affiliates or sublicensees to unrelated parties shall be deemed Net Sales
hereunder. In the event that a Licensed Product is a Combination Product, then
the Net Sales from said Licensed Product/Combination Product shall be determined
in accordance with the formula set forth in Section 2.4 below. In the event that
a Licensed Product is a Component Product, then the Net Sales from said Licensed
Product/Component Product shall be determined in accordance with the formula set
forth in Section 2.5 below. To the extent Licensee incurs any expenses (such as
attorneys' fees or settlement payments, as examples) to protect the Licensed
Patents against claims of invalidity, or to enforce the Licensed Patents against
infringers, or to defend against claims that the Licensed Products infringe the
patents of third parties, then said expenses shall be a deduction against the
gross amounts for calculating Net Sales.

             Patent '292.  The term "Patent '292" shall mean U.S. Patent No.
             -----------                                                    
4,839,292 entitled "Cell Culture Flask Utilizing a Membrane Barrier," issued to
Licensor on June 13, 1989.

             PTO.  The term "PTO" shall mean the United States Patent and
             ---
Trademark Office.

          2. License Terms and Conditions.
             ---------------------------- 

             2.1 Grant of License.  Licensor hereby grants to Licensee an
                 ----------------                                        
exclusive, worldwide license to use, make, have made and sell all products
and/or processes utilizing the Licensed Technology, with the full right to grant
sublicenses, subject to the terms of this Agreement.

             2.2 Reimbursement of Patent Costs.  As a part of the consideration
                 -----------------------------                   
for the exclusive license granted pursuant to Section 2.1 hereof, Licensee shall
reimburse Licensor for Licensor's out-of-pocket costs incurred for patent
attorney fees and patent application filing fees in connection with the Licensed
Patents, up to an aggregate maximum of $25,000. Such reimbursement shall be
subject to Licensor's presentation of appropriate documentation of Licensor's
payment of such expenses.

                                      -3-

<PAGE>
 
No payment shall be payable by Licensee hereunder unless and until the issue of
the validity of the claims as now stated in the Licensed Patents as described in
Section 3.1 hereof is resolved favorably to Licensor's reasonable satisfaction,
or, upon the expiration of one (1) year after the date of this Agreement if no
request for re-examination of the Licensed Patents is made within such period.
All payments made by Licensee to Licensor pursuant to this Section 2.2 shall be
credited against Licensee's obligation to pay royalties as set forth in Section
2.3 hereof.

             2.3  Royalties.
                  --------- 

                  2.3.1  Percentage Royalty.  As additional consideration for
                         ------------------
the exclusive license granted pursuant to Section 2.1 hereof, Licensee shall pay
to Licensor a continuing royalty on a country-by-country basis in the amount of
(i) three percent (3%) of Net Sales of Licensed Products made, used or sold in
any country where the Licensed Technology utilized therein is protected by a
valid patent.

                  2.3.2  Credits Against Royalties.  Licensee shall be entitled
                         -------------------------
to a credit against royalties payable hereunder in an amount equal to the
payments made by Licensee under Sections 2.2 and 3.4 hereof.

                  2.3.3  Minimum Annual Royalty.  From and after January 1,
                         ----------------------
1997, Licensee shall pay to Licensor minimum annual royalties as set forth
herein. The minimum annual royalty for the calendar year 1997 shall be $20,000.
For the three years thereafter, the minimum annual royalty for each subsequent
calendar year shall increase by $10,000, such that for all years after and
including the calendar year 2000, the minimum annual royalty shall be $50,000.
Any percentage royalties accrued and paid to Licensor (but not taken as a credit
pursuant to Section 2.3.2 hereof) for any calendar year shall be credited
against the minimum royalty payable for such calendar year. The payment of any
shortfall between actual royalties paid and the minimum annual royalty
applicable to such calendar year shall be payable to Licensor within sixty (60)
days after the last day of such calendar year. Licensor's sole remedy for any
failure by Licensee to pay the minimum annual royalty required hereunder shall
be to convert the exclusive license granted hereunder to a nonexclusive license
upon the expiration of sixty (60) days' written notice of Licensor's intention
to so convert the license, without Licensee's payment of any delinquent minimum
annual royalty. Such conversion would not relieve Licensee from payment of
royalties as described in Section 2.3.1.

                 2.3.4  Most Favored Licensee.  If this license becomes non-
                        ---------------------
exclusive and if Licensor grants a license to use the Licensed Patents to any
third party at a royalty rate lower than three percent (3%), then the royalty
rate payable by

                                      -4-

<PAGE>
 
Licensee under this Agreement shall be reduced to the same rate payable by the
third party.

                 2.4  Combination Product.
                      ------------------- 

                      2.4.1  Definition of Combination Product.  As used herein,
the term "Combination Product" shall mean a Licensed Product which cannot be
manufactured, used or sold without (i) infringing the Licensed Patents, and also
(ii) infringing one or more patents held by Licensee or a third party (referred
to herein as "other patent rights").
  
                      2.4.2  Net Sales of Combination Product. The Net Sales 
                             --------------------------------
of a Combination Product shall be determined in accordance with the following
formula:

                                A
                            X = - x C
                                B         , where

                            X = the Net Sales attributable to the portion of the
                      Combination Product which is attributable to the Licensed
                      Patents, on which Net Sales Licensee shall pay the royalty
                      rate set forth in Section 2.3.1; and

                            A = the value of the contribution of the Licensed
                      Patents (as compared to the value of the contributions of
                      the rights) used in the Combination Product; and

                            B = The aggregate value of all patent rights used
                      for the Combination Product, consisting of both the
                      Licensed Patents and all other patent rights used in the
                      Combination Product; and

                            C = the Net Sales for the Combination Product.

The values described above shall be determined by the parties hereto in good
faith.  In the absence of agreement as to said values, the values shall be
determined by arbitration in accordance with the provisions of Section 10.2
hereof.

                 2.5  Component Product.
                      ----------------- 

                      2.5.1  Definition of Component Product.  As used herein,
                             -------------------------------
the term "Component Product" shall mean a Licensed Product which is a distinct
component of a product which contains multiple components (including, as an
example of additional components, proprietary methods sold or licensed with the
Component Product).

                                      -5-

<PAGE>
 
                      2.5.2  Net Sales of Component Product.  The Net Sales of a
                             ------------------------------
Component Product shall be determined in accordance with the following formula:

                               A
                           X = - x C
                               B         , where

                           X = the Net Sales attributable to the Component
                      Product, on which Licensee is obligated to pay the royalty
                      rate set forth in Section 2.3.1; and

                           A = the value of the Component Product, based upon
                      costs to manufacture the Component Product, or the sales
                      price of the Component Product if it is sold separately;
                      and

                           B = The value of the aggregate product, with all
                      components (including methods sold or licensed with the
                      Component Product), including the Component Product, based
                      upon the same criteria as used for A above; and

                           C = the Net Sales for the aggregate product.

The values described above shall be determined by the parties in good faith.  In
the absence of agreement as to said values, the values shall be determined by
arbitration in accordance with the provisions of Section 10.2 hereof.

                 2.6  Quarterly Payments.
                      ------------------ 

                      2.6.1  Sales by Licensee.  With regard to Net Sales made
                             -----------------
by Licensee or its Affiliates, royalties shall be payable by Licensee quarterly,
within ninety (90) days after the end of each calendar quarter, based upon Net
Sales of Licensed Products during such preceding calendar quarter, commencing
with the calendar quarter in which the first commercial sale of any Licensed
Product is made.

                      2.6.2  Sales by Sublicensees.  With regard to Net Sales
                             ---------------------
made by sublicensees of Licensee or its Affiliates, royalties shall be payable
by Licensee quarterly, within one hundred twenty (120) days after the end of
each calendar quarter, based upon the Net Sales of Licensed Products by such
sublicensee during such preceding calendar quarter, commencing with the calendar
quarter in which the first commercial sale of any Licensed Product is made by
such sublicensee.

                 2.7  Term.  The term of this Agreement and the license granted
                      ----                                                     
hereunder shall commence on the date set forth in the preamble paragraph of this
Agreement, and unless sooner

                                      -6-

<PAGE>
 
terminated by Licensee upon delivery of thirty (30) days' written notice or in
accordance with the provisions of Section 8.1 hereof, the term of this Agreement
and the license granted hereunder shall expire when the last patent licensed
hereunder has expired.

                 2.8  Sublicense Rights.  Licensee shall have the sole and
                      -----------------
exclusive right to grant sublicenses to any party with respect to the rights
conferred upon Licensee under this Agreement, provided, however, that any such
sublicense shall be subject in all respects to all of the provisions contained
in this Agreement (but not including the payment of patent costs pursuant to
Sections 2.2 and 3.4 hereof and the obligation to pay minimum annual royalties
pursuant to Section 2.3.3 hereof). Licensee shall pay Licensor, or cause its
Affiliates or sublicensees to pay Licensor, the same royalties on all Net Sales
of such Affiliate or sublicensee the same as if such Net Sales had been made by
Licensee. Each Affiliate and sublicensee shall report its Net Sales to Licensor
through Licensee, which Net Sales shall be aggregated with any Net Sales of
Licensee for purposes of determining the Net Sales upon which royalties are to
be paid to Licensor. Any royalties paid to Licensor with respect to Net Sales of
any Affiliate or any sublicensee of Licensee or any Affiliate shall be credited
against Licensee's minimum annual royalty obligations hereunder.

                 2.9  Duration of Royalty Obligations.  The royalty obligations
                      -------------------------------
of Licensee as to each Licensed Product shall terminate on a country-by-country
basis concurrently with the expiration of the last to expire of the patents
licensed hereunder utilized by or in such Licensed Product in each such country.
Notwithstanding any other provision of this Agreement, in the event that, based
upon a challenge by a party other than Licensee, its Affiliates or sublicensees,
the existing favorable claims of the Licensed Patents are held to be invalid by
the PTO or any competent court of law, Licensee may terminate this Agreement and
Licensee thereafter shall have no further obligation to pay any royalties
hereunder.

                 2.10  Reports.  Licensee shall furnish to Licensor at the same
                       -------
time as each royalty payment is made by Licensee, a written report of Net Sales
of Licensed Products and the royalty due and payable thereon, including a
description of any offsets or credits deducted therefrom, on a product-by-
product and country-by-country basis, for the calendar quarter upon which such
royalty payment is based.

                 2.11  Records.  Licensee shall keep, and cause its Affiliates
                       -------
and sublicensees to keep, complete records and accounts of all sales of Licensed
Products in sufficient detail to enable the royalties payable on Net Sales of
each Licensed Product to be determined. Licensor shall have the right to appoint
an independent certified public accounting firm approved by Licensee, which
approval shall not be unreasonably withheld,

                                      -7-

<PAGE>
 
to audit, upon delivery of advance written notice and during normal business
hours without interruption of normal business operations, the records of
Licensee, its Affiliates and sublicensees as necessary to verify the royalties
payable pursuant to this Agreement. Licensee, its Affiliates and sublicensees
shall pay to Licensor an amount equal to any additional royalties to which
Licensor is entitled as disclosed by the audit. Such audit shall be at
Licensor's expense. Licensor may exercise its right of audit hereunder no more
frequently than once in any calendar year. The accounting firm shall disclose to
Licensor only such information as is necessary to verify the accuracy of the
royalty payments required hereunder, and all such information shall be treated
as Confidential Information by Licensor. Licensee, its Affiliates and
sublicensees shall preserve and maintain all records required for audit for a
period of three (3) years after the calendar quarter to which the record
applies.

                 2.12  Foreign Taxes.  Any tax required to be withheld by
                       -------------
Licensee under the laws of any foreign country for the account of Licensor shall
be paid by Licensee for and on behalf of Licensor to the appropriate
governmental authority and deducted from any royalties payable by Licensee
hereunder.

             3.  Patent Matters.
                 -------------- 

                 3.1  Validity of Licensed Patents.  The parties hereto
                      ----------------------------
acknowledge that there may be an issue concerning the validity of some of the
claims of the existing Licensed Patents. In order to resolve such issue,
Licensee may, in the exercise of its sole discretion and at its sole expense,
request a re-examination of the existing Licensed Patents by the PTO and the
applicable foreign agencies. Each of the parties hereto shall exercise good
faith and due diligence in their efforts to establish the validity of the
existing Licensed Patents.

                 3.2  Patent Prosecution and Maintenance.  From and after the
                      ----------------------------------
date of this Agreement, the provisions of this Section 3.2 shall control the
prosecution and maintenance of the Licensed Patents. Licensee shall direct and
control (i) the maintenance of Patent '292 and the re-examination of Patent '292
described in Section 3.1 hereof; (ii) the preparation, filing and prosecution of
all other domestic and foreign patent applications relating to Licensed
Technology (including any interferences and foreign oppositions); and (iii) the
maintenance of any patents issuing therefrom. Licensee shall select the patent
attorney, and the fees and expenses incurred by Licensee with respect to
services performed by such patent counsel and any filing or other fees shall be
paid as set forth below in Section 3.4. Licensor shall assist Licensee and
patent counsel retained by Licensee as necessary to accomplish the patent
processes described hereunder. Licensor shall sign all documents which are
reasonably necessary to enable Licensee to prosecute and maintain all patent
matters. Licensee shall use good faith and due diligence in determining

                                      -8-

<PAGE>
 
which foreign countries, in addition to the U.S.A., in which to file for and
maintain patent rights, depending on the commercial benefits Licensee can
reasonably anticipate in each country.  In as much as Licensee is paying the
patent costs, the ultimate decision as to all of these patent prosecution and
maintenance matters shall be made by Licensee.

                 3.3  Information to Licensor.  Licensee shall keep Licensor
                      -----------------------
informed with regard to the patent application, re-examination and maintenance
processes. Licensee shall deliver to Licensor copies of all patent applications,
amendments, related correspondence, and other related  matters.

                 3.4  Patent Costs.  The parties hereto agree that the exclusive
                      ------------                                              
license granted hereunder is in part in consideration for Licensee's assumption
of patent costs and expenses as described herein.  Licensee shall pay for all
expenses incurred by Licensee pursuant to Sections 3.1 and 3.2 hereof, in
addition to patent costs paid by Licensee as set forth in Section 2.2 hereof.

                 3.5  Ownership.  Patent '292 and the patent applications filed
                      ---------
and the patents obtained by Licensee pursuant to Section 3.2 hereof shall be
owned solely by Licensor, and included in the exclusive license granted
hereunder.

                 3.6  Infringement Actions.
                      -------------------- 

                      3.6.1  Prosecution and Defense of Infringements.  Licensee
                             ---------------------------------------- 
shall have the right but not the obligation to prosecute any and all
infringements of any patent licensed hereunder and to defend all charges of
infringement arising as a result of the exercise by Licensee, its Affiliates or
sublicensees of the rights granted hereunder. Licensee may enter into
settlements, stipulated judgments or other arrangements respecting such
infringement, at its own expense. Licensor shall permit any action to be brought
in his name if required by law, and Licensee shall hold Licensor harmless from
any costs, expenses of liability respecting all such infringements or charges of
infringement, except such infringements as shall result from any breach of
warranty made by Licensor herein. Licensor agrees to provide all necessary
assistance of a technical nature which Licensee may require in any litigation
arising with respect to the Licensed Technology. In the event Licensee elects
not to prosecute any infringement, Licensee shall notify Licensor in writing
promptly and Licensor shall have the right to prosecute such infringement on his
own behalf. If Licensee elects to prosecute an infringement, then Licensor shall
not be entitled to do so.

                      3.6.2  Allocation of Recovery.  Any damages or other
                             ----------------------
recovery from an infringement action undertaken by Licensee pursuant to Section
3.6.1 shall be retained by Licensee as its exclusive property; but any such
recovery, net of

                                      -9-

<PAGE>
 
Licensee's costs of litigation, shall be treated as "Net Sales" and Licensee
shall pay a royalty thereon pursuant to Section 2.3.1 above.  If Licensee elects
to not prosecute an infringement, and Licensor does prosecute said infringement,
then Licensee shall retain any recovery received from said prosecution.

             4.  Obligations Related to Commercialization.
                 ---------------------------------------- 

                 4.1  Commercial Development Obligation.  In order to
                      ---------------------------------
maintain Licensee's exclusive license rights granted hereunder in force,
Licensee shall use reasonable efforts and due diligence to develop the Licensed
Technology into commercially viable Licensed Products, as promptly as is
reasonably and commercially feasible, and thereafter to produce and sell
reasonable quantities of Licensed Products. Licensee shall keep Licensor
generally informed as to Licensee's progress in such development, production and
sale, including its efforts, if any, to sublicense Licensed Technology.

                 4.2   Milestone.  If Licensee has not, by July 1, 1998,
                       ---------
pursued reasonable efforts and due diligence to develop the Licensed Technology
into commercially viable Licensed Products, such that there is a reasonable
probability of Net Sales forthcoming, then Licensor may require Licensee to pay
to Licensor a one-time payment of Fifty Thousand Dollars ($50,000) as a
condition to retaining the exclusivity of the license granted hereunder in
force.  If said payment is so required and not paid, then Licensee's rights
under this Agreement shall become non-exclusive and no minimum royalties shall
thereafter be payable.  If Licensor concludes that Licensee has failed to pursue
said reasonable efforts and due diligence, then Licensor shall give written
notice of said conclusion to Licensee, and Licensee shall have three months
after receipt of said notice to cure the failure.  If there is a dispute as to
whether there is a failure or a cure, the dispute shall be resolved by
arbitration pursuant to Section 10.2 below.

                 4.3  Governmental Approvals and Marketing of Licensed
                      ------------------------------------------------
Products. Licensee shall be responsible for obtaining all necessary governmental
- --------
approvals for the development, production, distribution, sale and use of any
Licensed Product, at Licensee's expense. Licensee shall have sole responsibility
for any warning labels, packaging and instructions as to the use of Licensed
Products and for the quality control for any Licensed Product.

                 4.4  Product Liability Indemnity.  Licensee hereby agrees
                      ---------------------------
to indemnify, defend and hold harmless Licensor from and against any liability
or expense arising from any product liability claim asserted by any party as to
any Licensed Product made or sold by Licensee or its Affiliates and
sublicensees, other than any claim which arises due to a breach by Licensor of
any warranty made herein.

                                     -10-


<PAGE>

             5.  Representations and Warranties.  Licensor hereby represents and
                 ------------------------------                                 
warrants that (i) he is the rightful owner of the Licensed Technology, (ii) the
Licensed Technology is not subject to any lien, license, assignment, security
interest or other encumbrances, (iii) he has made full disclosure to Licensee of
all communications with respect to the Licensed Technology with the PTO and any
foreign patent agencies, (iv) he has the power and authority to enter into this
Agreement and grant the license provided for hereunder, and (v) except as
disclosed to Licensee, Licensor has no knowledge that the Licensed Technology
infringes any patents or other intellectual property rights of third parties, or
that any third party is in any way infringing the Licensed Technology covered by
this Agreement.

             6.  Interests in Intellectual Property Rights.
                 ----------------------------------------- 

                 6.1  Preservation of Title.  Licensor shall retain full
                      ---------------------
ownership and title to Licensed Technology, Patent '292 and any other patents
licensed hereunder and shall use his reasonable best efforts to preserve and
maintain such full ownership and title.

                 6.2  Ownership of Improvements.
                      ------------------------- 

                      6.2.1  Developed by Licensee.  Any improvements to
                             --------------------- 
Licensed Technology conceived, developed or reduced to practice by Licensee, its
Affiliates or sublicensees or their employees shall remain the sole and
exclusive property of such party, and shall not be included in Licensed
Technology hereunder.

                      6.2.2  Developed by Licensor.  Any improvements to
                             ---------------------
Licensed Technology conceived, developed or reduced to practice by Licensor
during the term of this Agreement shall be included in Licensed Technology and
subject to the exclusive license granted hereunder.

             7.  Confidentiality and Publication.
                 ------------------------------- 

                 7.1  Treatment of Confidential Information.  The parties agree
                      -------------------------------------
that during the term of this Agreement, and for a period of three (3) years
after this Agreement terminates, a party receiving Confidential Information of
the other party will (i) maintain in confidence such Confidential Information to
the same extent such party maintains its own proprietary industrial information,
(ii) not disclose such Confidential Information to any third party without prior
written consent of the other party and (iii) not use such Confidential
Information for any purpose except those permitted by this Agreement.

                 7.2  Publications.  In order to protect the rights granted to
                      ------------
Licensee hereunder, Licensor shall submit to Licensee copies of proposed
publications of Licensor which contain subject matter relating to intellectual
property licensed hereunder and

                                     -11-


<PAGE>

afford Licensee sixty (60) days to review such proposed publications.  Upon
timely written request by Licensee, Licensor shall delay any such publication to
facilitate the preparation and filing of a patent application, which delay shall
not exceed ninety (90) days from the date Licensee requests such delay.

             8.  Termination.
                 ----------- 

                 8.1  Termination Upon Default.  Upon the failure of a party to
                      ------------------------
perform any obligation required of it or him to be performed hereunder, and the
failure to cure within thirty (30) days after receipt of written notice from the
other party specifying in reasonable detail the nature of such default, the non-
defaulting party may deliver to the defaulting party written notice of intent to
terminate, such termination to be effective upon the date set forth in such
notice.

             Such termination rights shall be in addition to and not in
substitution for any other remedies that may be available to the non-defaulting
party. Termination pursuant to this Section 8.1 shall not relieve the defaulting
party from liability and damages to the other party for breach of this
Agreement. Waiver by either party of a single default or a succession of
defaults shall not deprive such party of any right to terminate this Agreement
arising by reason of any subsequent default.

                 8.2  Transfer Upon Bankruptcy or Insolvency.  In the event of
                      -------------------------------------- 
the bankruptcy or insolvency of Licensee, this Agreement and the rights granted
to Licensee hereunder may be transferred by Licensee or any trustee appointed
for the estate of Licensee, provided such transferee shall agree in writing to
comply with all of the terms and conditions set forth herein and to cure any
financial defaults by Licensee.

                 8.3  Rights Upon Expiration.  Neither party shall have any
                      ----------------------
further rights or obligations upon the expiration of this Agreement other than
the obligation of Licensee to make any and all reports and payments for the
final quarter period. Provided, however, that upon such expiration, each party
shall be required to continue to abide by its non-disclosure obligations as
described in Section 7.1, and Licensee shall continue to abide by its obligation
to indemnify Licensor as described in Section 4.4 for products sold prior to the
termination.

                 8.4  Rights Upon Termination.  Notwithstanding any other
                      -----------------------
provision of this Agreement, upon any termination of this Agreement prior to the
regularly scheduled expiration date of this Agreement, the license granted
hereunder shall terminate. Except as otherwise provided in Section 8.5 of this
Agreement with respect to work-in-progress, upon such termination, Licensee
shall have no further right to develop, manufacture or sell any Licensed
Products, or to otherwise use any Licensed Technology. Any such termination
shall not relieve either party from any obligations accrued to the date of such
termination. Upon such

                                     -12-

<PAGE>
 
termination, each party shall be required to abide by its nondisclosure
obligations as described in Section 7.1, and, provided termination was not
initiated by Licensee due to Licensor's breach hereunder, Licensee shall
continue to abide by its obligations to indemnify Licensor as described in
Section 4.4 for products sold prior to the termination.

                 8.5  Work-in-Progress.  Upon any early termination of this
                      ----------------
Agreement and the license granted hereunder, Licensee shall be entitled to
finish any work-in-progress and to sell any completed inventory of Licensed
Products which remain on hand as of the date of termination, so long as Licensee
pays to Licensor the royalties applicable to such sales in accordance with the
terms and conditions as set forth in this Agreement .

             9.  Binding Upon Successors and Assigns.  This Agreement shall be
                 -----------------------------------
binding upon and inure to the benefit of any successors in interest and assigns
of Licensor and Licensee. Any such successor or assignee shall expressly assume
in writing the performance of all the terms and conditions of this Agreement to
be performed by the assigning party.

            10.  General Provisions.
                 ------------------ 

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

                 10.2  Arbitration.  Any matter or disagreement arising under
                       -----------
this Agreement shall be submitted for decision to a panel of three neutral
arbitrators with expertise in the subject matter to be arbitrated. One
arbitrator shall be selected by each party and the two arbitrators so selected
shall select the third arbitrator. The arbitration shall be conducted in
accordance with the Rules of the American Arbitration Association. The decision
and award rendered by the arbitrators shall be final and binding. Judgment upon
the award may be entered in any court having jurisdiction thereof. Any
arbitration shall be held in Ann Arbor, Michigan, or such other place as may be
mutually agreed upon in writing by the parties.

                 10.3  Entire Agreement; Modification.  This Agreement sets
                       ------------------------------
forth the entire agreement and understanding between the parties as to the
subject matter hereof. There shall be no amendments or modifications to this
Agreement, except by a written document which is signed by both parties.

                                     -13-

<PAGE>
 
                 10.4  Governing Law.  This Agreement shall be construed and
                       -------------
enforced in accordance with the laws of the State of Michigan.

                 10.5  Severability.  If any one or more of the provisions of
                       ------------
this Agreement is held to be invalid or unenforceable by a court of competent
jurisdiction, it shall be considered severed from this Agreement and shall not
serve to invalidate the remaining provisions thereof. The parties shall make a
good faith effort to replace any invalid or unenforceable provision with a valid
and enforceable provision such that the objectives contemplated by them when
entering this Agreement may be realize d.
 
                 10.6  No Waiver.  Any delay in enforcing a party's rights under
                       ---------
this Agreement or any waiver as to a particular default or other matter shall
not constitute a waiver of such party's rights to the future enforcement of its
rights under this Agreement, excepting only as to an express written and signed
waiver as to a particular matter for a particular period of time.

                 10.7  Attorneys' Fees.  In the event of a dispute between the
                       ---------------
parties hereto or in the event of any default hereunder, the party prevailing in
the resolution of any such dispute or default shall be entitled to recover its
reasonable attorneys' fees and other costs incurred in connection with resolving
such dispute or default.

                 10.8  Notices.  Any notices required by this Agreement shall be
                       -------
in writing, shall refer to this Agreement and shall be sent by registered or
certified mail, postage prepaid, or by telefax, telex or cable, charges prepaid,
or by overnight courier, charges prepaid to the addresses set forth below unless
subsequently changed by written notice to the other party:

     For Licensee:           Aastrom Biosciences, Inc.
                             Post Office Box 376
                             Ann Arbor, Michigan 48106
                             Attention:  R. Douglas Armstrong, Ph.D.
                                         President/CEO
                             Fax No.:  (313) 665-0485

     For Licensor:           Joseph G. Cremonese
                             227 Maple Drive
                             Greensburg, Pennsylvania 15601
                             Fax No.:  (412) 838-7780

Notice shall be deemed delivered upon the earlier of (i) when received, (ii)
three (3) days after deposit into the mail, or (iii) the date notice is sent via
telefax, telex or cable,

                                     -14-


<PAGE>
 
(iv) the day immediately following delivery to overnight courier (except Sunday
and holidays).

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


LICENSOR:                                 LICENSEE:

                                          AASTROM BIOSCIENCES, INC.


/s/ Joseph G. Cremonese                   By: /s/ R. Douglas Armstrong
- --------------------------                ----------------------------
Joseph G. Cremonese                       R. Douglas Armstrong, Ph.D.
7-17-92                                   President/CEO
                                          8/5/92

                                     -15-

<PAGE>
 
             [LETTERHEAD OF AASTROM BIOSCIENCES, INC. APPEARS HERE]



                                             July 14, 1992


Mr. Joseph G. Cremonese
227 Maple Drive
Greensburg, PA 15601


Dear Joe,

     In follow-up to our discussions, this letter is to constitute an Addendum 
to the "License Agreement by and between AASTROM Biosciences, Inc., a Michigan 
corporation and Joseph G. Cremonese" that is conditional upon the formal 
execution of that Agreement.

     In  Addendum to that Agreement, the parties agree to the following:

     "If Licensee (AASTROM) elects to terminate the Agreement in advance of one 
year after the date of the Agreement, without the Licensee initiating 
reexamination of the Licensed Technology, or in the absence of new information 
which would clearly invalidate the key claims of the Licensed Technology,
then Licensee shall pay to Licensor (Cremonese) a termination fee of Seven 
Thousand Five Hundred Dollars ($7,500) at the time of termination."

     Execution as designated below, in adjunct with execution of the License 
Agreement, will serve to formalize this Addendum.

                                             Sincerely,

                                             /s/ R. Douglas Armstrong

                                             R. Douglas Armstrong, Ph.D.
                                             President/CEO



Licensor:                                    Licensee:

                                             AASTROM Biosciences, Inc.

/s/ Joseph G. Cremonese                      By: /s/ R. Douglas Armstrong
- --------------------------                      ------------------------------ 
    Joseph G. Cremonese                         R. Douglas Armstrong, Ph.D.
                                                President/CEO   

Date: 7-17-92                                Date 8/5/92
      --------                                    -------


<PAGE>
 
                                 July 7, 1993



Mr. Joseph G. Cremonese
227 Maple Drive
Greensburg, PA 15601

Dear Joe,

In follow-up to our discussion, this letter is to formalize our understanding 
for extension of our license agreement. More specifically, we mutually agree 
to allow AASTROM a 1-month extension to initiate a re-examination request for 
Patent #4,839,292, as per sections 2.2 and 3.1 of our July 17, 1992, License 
Agreement. All other provisions of the License Agreement are unmodified.

To represent your agreement with this, please sign as indicated below.

Thank you.

Sincerely,

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

RDA:pp



I agree to the terms as indicated above.


/s/ JOSEPH G. CREMONESE    7/8/93
- ---------------------------------
Joseph G. Cremonese




<PAGE>
 
                                                                   EXHIBIT 10.17


                                                                    ATTACHMENT 1
                                                              RESEARCH AGREEMENT
                                                            UM/Ann Arbor Stromal
                               LICENSE AGREEMENT

By this Agreement, Ann Arbor Stromal, Inc. (hereinafter "Ann Arbor Stromal") and
the Regents of The University of Michigan, a constitutional corporation of the 
State of Michigan (hereinafter "University") agree as follows:

1.  INCORPORATION BY REFERENCE
    --------------------------

    Incorporated by reference with full force and effect to the provisions,
    definitions, terms and conditions of this License Agreement (hereinafter
    "License") are the provisions, definitions, terms and conditions of the
    Research Agreement to which this License is attached, including the Option
    Agreement and its Appendices.

2.  DEFINITIONS
    -----------

    2.1  "Effective Date" of this License shall be the date of completed
         execution by both Parties in accordance with the provisions of Article
         9 entitled "License", in the abovementioned Research Agreement to which
         this License is attached.

    2.2  "Parties", in singular or plural usage as required by the context,
         means Ann Arbor Stromal and/or University.


                                       1

<PAGE>
 
     2.3  "Territory" means all countries of the world.

     2.4  "Licensed Technology" means all patentable inventions and Know-how for
          the production of red blood cells, white blood cells, platelets and
          bone
 marrow cells, which are either described in University Project
          proposal, or conceived or reduced to practice as part of Project, or
          conceived or reduced to practice, whether or not pursuant to or as
          part of the Project, by Drs. Stephen G. Emerson, Michael F. Clarke or
          Bernhard O. Palsson, or those working under their direction, during
          the term of their participation in the Project and Ann Arbor Stromal's
          funding of the Project.

     2.5  "Licensed Patent(s)" means any and all pending patent applications(s)
          included within Licensed Technology, whether now existing or hereafter
          filed, both domestic and foreign, and any patents issuing therefrom.

     2.6  "Valid Claim(s)" means any claim(s) pending in a patent application or
          in an unexpired patent included within the Licensed Patents which has
          not been held unenforceable, unpatentable, or invalid by a decision of
          a court or other governmental agency of competent jurisdiction,
          unappealable or unappealed within the time allowed for appeal, and
          which has not been admitted to be invalid or unenforceable through
          reissue or disclaimer. If in any country there should be two or more
          such decisions conflicting with respect to the validity of the same
          claim, the decision of the higher or highest tribunal shall thereafter
          control;

                                       2


<PAGE>
 
          however, should the tribunals be of equal rank, then the decision or
          decisions upholding the claim shall prevail when the conflicting
          decisions are equal in number, and the majority of decisions shall
          prevail when the conflicting decisions are unequal in number.

     2.7  "Know-How" means (a) all information, data and knowledge contained in
          patent applications or patents which are at anytime included in the
          definition of Licensed Patents, and (b) any other methods, procedures,
          processes, compositions of matter, biological materials, trade
          secrets, experience, work products technical information, inventions,
          discoveries, improvements, reports, data, results from experiments,
          developmental efforts and demonstrations and subject matter related to
          the Project, whether or not contained in Licensed Patents.

     2.8  "Product(s)" means any red blood cells, white blood cells, platelets
          and bone marrow cells as well as any components, by-products, progeny
          or derivatives thereof and any factor, composition, substance,
          equipment, mechanism, device or other property and combinations
          thereof, the manufacture, use or sale of which would, but for this
          License, comprise an infringement of one or more Valid Claims.

     2.9  "Combination Sales" shall mean sales of Product by Ann Arbor Stromal,
          its Affiliates or subsidiaries as a combined package comprised in part
          of Product and in part of one or more other products or parts which
          constitute either an

                                       3


<PAGE>
 
         active ingredient or a significant delivery system or mechanism and
         which could readily be sold by Ann Arbor Stromal, its Affiliates or
         subsidiaries and used for their intended purpose by their purchasers
         without the incorporation or use of Product.

    2.10 "Net Sales" means the sum, over the term of this License, of all
         amounts of monies received and all other consideration received (when
         in a form other than cash or its equivalent, the fair market value
         thereof when received) by Ann Arbor Stromal, its Affiliates or
         subsidiaries from purchasers or users from or by reason of the sale,
         distribution or use of Product, less any amounts collected for taxes,
         including sales and use taxes, customer charges, allowances (including
         any allowance for bad debts), import and export duties and other
         governmental charges, prompt payment or other customary trade
         discounts allowed or taken, credits or refunds for goods returned and
         transportation and delivery charges (including insurance premiums).

         If Product is sold in Combination Sales, then Net Sales shall be
         computed in the following manner: First, gross revenues from the
         Combination Sales shall be reduced by any applicable deductions
         itemized in the first paragraph of this definition in order to arrive
         at "Combination Net Sales"; second, Net Sales shall be calculated by
         employing the following formulas:

                                       4

<PAGE>
 
                 C - p = Net Sales.

         In the above formula, "p" is the fair market value of all other
         products or parts which constitute an active ingredient or significant
         delivery system or mechanism within the Combination Sale and C is
         equal to Combination Net Sales.

         All fair market value calculations made by Ann Arbor Stromal hereunder
         shall be in good faith determined by Ann Arbor Stromal in the event no
         market price is available. In the event the University disagrees with
         any aspect of Ann Arbor Stromal's implementation of this definition,
         University may request that such dispute be submitted to arbitration
         as described in Article 17 and Ann Arbor Stromal hereby agrees to
         promptly grant and fully cooperate with such request.

    2.11 "Affiliate" shall mean any corporation, partnership, proprietorship or
         other entity controlled by, controlling, or under common control with
         Ann Arbor Stromal, and shall include any corporation, partnership,
         proprietorship or other entity directly or indirectly owning, owned by
         or under common ownership with the party in question to the

                                       5

<PAGE>
 
         extent of twenty-five percent (25%) or more of the equity or voting
         shares, including shares owned beneficially by such party.

    2.12 "Calendar Quarters" means the three (3) months ending on the last day
         of March, June, September and December of each year.

3.  GRANTS
    ------

    3.1  Subject to the conditions and provisions of this License, University
         hereby grants to Ann Arbor Stromal an exclusive world-wide license,
         without the right to grant sublicenses, except as described in
         paragraph 3.2 below, under Licensed Patents and to use Know-How to
         make, use, and sell Product(s), except that University hereby retains
         the right to use Licensed Patents and Know-How solely for research
         purposes, and except that to the extent funding from federal agencies
         results in Licensed Technology or Licensed Patents in addition to
         Project funding, the federal government may have its standard license
         rights with respect to such Licensed Technology or Licensed Patents.

    3.2  If at any time Ann Arbor Stromal wishes to grant sublicense rights
         under its exclusive license rights granted herein, University and Ann
         Arbor Stromal shall negotiate in good faith in order to allow Ann
         Arbor Stromal to enter into such sublicensing arrangements with a
         royalty return on Product(s) to University comparable to royalties
         earned by

                                       6

<PAGE>
 
         University under this License. Subject only to this understanding and
         the need to have any sublicensing arrangements reflect a fair market
         value return to Ann Arbor Stromal as in an arms length transaction, it
         is the understanding of the parties that Ann Arbor Stromal should be
         able to make its own decisions as to the appropriate mechanisms,
         including sublicensing, for exploiting the Licensed Technology.

    3.3  The University and Ann Arbor Stromal hereby assert that, to the best of
         their knowledge as of the date of execution of the Option Agreement,
         there do not exist any University patents or pending patents, other
         than the Licensed Patents of this License Agreement, which would be
         infringed by the practice of the Licensed Patents of this License or
         which would otherwise prevent the practice of any of the Valid Claims.
         If, however, such University patents or patent applications are
         subsequently found to have existed prior to the date of the Option
         Agreement, University shall use reasonable efforts to grant to Ann
         Arbor Stromal a nonexclusive license to such patents and/or patent
         applications, to the extent necessary for the practice of the Licensed
         Technology of this License.

4.  ROYALTIES
    ---------

    4.1  The license rights granted to Ann Arbor Stromal herein are subject to
         Ann Arbor Stromal's payment of royalties to University according to the
         provisions of this Section 4.

                                       7

<PAGE>
 
    4.2  For Product(s) defined in 2.8 herein, Ann Arbor Stromal will pay
         University a royalty equal to two percent (2%) of Net Sales of such
         Product(s) by Ann Arbor Stromal and Affiliates for the life of the last
         to expire of Licensed Patents.

    4.3  Where Net Sales form the basis upon which payment to University is
         derived, the obligation to pay University under this Section 4 is
         imposed only once with respect to the same unit of Product regardless
         of the number of Valid Claims, Licensed Patents or items of Know-How
         covering the same; however, for purposes of determination of payments
         due hereunder, whenever the term Product may apply to a property during
         various stages of manufacture, use or sale, Net Sales, as otherwise
         defined shall be derived from the sale, distribution or use of such
         Product by Ann Arbor Stromal and Affiliates at the stage of its highest
         invoiced value to unrelated third parties.

    4.4  If at any time or from time to time an unrelated third party in any
         country shall, under right of a compulsory license granted or ordered
         to be granted by a competent governmental authority, manufacture, use
         or sell any Product with respect to which royalties shall be payable
         pursuant to Paragraph 4.2 of this Section, then Ann Arbor Stromal, upon
         notice to University and during the period such compulsory license
         shall be effective, shall have the right to reduce such royalty on each
         unit of Product sold

                                       8


<PAGE>
 
         in such country to an amount no greater than the amount payable by said
         third party in consideration of its compulsory license.

5.  REPORTS
    -------


    5.1  Within sixty (60) days after the close of each Calendar Quarter during
         the term of this License (including the last day of any such Calendar
         Quarter following any termination of this License), Ann Arbor Stromal
         shall report to University all royalties accruing to University under
         Section 4 during such Calendar Quarter. Such quarterly reports shall
         indicate for each Calendar Quarter the gross sales and Net Sales of
         Product; such reports shall also indicate Net Sales with respect to
         which payments are due and the amount of such payments, as well as the
         various calculations used to arrive at said amounts, including the
         quantity, description (nomenclature and type designation), country of
         sale and country of manufacture of Product(s). In case no payment is
         due for any such period, Ann Arbor Stromal shall so report.

    5.2  Ann Arbor Stromal covenants that it will promptly establish and
         consistently employ a system of specific nomenclatures and type
         designations for Product(s) so that the various types can be identified
         and segregated, and Ann Arbor Stromal and Affiliates will consistently
         employ such system when rendering invoices thereon and henceforth
         agrees to inform University, or its auditors, when requested as to

                                       9


<PAGE>
 
         the details concerning such nomenclature system as well as to all
         additions thereto and changes therein.

    5.3  Ann Arbor Stromal shall keep and it shall cause its Affiliates to keep,
         true and accurate records and books of account containing data
         reasonably required for the computation and verification of payments to
         be made as provided by this License, which records and books shall be
         open for inspection upon reasonable notice during business hours by
         inspectors selected by and at the expense of University for the purpose
         of verifying the amount of payments due and payable. Said right of
         inspection will exist for six (6) years from the date of origination of
         any such record and this requirement and right of inspection shall
         survive any termination of this License for a period of three (3) years
         after such termination. However, in the event that such inspection
         reveals an underpayment of royalties to University in excess of five
         percent (5%), then said inspection shall be at Ann Arbor Stromal's
         expense and such underpayment shall become immediately due and payable
         to University.

    5.4  The reports provided hereunder shall be certified by an authorized
         representative of Ann Arbor Stromal to be correct to the best of Ann
         Arbor Stromal's knowledge and information.

                                      10


<PAGE>
 
6.  TIMES AND CURRENCIES OF PAYMENTS
    --------------------------------

    6.1  Payments accrued at the close of each Calendar Quarter shall be due and
         payable in Ann Arbor, Michigan on the date each quarterly report,
         provided for under Section 5 above, is due and shall be paid in United
         States dollars.  Ann Arbor Stromal agrees to make all payments due
         hereunder to University by check addressed to the University's
         Intellectual Properties Office or by wire transfer to the bank account
         designated by University with telephonic confirmation of receipt
         thereof.

    6.2  On all amounts outstanding and payable to University, interest shall
         accrue from the date such amounts are due and payable at a rate of two
         (2) points above the prime lending rate as established by the Chase
         Manhattan Bank, N.A. in New York City, New York, or at such lower rate
         as may be required by law.

    6.3  Any United States currency payments hereunder shall be determined by
         converting foreign currencies into their equivalent in United States
         dollars at the exchange rate of such currency as reported (or if
         erroneously reported, as subsequently corrected) in the Wall Street
         Journal on the last business day of the Calendar Quarter during which
         such payments accrue (or if not reported on that date, as quoted by the
         Chase Manhattan Bank, N.A. in New York City, New York).

                                      11

<PAGE>
 
7.  COMMERCIALIZATION
    -----------------

    7.1  Ann Arbor Stromal agrees to use commercially reasonable efforts in
         proceeding with the development, manufacture, marketing and sale of
         Products to commercially exploit the Licensed Technology and in
         creating a supply and demand for same; provided, however, Ann Arbor
         Stromal shall be entitled to exercise prudent business judgment in
         meeting its obligations hereunder.

    7.2  Where Ann Arbor Stromal engages in continuing development with respect
         to Product(s), Ann Arbor Stromal shall keep University informed of such
         developments in writing. Ann Arbor Stromal shall promptly inform
         University of any patent applications, or similar applications,
         relating to Product(s) or improvements thereon, filed by or on behalf
         of Ann Arbor Stromal or Affiliates anywhere in the world.

8.  INFRINGEMENT
    ------------

    8.1  In the event a third party is infringing a Valid Claim by making, using
         or selling Product(s) as defined herein, Ann Arbor Stromal shall have
         the right to bring suit in its own name. University agrees to use
         reasonable efforts to cooperate in the prosecution of such suit. Ann
         Arbor Stromal shall bear the expense of any such litigation and, except
         as described in Paragraph 8.5 below, shall have full authority to
         negotiate a settlement on such terms as Ann Arbor Stromal shall
         determine. Ann Arbor Stromal shall

                                      12

<PAGE>
 
     share twenty-five percent (25%) of any resulting settlement payments or
     recovery awarded, less reasonable and actual attorneys' fees paid and
     unrecovered by Ann Arbor Stromal and University, with University.

8.2  In the event University, in its sole discretion determines that an
     infringement of Valid Claims resulting from a third party's making, using
     or selling of Product(s) is significant, University shall serve notice on
     Ann Arbor Stromal and Ann Arbor Stromal shall, within sixty (60) days of
     said notice, commence appropriate legal action. Ann Arbor Stromal shall
     share twenty-five percent (25%) of any resulting settlement payments or
     recovery awarded, less reasonable and actual attorneys' fees paid and
     unrecovered by Ann Arbor Stromal and University, with University. If Ann
     Arbor Stromal fails to commence such action, University may, at its option,
     commence legal action. Ann Arbor Stromal shall use reasonable efforts to
     cooperate in such action. University shall bear the expense of any such
     litigation and, except as described in Paragraph 8.5 below, shall have full
     authority to negotiate a settlement on such terms as University shall
     determine. Provided that Ann Arbor Stromal has maintained the license
     rights granted in 3.1 herein, University shall share twenty-five percent
     (25%) of any resulting settlement payments or recovery awarded, less
     reasonable and actual attorneys' fees paid and unrecovered by University
     and Ann Arbor Stromal, with Ann Arbor Stromal.

                                      13

<PAGE>
 
    8.3  In the event that during the term hereof there be made against Ann
         Arbor Stromal, any charge for infringement of any third-party patent by
         reason of Ann Arbor Stromal's or Affiliate's manufacture or sale of a
         Product or any customer's use of the Product which charge is grounded
         essentially on an asserted domination by that third-party patent of the
         manufacture, sale or use of such Product, Ann Arbor Stromal shall give
         written notice thereof to University. Ann Arbor Stromal agrees to
         effectuate, if possible, an acceptable change in the Product to avoid
         such alleged infringement. If no such satisfactory change can be
         effectuated, University and Ann Arbor Stromal agree to collaborate and
         enter into discussions with said third party for the purposes of
         negotiating a settlement. If no settlement can be agreed upon by Ann
         Arbor Stromal, University and the third party, Ann Arbor Stromal shall
         have the right, but not the obligation, to defend any suit for
         infringement brought against it by the third party, and if required by
         law or if requested by University, to join University as a party
         defendant. If Ann Arbor Stromal shall elect not to defend such
         infringement suit, Ann Arbor Stromal shall promptly notify University
         to that effect and University shall thereafter have the obligation to
         defend the suit provided Ann Arbor Stromal reimburses the University
         within thirty (30) days of invoicing for all cost and expenses
         (including reasonable attorney fees), and if required by law or if
         requested by Ann Arbor Stromal, to join Ann Arbor Stromal as a party
         defendant.

                                      14

<PAGE>
 
    8.4  Ann Arbor Stromal will bear the cost of defending claims of
         infringement or pursuing infringers, except as allowed in Paragraph 8.2
         above. However, Ann Arbor Stromal can be reimbursed for up to one-half
         of the unrecovered amount of such actual and reasonable expenses in the
         following manner: Ann Arbor Stromal can deduct from royalties otherwise
         due and payable to University under the License, up to fifty percent
         (50%) until such time as Ann Arbor Stromal has recovered one-half of
         its actual, reasonable, and otherwise unrecovered expenses.
         University's "obligation" of bearing one-half of Ann Arbor Stromal's
         expenses shall not exceed the ability of the above-described mechanism
         (i.e., a 50% reduction in royalty payments due and payable) to
         reimburse such expenses and University royalty payments otherwise due
         shall never be reduced by more than 50%. Ann Arbor Stromal will make an
         accounting to University of all such expenses as part of its reporting
         obligations under Section 5.

    8.5  Neither University nor Ann Arbor Stromal shall compromise or settle any
         claim or action in any manner that would affect the rights of the other
         Party without the consent of said other Party.

9.  TERMINATION
    -----------

    9.1  With respect to any termination of this License, and except as provided
         herein to the contrary, all rights and

                                      15

<PAGE>
 
    obligations of the Parties hereunder shall cease with respect thereto,
    except as follows:

    9.1.1  Obligations to pay royalties and other sums accruing hereunder up to 
           the day of such termination;

    9.1.2  Obligations to pay royalties on Net Sales, subsequent to said date of
           termination of Product(s) in Stock at the date of termination with
           respect to which stock Ann Arbor Stromal shall have a reasonable time
           to sell or liquidate in a reasonable manner as deemed necessary by
           Ann Arbor Stromal under the circumstances;

    9.1.3  Obligations for record keeping and accounting reports for so long as
           Product(s) are sold pursuant to Paragraph 9.1.2 above. At such time
           as there are no sales or other dispositions of Product(s) upon
           termination of this License, Ann Arbor Stromal shall render a final
           report and royalty payment;

    9.1.4  University's rights to audit books and records as described in 
           Section 5 herein;

    9.1.5  Obligations of indemnity under Section 18;

    9.1.6  Any cause of action or claim of Ann Arbor Stromal or University
           accrued or to accrue because of any breach or default by the other
           Party hereunder;

9.2 This License will become effective on its Effective Date and, unless 
    terminated under another, specific provision of

                                      16

<PAGE>
 
         this License, will remain in effect until and terminate upon the
         expiration of the later of Ann Arbor Stromal's obligation to pay
         royalties under Paragraph 4.3 herein or the last to expire of Licensed
         Patents. After such full-term termination of this License, Ann Arbor
         Stromal shall have the right to make, use and sell Product(s) without
         further payment to University hereunder.

    9.3  If Ann Arbor Stromal shall at any time default in the payment of any
         royalty or the making of any report hereunder, or shall commit any
         material breach of any material covenant or promise herein contained,
         --------
         or shall make any false report and shall fail to remedy any such
         default, material breach or report within sixty (60) days after written
         notice thereof by University, University may, at its option, terminate
         this License by notice in writing to such effect. In the event of such
         termination, interest shall continue to accrue as described in
         Paragraph 6.2 on any amounts outstanding and payable to University and
         any such termination shall be without prejudice to University's other
         legal rights for breach of this License.

    9.4  In the event that Ann Arbor Stromal desires to terminate this License,
         Ann Arbor Stromal shall serve upon University a notice of termination,
         including a statement of reasons for such termination, at least six (6)
         months before a termination date established by Ann Arbor Stromal. Such
         notice shall be deemed by the parties to be final, and immediately upon
         service of such notice of termination,

                                      17

<PAGE>
 
         University shall have the right to begin negotiations and enter into
         agreements with others for the manufacture, sale and use of the
         Product(s), and may, at its option, disclose to said others any and all
         information related to Product(s) other than Confidential Information
         generated or developed solely by Ann Arbor Stromal. During the period
         of time from the notice of termination until termination pursuant to
         this provision, Ann Arbor Stromal shall continue to commercialize
         Product(s) and to make them reasonably available to the public at fair
         market value.

10. ASSIGNMENT
    ----------

    This License shall not be transferable or assignable by either Party without
    the prior written consent of the other Party, which consent shall not be
    unreasonably withheld; and any attempt to transfer or assign this License
    without such consent shall be void from the beginning. No transfer or
    assignment may be made by Ann Arbor Stromal unless and until the intended
    transferee or assignee agrees in writing to accept all of the terms and
    conditions of this License. For purposes of implementing this clause the
    University's consent may only be withheld:

         i) if the University reasonably believes that implementing the terms of
            the proposed transfer or assignment could economically discriminate
            against the University or its employees holding equity in Ann Arbor
            Stromal as compared to any of the other shareholders or investors in
            Ann Arbor Stromal or their principals; or

                                      18

<PAGE>
 
         ii)  if the University reasonably believes that the proposed transfer
              or assignment is to a third party which is not in a financial and
              technical position at least equivalent to that of Ann Arbor
              Stromal for purposes of exploiting and commercializing the
              Licensed Technology.


11. REGISTRATION OR RECORDATION
    ---------------------------


    11.1 If the terms of this License, or any assignment or license under this
         License are or become such as to require or make it appropriate that
         the Agreement or license or any part thereof be registered with or
         reported to a national or supranational agency of any area in which Ann
         Arbor Stromal, or Affiliates would do business, Ann Arbor Stromal will,
         at its expense, undertake such registration or report. Prompt notice
         and appropriate verification of the act of registration or report of
         any agency ruling resulting from it will be supplied by Ann Arbor
         Stromal to University.

    11.2 Any formal recordation of this Agreement or any license herein granted
         which is required by the law of any country of the Territory as a
         prerequisite to enforceability of the Agreement or license in the
         courts of any such country or for other reasons shall also be carried
         out by Ann Arbor Stromal at its expense, and appropriately verified
         proof of recordation shall be promptly furnished to University.

                                      19


<PAGE>
 
12. EXPORT LAWS AND REGULATIONS OF THE UNITED STATES
    ------------------------------------------------


    12.1 The Export Regulations of the United States Department of Commerce
         prohibit the exportation from the United States of certain types of
         technical data and commodities (listed in the Export Administration
         Regulations), unless the exporter (e.g., Ann Arbor Stromal or
         Affiliates) has received the required General License or Validated
         License, whichever is applicable. In addition, the exporter may be
         required to obtain certain written assurances regarding re-export from
         the foreign importer for certain types of technical data and
         commodities. Prior to its engaging in any export activity, Ann Arbor
         Stromal has advised University that it will receive a copy of the then
         current Export Administration Regulations of the United States
         Department of Commerce and will arrange for a subscription under which
         it will receive Supplementary Bulletins from the United States
         Department of Commerce upon their issuance. Ann Arbor Stromal hereby
         agrees to comply with, and to require Affiliates to comply with, the
         Export Administration Regulations of the United States Department of
         Commerce; and Ann Arbor Stromal hereby gives University the assurances
         called for in the Export Administration Regulations, including the
         assurances called for in Part 379.4 and any successor provisions of
         such regulations.

    12.2 This License shall be subject to all United States Government laws and
         regulations now or hereafter applicable to the subject matter of this
         License.

                                      20


<PAGE>
 
13.  NOTICES
     -------

     Any notice, request, report, or payment required or permitted to
     be given or made under this License by any Party shall be given
     by sending such notice by prepaid certified mail, return receipt
     requested, or by facsimile transmission to the address set forth
     below or such other address as such party shall have specified by
     written notice given in conformity herewith.  Any notice not so
     given shall not be valid unless and until actually received, and
     any notice given in accordance with the provisions of this paragraph
     shall be effective when mailed:

          TO University:  The University of Michigan
                          Intellectual Properties Office
                          475 East Jefferson, Room 2354
                          Ann Arbor, Michigan 48109-1248
                          Attention:  File No. 433

          TO  Ann Arbor Stromal:  Robert Kunze
                                  General Partner
                                  H&Q Life Science Technology Fund I
                                  One Bush Street
                                  San Francisco, California 94104

          With copy provided to:  Kenneth L. Guernsey
                                  Attorney at Law
                                  Cooley, Godward, Castro, Huddleson & Tatum
                                  One Maritime Plaza, 20th Floor
                                  San Francisco, CA 94111-3580

14.  INVALIDITY
     ----------

     In the event that any term, provision, or covenant of this License shall
     be determined by a court of competent jurisdiction to be invalid, illegal,
     or unenforceable, that term will be curtailed, limited, or deleted, but
     only to the extent necessary

                                      21


<PAGE>
 
     to remove such invalidity, illegality, or unenforceability, and the
     remaining terms, provisions, and covenants shall not in any way be affected
     or impaired thereby. In the event that the time period of any covenant
     shall be held unenforceable as a matter of law, said covenant will be
     interpreted to be effective for an enforceable time period.

15.  ENTIRE AGREEMENT AND AMENDMENT
     ------------------------------

     This License contains the entire understanding of the Parties with respect
     to the matter contained herein, and supersedes all prior agreements, oral
     or written, and all other communication between them relating to the
     subject matter hereof. The Parties hereto may, from time to time during the
     continuance of this License, modify, vary or alter any of the provisions of
     this License, but only by an instrument duly executed by authorized
     officials of both Parties hereto.

16.  GOVERNING LAW
     -------------

     This License and the relationships between the Parties shall be governed in
     all respects by the law of the State of Michigan, the United States of
     America, except that questions affecting the construction and effect of any
     patent shall be determined by the law of the country in which the patent
     has been granted.

                                      22


<PAGE>
 
17.  ARBITRATION AND DISPUTE RESOLUTION
     ----------------------------------

     Any dispute relating to the interpretation or performance of this Agreement
     or the grounds for the termination hereof shall be resolved at the request
     of either party through final and binding arbitration by a single
     arbitrator in accordance with the Commercial Arbitration rules of the
     American Arbitration Association ("AAA"). Such arbitrator shall be selected
     by the mutual agreement of the parties or, failing such agreement, shall be
     selected according to the relevant AAA rules. The parties shall bear the
     costs of such arbitrator and arbitration equally. The prevailing party in
     any such arbitration shall be entitled to its reasonable attorney's fees
     and costs solely at the discretion of the arbitrator in addition to any
     other amount of recovery ordered by such arbitrator. The arbitrator or
     court, as the case may be, shall determine which party is the "prevailing
     party" for purposes of this section. If judicial enforcement or review of
     such arbitrator's award is sought by either party, judgment may be entered
     upon such award in any court of competent jurisdiction. Ann Arbor Stromal
     hereby consents to venue and personal jurisdiction in Ann Arbor, Michigan
     for any such arbitration proceeding and for any court proceeding. The duty
     of the parties to arbitrate any dispute relating to the interpretation or
     performance of this Agreement or the grounds for the termination thereof
     shall survive any termination of this Agreement.

                                      23

<PAGE>
 
18.  INDEMNITY:  INSURANCE
     ---------------------

     18.1  Ann Arbor Stromal shall defend, indemnify and hold harmless and
           shall require Affiliates to defend, indemnify and hold harmless
           University, its fellows, officers, employees and agents, for and
           against any and all claims, demands, damages, losses, and expenses
           of any nature (including attorneys' fees and other litigation
           expenses), resulting from, but not limited to, death, personal
           injury, illness, property damage or products liability arising from
           or in connection with, any of the following:

           18.1.1  Any manufacture, use, sale or other disposition by
                   Ann Arbor Stromal, Affiliates, or other transferees of
                   Products;

           18.1.2  The direct or indirect use of Products by any person;

           18.1.3  The use by Ann Arbor Stromal or Affiliates of any invention,
                   discovery, data, information, product or process related to
                   Licensed Patents or Know-How.

     18.2  University shall be entitled to participate at its option and expense
           through counsel of its own selection, and may join in any legal
           actions related to any such claims, demands, damages, losses and
           expenses under Paragraph 18.1.

                                      24 
 

<PAGE>
 
19.  NO WARRANTY:  LIMITATIONS OF LIABILITY
     --------------------------------------

     19.1  UNIVERSITY MAKES NO REPRESENTATIONS, EXTENDS NO WARRANTIES
           OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT
           LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY OR
           FITNESS FOR A PARTICULAR PURPOSE, AND ASSUMES NO 
           RESPONSIBILITIES WHATEVER WITH RESPECT TO DESIGN, DEVELOPMENT,
           MANUFACTURE, USE, SALE OR OTHER DISPOSITION BY ANN ARBOR STROMAL
           OR AFFILIATES OF PRODUCTS.  Regardless of any testing which may
           have been done at University, University makes no representations
           regarding how Product can or should be used in any specific process.

     19.2  THE ENTIRE RISK AS TO PERFORMANCE OF PRODUCTS IS ASSUMED BY ANN
           ARBOR STROMAL AND AFFILIATES.  Every user of Product must do its
           own verification testing and define for itself any processes for 
           its use of Product.  In no event shall University be responsible
           or liable for any direct, indirect, special, incidental, or
           consequential damages or lost profits to Ann Arbor Stromal,
           Affiliates, users or any other individual or entity regardless of
           legal theory.  The above limitations on liability apply even though
           University may have been advised of the possibility of such damage.

     19.3  University represents that to the best of its knowledge and belief
           it has the lawful right to grant the license set forth herein
           without breaching the terms or conditions of any agreements with
           any third parties.

                                      25

<PAGE>
 
20.  PUBLICITY
     ---------

     Ann Arbor Stromal agrees to refrain from using and to require
     Affiliates to refrain from using quotes or opinions attributed or
     attributable to University or any employee of University in publicity,
     advertising, or news releases without the prior written approval of an
     authorized representative of University.  Reports in scientific literature
     and presentations of joint research and development work are not considered
     publicity.

21.  PRODUCT MARKING
     ---------------

     Ann Arbor Stromal and Affiliates agree to mark Products with the
     appropriate patent notice as approved by University.

22.  NON-WAIVER
     ----------
     
     No waiver, no matter how long continuing or how many times extended,
     by either Party of a breach of any term or condition of this License 
     shall be considered as a permanent waiver or as an amendment to this
     instrument.

23.  ARTICLE HEADINGS
     ----------------

     The Article headings herein are for purposes of convenient reference
     only and shall not be used to construe or modify the terms written in
     the text of this agreement.

                                      26

<PAGE>
 
24.  FORCE MAJEURE
     -------------

     Neither Party hereto shall be deemed to be in default of any provision of
     this License, or for any failure in performance, resulting from acts or
     events beyond the reasonable control of such Party. For purposes of this
     License, such acts shall include, but not be limited to, acts of Good, acts
     of civil or military authority, civil disturbance, war, strikes, fires,
     power failures, other catastrophes, or other "force majeure" events beyond
     the Parties' reasonable control.

25.  NO AGENCY RELATIONSHIP
     ----------------------

     Except as clearly and specifically provided under the terms and provisions
     of this License, neither Party shall be deemed to be an agent of the
     other in connection with the exercise of any rights hereunder, and neither
     shall have any right or authority to assume or create any obligation or
     responsibility on behalf of the other.

26.  CONFIDENTIALITY PROVISIONS
     --------------------------

     26.1  University and Ann Arbor Stromal each agree not to disclose or use,
           except as required by law or contemplated by this License and the
           Research Agreement to which this License is attached, the following
           ("Confidential Information"):  (i) any of the terms of this License
           and the Exhibits hereto (except for disclosure of basic terms which
           may be required under University policy), or (ii) except as otherwise

                                      27

<PAGE>
 
      provided for in the Research Agreement's Article 7 (Publications), any
      Project related Know-How, data, process, technique, drawing, formula,
      future development, or engineering or manufacturing development of either
      party and any marketing, business plan, servicing, financial or personnel
      matter relating to the other party, its present or future products, sales,
      suppliers, customers, employees, investors or business except as Ann Arbor
      Stromal finds reasonably necessary to conduct its business or raise
      capital or (iii) any information received from the other party which is in
      written form and marked "Confidential", "Proprietary", "Secret" or the
      like.

26.2  The parties hereto agree that the provisions of this Article 26 shall
      survive, whether or not the other provisions hereof remain in full
      force and effect, for a period of three (3) years after any termination
      of this License.

26.3  Confidential Information shall not include and neither party shall be
      obligated to hold in confidence or restrict the use of any information
      (i) which is or becomes public knowledge without breach of this License,
      (ii) which is or becomes available without a confidentiality restriction
      and without breach of this License from a source other than a party 
      hereto, (iii) which is produced in response to a court order or government
      action, (iv) which is disclosed with the other party's prior written
      approval, (v) which is independently developed by the party receiving
      the Confidential Information from the other party, or (vi) which is known
      by other means to the party receiving the 

                                      28



<PAGE>
 
     Confidential Information at the time of disclosure of same, and in the
     case of (v) and (vi), can be established by documentary evidence.

IN WITNESS WHEREOF, each of the Parties hereto has caused this entire
agreement to be executed in duplicate originals by its duly authorized
officer or representative.


                                     FOR THE REGENTS OF
FOR ANN ARBOR STROMAL, INC.          THE UNIVERSITY OF MICHIGAN

By /s/ R. DOUGLAS ARMSTRONG          By /s/ ROBERT F. GAVIN
   ---------------------------          ---------------------------
   (authorized representative)          (authorized representative)

Typed Name  R. Douglas Armstrong     Typed Name   Robert F. Gavin
            --------------------                  ---------------
Title  President and CEO             Title  Director, Intellectual Properties
       -----------------                    ---------------------------------
Date   3/13/92                       Date   3/13/92
       -------                              -------


                                      29



<PAGE>
 
                     FIRST AMENDMENT TO LICENSE AGREEMENT

This First Amendment to License Agreement is made as of March 13, 1992,
                                                        ---------------
by and between Aastrom Biosciences, Inc. (formerly Ann Arbor Stromal, Inc.),
a Michigan corporation, (hereinafter "Aastrom") and the Regents of the 
University of Michigan, a constitutional corporation of the State of Michigan 
(hereinafter "University").

                                  RECITATIONS

The following is a recital of facts underlying this Agreement:

A.  On March 13, 1992 the parties hereto have executed a certain License
       --------------
    Agreement ("License Agreement") as contemplated by a certain Research
    Agreement between the parties hereto which was executed by them during
    August of 1989 (the "Research Agreement").  Defined terms not otherwise 
    defined in this First Amendment shall have the meanings set forth in the
    License Agreement.

B.  The parties now wish to amend the License Agreement in certain respects.

NOW, THEREFORE, in consideration of their mutual promises, the parties hereto
agree as follows:

1.  The License Agreement is hereby amended as follows.

    (a) Licensed Technology includes:





<PAGE>
 
i)   all patent applications, including related foreign patent applications,
     and patents issuing therefrom identified in Exhibit A attached hereto;

ii)  all Know-How included in patents and patent applications of Exhibit A
     and grant proposals, papers, abstracts and other documents described in
     Exhibit B attached hereto; and

iii) all additional patentable inventions and Know-How for the production of
     red blood cells, white blood cells, platelets and bone marrow cells, which
     is either described in University Project proposal, or conceived or reduced
     to practice as part of Project, or conceived or reduced to pratice, whether
     or not pursuant to or as part of the Project, by Drs. Stephen G. Emerson,
     Michael F. Clarke or Bernhard O. Palsson, or those working under their
     direction, during the term of their participation in the Project and
     Aastrom's funding of the Project.

(b)  Section 3.2 of the License Agreement hereby is amended to read in its
     entirety as follows:

     3.2  Aastrom shall have the right to grant one or more sublicenses for
          third parties to use the rights granted to Aastrom under its exclusive

                                       2


<PAGE>
 
license rights granted in this License Agreement; and, subject to approval by
Aastrom, sub-sublicense agreements may also be granted by a third party
sublicensee. All sublicenses and sub-sublicenses, if any, shall provide that the
sublicensee and sub-sublicensee shall comply fully with all provisions of this
License Agreement, including without limitation, paying the same royalty to the
University as is specified in this License Agreement. Notwithstanding any such
sublicensing, Aastrom shall still remain fully responsible and liable for
compliance with all terms of this License Agreement, including compliance by any
and all sublicensees and sub-sublicensees. No consent from University is
required for any sublicense or sub-sublicense, as described above; however,
Aastrom shall provide timely notice of each sublicense hereunder along with
copies of all sublicense agreements. Should Aastrom propose to enter into a
sublicense which reduces any royalties payable to University, or which otherwise
modifies any of the rights of University under this License Agreement, then no
such sublicense can be entered into without the prior written consent of
University and any

                                       3

<PAGE>
 
          such sublicense entered into without prior written consent of
          University shall be void from the beginning. For example, if the
          proposed sublicensee is to issue stock to Aastrom in lieu of
          royalties, or if a proposed sublicensee is to make a lump sum front-
          end payment as a set-off against or in lieu of future royalties, then
          there shall be negotiations between Aastrom and University for an
          equitable allocation of said consideration in lieu of royalties, with
          the mutual consent of Aastrom and University required for any such
          non-conforming sublicense agreement.

2.  Article 13 of the License Agreement, entitled "Notices", is amended as
    follows:

    i)    Provision for notice to Robert Kunze and Kenneth Guernsey is hereby
          deleted; and

    ii)   Notice to Aastrom shall be provided to:

          Aastrom Biosciences, Inc.
          President/CEO
          P.O. Box 130469
          Ann Arbor, Michigan 48113-0469

                                       4

<PAGE>
 
3.  As amended hereby, the License Agreement shall continue in full force
    and effect.

IN WITNESS WHEREOF, the parties hereto have caused their duly authorized 
representatives to execute and deliver this First Amendment as of the date
set forth above.

                                        FOR THE REGENTS OF
FOR AASTROM BIOSCIENCES, INC.           THE UNIVERSITY OF MICHIGAN


By /s/ R. DOUGLAS ARMSTRONG             By /s/ ROBERT F. GAVIN
   ---------------------------             --------------------------
   (authorized representative)             (authorized representative)

Typed Name  R. Douglas Armstrong        Typed Name  Robert F. Gavin
            --------------------                    ---------------

Title  President and CEO                Title  Director, Intellectual Properties
       -----------------                       ---------------------------------

                                       5


<PAGE>
 
                                                                       EXHIBIT A

               License Agreement Amendment dated March 13, 1992
                      between UM and Aastrom Biosciences

                 DOCUMENTATION FOR LICENSE AMENDMENT AGREEMENT

1.  The following U.S. patent applications and all related foreign applications:

    A.  U.S. APPLICATION, SER. #07/366,639, OSMMN REF. #2363-022-55
        Methods, Compositions and Devices for Growing Cells.
        Filed:  6/15/89

    B.  U.S. APPLICATION, SER. #07/628,343, OSMMN REF. #2363-023-55 CIP
        Methods and Compositions for the Ex Vivo Replication of Stem Cells
        and for the Optimization of Hematopoietic Progenitor Cell Cultures.
        Filed:  12/17/90

    E.  U.S. APPLICATION, SER. #07/737,024, OSMMN REF. #2363-034-55
        Methods and Compositions for the Ex Vivo Replication of Stem Cells,
        for the Optimization of Hematopoietic Progenitor Cell Cultures,
        and for Increasing the Metabolism, GM-CSF Secretion and/or IL-6
        Secretion of Human Stromal Cells.
        Filed: 7/29/91

    F.  U.S. APPLICATION, SER. #07/740,590, OSMN REF. #2363-035-55
        Methods for Human Gene Therapy, Including Methods and Compositions
        for the Ex Vivo Replication and Stable Genetic Transformation of Human
        Stem Cells, for the Optimization of Human Hematopoietic Progenitor Cell
        Cultures and Stable Genetic and/or IL-6 Secretion of Human Stromal 
        Cells.
        Filed: 8/5/91

    H.  U.S. APPLICATION, SER. #07,815,513, OSMMN REF. #2363-036-55
        Methods for Regulating the Specific Lineages of Cells Produced in
        a Human Hematopoietic Cell Culture, Methods for Assaying the Effect
        of Substances on Lineage-Specific Cell Production, and Cell Compositions
        Produced by these Cultures.
        Filed:  1/2/92

    I.  U.S. APPLICATION, SER. #07/822,136, OSMMN REF. #2363-055-55
        Targeted Virus.
        Filed:  1/17/92

    J.  PENDING U.S. APPLICATION, OSMMN REF. #2363-043-55
        Methods, Compositions and Devices for Maintaining and Growing Human
        Stem and/or Hematopoietic Cells.
        Filed:  3/4/92


Page 1
2/4/92


<PAGE>
 

<TABLE> 
<CAPTION> 

     DESCRIPTION                       AUTHOR                      DATE
     -----------                       ------                      ----
<S>                                    <C>                         <C>

2.   Business Plan and Strategy        AASTROM Biosciences, Inc.   Dec., 1991

3.   Research Plan                     AASTROM Biosciences, Inc.   Sept., 1991

4.   Goals, Science/Business,          Ann Arbor Stromal, Inc.     Undated
     Personnel & Structure      

5.   Research Agreement                Appendix C to Option        3/24/89
                                       Agreement

6.   SBIR Proposal: Hematopoietic      R. Douglas Armstrong        12/12/91
     Cell Expansion System

7.   NRA-91-OSSA-18 Proposal:          Bernard O. Palsson          11/25/91
     Shear Sensitivities of Human
     Bone Marrow Cultures

8.   ACS Proposal:  Hematopoietic      Bernard O. Palsson          10/30/91
     Bioreactor System to Improve
     Bone Marrow Transplantation
     for Treatment of Cancer

9.   Aastrom System One (Version       Bernard O. Palsson          10/19/91
     1.00 - Draft)                

10.  NRA-91-OSSA-13 Proposal:          Bernard O. Palsson          8/15/91
     Reconstructing Human Bone
     Marrow Ex Vivo

11.  NSF Proposal:  Optimal Growth     Bernard O. Palsson          7/3/90 
     Factor Combinations for Human
     Bone Marrow Cultures and Large-
     Scale Cell Production

12.  Naval Medical Command Proposal:   Bernard O. Palsson          2/20/89
     Ex vivo Bone Marrow:
     Construction of a Perfusion
     Device

13.  SBIR Proposal: Bioreactor for     R. Douglas Armstrong        12/12/91 
     Retrovirus Infection of hemato-
     poietic Cells 

14.  Experiment (Clarke)               Michael F. Clarke           1/9/92

15.  NIH Proposal:  In Vitro           Stephen G. Emerson          1/16/92 
     Expanded Hematopoietic
     Progenitors for ABMT

16.  NIH Proposal:  Stromal Cell       Stephen G. Emerson          9/20/91
     CSF Regulation and
     Hematopoiesis

17.  Aplastic Anemia Foundation        Stephen G. Emerson          7/1/92 (beg.
     of America (Postdoctoral                                      date)
     application): Leslie G.
     Blesecker
</TABLE>
 

Documentation for License Amendment Agreement
Page 2
2/4/92

<PAGE>
 

<TABLE> 
<CAPTION> 
    
     DESCRIPTION                            AUTHOR                    DATE
     -----------                            ------                    ----
<S>                                         <C>                       <C>
18.  The Leukemia Society of                Stephen G. Emerson        8/29/89
     America (Scholarship 
     application): Stem Cell
     Cytoadhesion Molecules in 
     Chronic Myelogenous Leukemia

19.  The Leukemia Society of America        Stephen G. Emerson        4/26/91
     (Scholarship application -
     continuation) Stem Cell
     Cytoadhesion Molecules in Chronic
     Myelogenous Leukemia

20.  NIH Proposal:  Optimization and        Stephen G. Emerson        7/20/90
     Manipulation of Human Marrow Cultures

21.  NSF Proposal: (Research Experience     Stephen G. Emerson        1/30/89
     for Undergraduates) Effect of Serum
     Concentration and Perfusion Rate on
     Stromal Cell Metabolism

22.  NSF Proposal:  Contruction and         Stephen G. Emerson        5/15/89
     Maintenance of Functioning Bone
     Marrow Tissue Ex Vivo

23.  NSF Proposal:  Construction of a       Stephen G. Emerson        5/10/88
     High Efficiency Ex Vivo Bone Marrow

24.  NRA-88-OSSA-5 Proposal:  Development   Stephen G. Emerson        8/15/88
     of a Device for the Large-Scale
     Cultivation of Human Bone Marrow:
     Space Flight Applications

25.  Presidential Initiations Proposal:     Stephen G. Emerson        Undated
     Development of an Artificial Bone
     Marrow

26.  Paper:  In Vitro Myelopoiesis          Schwartz RM, Emerson      Blood, 
     Stimulated by Rapid Medium Exchange    SG, Clarke MF, Palsson    78:12, pp
     and Supplementation with hemato-       BO                        3155-3161,
     poietic Growth Factors                                           (12/15/91)

27.  Paper:  Can Dexter Cultures Support    Varma A, El-Awar FY,      Experi-
     Stem Cell Proliferation?               Palsson BO, Emerson SG,   mental
                                            Clarke MF                 Hematology,
                                                                      20:87-91
                                                                      (1992)

28.  Paper:  Rapid medium perfusion rate    Schwartz RM, Palsson      PNAS,
     significantly increases the            BO, Emerson SG            88:6760-
     productivity and longevity of human                              6764
     bone marrow cultures                                             (8/91)

29.  Paper:  The Construction of High       Emerson SG, Palsson BO,   J Cell.
     Efficiency Human Bone Marrow Tissue    Clarke MF                 Biochem
     Ex Vivo                                                          45:268-
                                                                      272 (1991)
</TABLE>
                                                                
Documentation for License Amendment Agreement
Page 3
2/4/92

<PAGE>
 

<TABLE> 
<CAPTION> 
     
     DESCRIPTION                              AUTHOR             DATE
     -----------                              ------             ----
<S>                                           <C>                <C>
30.  Paper:  Culture Perfusion Schedules      Caldwell J,        J Cell Phys
     Influence the Metabolic Activity and     Palsson BO,        147:344-353
     Granulocyte-Macrophage Colony-           Locey B,           (1991)
     Stimulating Factor Production Rates      Emerson SG
     of Human Bone Marrow Stromal Cells

31.  Paper:  Influence of Medium Exchange     Caldwell J,        Biotechnol.
     Schedules of Metabloic, Growth, and      Locey B,           Progress
     GM-CSF Secretion Rates of Genetically    Clarke MF,         Vol. 7, No.1
     Engineering NIH-3T3 Cells                Emerson SG         Jan/Feb, 1991
                                              Palsson BO

32.  Paper:  The Influence of Extra-Cellular  Schwartz RM,       Submitted to
     Matrix and Stroma Remodeling on the      Caldwell J,        Cytotechnology
     Productivity of Long-Term Human Bone     Clarke MF,         Sept., 1991
     Marrow Cultures                          Emerson SG,        
                                              Palsson BO

33.  Advanced Technology Program Proposal:    R. Douglas         9/24/91
     ATP 91-01:  Human Stem Cell and          Armstrong
     Hematopoietic Expansion Systems

34.  Thesis:  Optimization of Human Long-     Richard M.         1991
     Term Bone Marrow Cultures                Schwartz

35.  Chapter: The Role of Physiologic         Caldwell J,        Undated
     Perfusion in the Metabolism and          Palsson BO,
     Genetic Regulation of Cytokine           Clarke MF, 
     Production in Mesenchymal Stromal Cells  Emerson SG

36.  UM Disclosure #715 "Mouse Tyrosine       Emerson SG         Biotechnol
     Kinare partial CDNA sequences A1,
     A8, P4, P7, P21"
</TABLE>
 

Documentation for License Amendment Agreement
Page 4
2/4/92


<PAGE>
 
                              SECOND AMENDMENT TO
                               LICENSE AGREEMENT


This Second Amendment to License Agreement is entered into as of October 8,
1993, by and between Aastrom Biosciences, Inc. (formerly Ann Arbor Stromal,
Inc., a Michigan corporation, hereinafter called "Aastrom"), and the Regents of
the University of Michigan, a constitutional corporation of the State of
Michigan (hereinafter called "University").


                                  RECITATIONS

The following is a recital of facts underlying this Agreement.

A.   In August, 1989, the parties hereto entered into a certain Research
     Agreement (the "Research Agreement") pursuant to which Aastrom provided
     funding to the University for the University to conduct a certain research
     project.  Pursuant to an Extension Agreement dated March 2, 1992, the
     parties extended the term of the Research Agreement until June 30, 1993,
     and extended the scope of the research projects and funding under the
     Research Agreement.  As used hereinafter, the term "Research Agreement"
     shall include said Extension Agreement.  Pursuant to the Research
     Agreement, Aastrom is entitled to an exclusive license to utilize any and
     all inventions, technology, and know-how (i) resulting from the research
     projects funded by Aastrom at the University, or (ii) related to the
     research projects (subject to certain qualifications).

B.   On March 13, 1992, the parties entered into a certain License Agreement
     (the "License Agreement"), as contemplated by the Research Agreement; and
     on March 13, 1992, the parties also entered into that certain First
     Amendment to License Agreement (the "First Amendment to License Agreement")
     for the purpose of modifying and clarifying certain terms in the original
     License Agreement.  As used hereinafter, the term "License Agreement" shall
     include said First Amendment.

C.   Subsequent to entering into the First Amendment to License Agreement, some
     additional patent rights, technology, know-how and other intellectual
     property rights have been identified which are to be licensed to Aastrom
     pursuant to the License Agreement.  This Second Amendment is being entered
     into for the purpose of identifying said additional rights.

     NOW THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:

     1.   LICENSED TECHNOLOGY.  In addition to all other Licensed Technology (as
          defined in the License Agreement) which is already identified as being
          covered by the License Agreement, the Licensed Technology shall also
          include the additional patent-

                                       

<PAGE>
 
          related matters identified in Exhibit A attached hereto, as well as
          the additional technology and know-how identified in the documents
          described in Exhibits B (1) and B(2) attached hereto, which technology
          and know-how have resulted from research pursuant to the Research
          Agreement.

     2.   EFFECT.  Excepting only as otherwise expressly set forth above, all
          other terms and provisions of the License Agreement shall remain in
          full force and effect.

     IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute and deliver this Second Amendment as of the date set
forth above.

FOR:                                FOR:
 
                                    THE REGENTS OF
AASTROM BIOSCIENCES, INC.           THE UNIVERSITY OF MICHIGAN

BY: /s/ R. DOUGLAS ARMSTRONG        BY: /s/ ROBERT L. ROBB
    ---------------------------         -----------------------------------
    R. DOUGLAS ARMSTRONG, PH.D.
    PRESIDENT AND CEO                   ITS: Director Technology/Management
                                             Office


                                      -2-

                                       

<PAGE>
 
                                   EXHIBIT A

                                 PATENT MATTERS

All of the following patent applications and patent matters, including all
related foreign patent rights and all patents issued and patent rights related
thereto:

A.   U.S. APPLICATION #07/990,299, CAMPBELL & FLORES REF.#P-UM 9380
     Novel Embryonic Tyrosine Kinase Sequences and Uses Thereof
     Biesecker, Leslie G.; Emerson, Stephen Gx.
     filed:  12/8/92

B.   PENDING U.S. APPLICATION, CAMPBELL & FLORES REF. #P-UM 9430
     P53-Mediated Apoptosis for the Therapeutic Treatment of Diseases
     Clarke, Michael F.

C.   PENDING U.S. APPLICATION, CAMPBELL & FLORES REF. #P-AA 9609
     Directed Motion of Gene-Transfer Vectors for Increased Infectivities
     Palsson, Bernhard O.

                                      -3-

                                       

<PAGE>
 
                                 EXHIBIT B (1)

                         Know-how and Technology Items

All of the following and attached grant proposals, papers, abstracts and other
documents, together with all inventions, know-how and/or technology described
therein or resulting therefrom:

<TABLE>
<CAPTION>
 
DESCRIPTION                            AUTHOR                    DATE
<S>                                <C>                       <C>
1.  PAPER:  BONE MARROW            GUBA, SC; SARTOR,         BLOOD
    STROMAL FIBROBLASTS SECRETE    CL; GOTTSCHALK, LR;       80(5):1190-1198
    INTERLEUKIN-6 AND              YE-HE,J;                  SEPT., 1992)
    GRANULOCYTE-MACROPHAGE         MULLIGAN,T;
    COLONY-STIMULATING FACTOR      EMERSON,SG
    IN THE ABSENCE OF
    INFLAMMATORY STIMULATION:
    DEMONSTRATION BY SERUM-FREE
    BIOASSAY, ENZYME-LINKED
    IMMUNOSORBENT ASSAY, AND
    REVERSE TRANSCRIPTASE
    POLYMERASE CHAIN REACTION
 
2.  ABSTRACT:  MOLECULAR           GOTTSCHALK, LR;           ASH, 1992
    REGULATION OF THE HUMAN        GIANNOLA, DM;
    IL-3 GENE IN T-CELLS:          EMERSON, SG
    EXPRESSION REQUIRES AN
    INTACT AP-1 AND ELF-1
    NUCLEAR PROTEIN BINDING SITE

3.  ABSTRACT:  EX VIVO             PALSSON, BO;              ASH, 1992
    EXPANSION OF HEMATOPOIETIC     SCHWARTZ, RM;
    PROGENITOR CELLS AND LTCIC     PALSSON, M;
    BY CONTINUOUS PERFUSION        ARMSTRONG, RD;
    CULTURE                        CLARKE, MF;
                                   EMERSON, SG

4.  ABSTRACT:  IL-1 ALPHA          CALDWELL, J;              ASH, 1992
    AND TNF-ALPHA ACT              EMERSON, SG
    SYNERGISTICALLY TO
    STIMULATE PRODUCTION OF
    MYELOID COLONY-STIMULATING
    FACTORS BY CULTURED HUMAN
    BONE MARROW STROMAL CELLS
    AND CLONED STROMAL CELL
    STRAINS

5.  ABSTRACT:  THE CLONING         BIESECKER, LG;            ASH, 1992
    OF 5 NOVEL TYROSINE KINASE     GOTTSCHALK, LR;
    PARTIAL CDNAS ENCODING         EMERSON, SG
    CANDIDATE STEM CELL
    CYTOKINE RECEPTORS

6.  PAPER:  IDENTIFICATION         BIESECKER, L.G., ET AL    PNAS
    OF FOUR MURINE CDNAS                                     90, 7044-7048
    ENCODING PUTATIVE PROTEIN                                (1993)
    KINASES FROM PRIMITIVE
    EMBRYONIC STEM CELLS
    DIFFERENTIATED IN VITRO
 </TABLE>


                                      -4-

                                       

<PAGE>
 

<TABLE>
<CAPTION>
<S>                                        <C>                    <C> 
7.  PAPER: INTERLEUKIN 6 IS A              BIESECKER, LG;         EXPERIMENTAL
    COMPONENT OF HUMAN UMBILICAL           EMERSON, SG            HEMATOLOGY,
    CORD SERUM AND STIMULATES                                     21:774-778
    HEMATOPOIESIS IN EMBRYONIC STEM                               1993
    CELLS IN VITRO
 
8.  PAPER:  MOLECULAR REGULATION           GOTTSCHALK, LR;        JOURNAL OF
    OF THE HUMAN IL-3 GENE:                GIANNOLA, DM;          EXPERIMENTAL
    INDUCIBLE T-CELL RESTRICTED            EMERSON, SG            MEDICINE
    EXPRESSION REQUIRES INTACT AP-1                               IN PRESS
    AND ELF-1 NUCLEAR PROTEIN                                     NOV., 1993
    BINDING SITES
 
9.  PAPER:  IL-1 ALPHA AND                 CALDWELL, J;           JOURNAL OF
    TNF-ALPHA ACT SYNERGISTICALLY TO       EMERSON, SG            CELLULAR
    STIMULATE PRODUCTION OF MYELOID                               PHYSIOLOGY
    COLONY-STIMULATING FACTORS BY                                 ACCEPTED
    CULTURED HUMAN BONE MARROW                                    1994
    STROMAL CELLS AND CLONED STROMAL
    CELL STRAINS
 
10. ABSTRACT:  PHASE I                     SILVER, SM;            ASH, 1993
    EVALUATION OF EX VIVO EXPANDED         ADAMS, PT;
    HEMATOPOIETIC CELLS PRODUCED BY        HUTCHINSON, RJ;
    PERFUSION CULTURES IN AUTOLOGOUS       DOUVILLE, JW;
    BONE MARROW TRANSPLANTATION            PAUL, LA; CLARKE,
    (BMT).                                 MF; PALSSON, BO;
                                           EMERSON, SG

11. ABSTRACT:  EXPANSION IN                VAN ZANT, G;           ASH, 1993
    BIOREACTORS OF HUMAN PROGENITOR        LARSON, DB;
    POPULATIONS FROM CORD BLOOD AND        DRUBACHEVSKY, I;
    MOBILIZED PERIPHERAL BLOOD             PALSSON, M;
                                           EMERSON, SG

12. ABSTRACT:  CLINICAL SCALE              ARMSTRONG, RD;         ASH, 1993
    PRODUCTION OF STEM AND                 KOLLER, MR; PAUL,
    HEMATOPOIETIC CELLS EX VIVO            L; DOUVILLE, J;
                                           MALUTA, J; FISH,
                                           R; PALSSON, BO;
                                           VAN ZANT, G;
                                           EMERSON,SG

13. ABSTRACT:  EXPANSION OF                RUMMEL, SA;            ASH, 1993
    HUMAN HEMATOPOIETIC                    EMERSON, SG; VAN
    STEM/PROGENITOR CELLS RESISTANT        ZANT, G
    TO TREATMENT WITH
    4-HYDROPEROXYCYCLOPHOSPHAMIDE

14. ABSTRACT:  BIOREACTOR                  KOLLER, MR;            ASH, 1993
    EXPANSION OF WHOLE,                    NEWSOM, B; VAN
    DENSITY-SEPARATED, AND                 ZANT, G; EMERSON,
    CD34-ENRICHED HUMAN BONE MARROW        SG, PALSSON, BO

15. SEMINAR: PROGRESS REPORT               PETER G. EIPERS        10/19/92

16. PAPER:  MEL CELLS, THE                 CLARKE, MF             SUBMITTED TO
    ONCOGENE C-MYB                                                NATURE 1/93
</TABLE>
 

                                      -5-
                                       

<PAGE>
 

<TABLE> 
<CAPTION> 
<S>                                      <C>                  <C>
17.  PAPER:  CELL CYCLE ANALYSIS         RYAN, JJ; RIZWAN,    MOLECULAR AND
     OF P53-INDUCED CELL DEATH IN        D; GOTTLIEB, CA;     CELLULAR BIOLOGY
     MURINE ERYTHROLEUKEMIA CELLS        CLARKE, MF           13(1)
                                                              (JAN, 1993)
 
18.  SEMINAR:  MY PRIMARY OBJECT..       ALICE CURRY          1/25/93

19.  SEMINAR:  PROGRESS REPORT,          PETER G. EIPERS      3/8/93
     FEB. 1993

20.  SEMINAR:  CONSTRUCTION OF A         FAISAL EL-AWAR       4/19/93
     RETROVIRUS PACKAGING CELL LINE

21.  SEMINAR:  FIRST CD 18               PETER G. EIPERS      6/14/93
     INFECTION........................

22.  SEMINAR:  GENERATION OF AN          ALICE M. CURRY       7/26/93
     HIV-BASED PACKAGING LINE

23.  PROGRESS REPORTS                    ALICE M. CURRY       JAN., APR., MAY,
                                                              JULY, 1993
 
24.  PAPER: EFFECT OF STROMAL AGE        EL-AWAR, FY;         SUBMITTED TO
     ON HEMATOPOIESIS IN HUMAN           EMERSON, SG;         EXP. HEMATOLOGY
     LONG-TERM BONE MARROW CULTURES      CLARKE, MF

25.  ABSTRACT:                           EIPERS, PG;          ASH,  1993
     RETROVIRUS-MEDIATED GENE            KRAUSS, JC; TODD,
     TRANSFER IN HUMAN BONE MARROW       RF; EMERSON, SG;
     MONONUCLEAR CELLS GROWN IN          PALSSON, BO;
     CONTINUOUS PERFUSION CULTURES       CLARKE, MF

26.  NIH GRANT APPLICATION:              MICHAEL F. CLARKE    9/30/93
     ANALYSIS OF THE KINETICS OF
     HEMATOPOIETIC CELL DIVISION BY
     RETROVIRUS TAGGING

27.  ABSTRACT:  FLOW CYTOMETRIC          ROGERS, CE;          ASH, 1993
     ANALYSIS OF BIOREACTOR EXPANDED     BRADLEY, MS;
     HUMAN BONE MARROW; ERYTHROID        PALSSON, BO;
     DEVELOPMENT AND CORRELATION WITH    KOLLER, MR
     BURST-FORMING UNIT-ERYTHROID
     (BFU-E).

28.  ABSTRACT:  EXTENDED GROWTH          OH, DJ; KOLLER,      ASH, 1993
     OF STEM AND PROGENITOR CELLS        MR; PALSSON, BO
     FROM ADULT HUMAN BONE MARROW IN
     SEQUENTIAL BIOREACTOR CULTURES

29.  ABSTRACT:  GROWTH FACTOR            PALSSON, BO;         ASH, 1993
     CONSUMPTION AND PRODUCTION IN EX    BRADLEY, MS;
     VIVO PERFUSION CULTURES OF HUMAN    KOLLER, MR
     BONE MARROW

30.  SEMINAR:  INTRO TO                  MINETTE LEVEE        10/13/92
     MICROENCAPSULATION
</TABLE>
 

                                      -6-

                                       

<PAGE>
 

<TABLE> 
<CAPTION> 
<S>                                      <C>                  <C> 
31.  SEMINAR:  FLOW CYTOMETRY &          CLARE ROGERS         11/30/92
     HUMAN MARROW

32.  SEMINAR:  CULTIVATION OF            DUK JAE OH           1/18/93
     BONE MAROW CELLS IN HEMOGEN 107
     (DIAMOND SHAPE) REACTORS

33.  SEMINAR:  ENCAPSULATED BONE         LEVEE, MG; LEE,      3/29/93
     MARROW CULTURES AS A POTENTIAL      GM; PAEK, SH;
     ASSAY FOR HUMAN HEMATOPOIETIC       PALSSON, BO
     PROGENITORS

34.  SEMINAR:  FLOW CYTOMETRIC           ROGERS, CE;          3/29/93
     ANALYSIS OF HUMAN MYELOID           BRADLEY, S;
     LINEAGE DEVELOPMENT IN              KOLLER, MR;
     HEMATOPOIETIC BIOREACTOR SYSTEMS    PALSSON, BO

35.  SEMINAR:  OXYGEN TRANSPORT          PENG, CA;            4/5/93
     IN THE HEMOGEN BIOREACTORS          PALSSON, BO

36.  SEMINAR:  TISSUE ENGINEERING        BERNHARD O.          4/12/93
                                         PALSSON

37.  SEMINAR:  DYNAMICS OF CELL          PENG, CA; ROGERS,    6/7/93
     GROWTH AND DIFFERENTIATION IN       C; OH, DJ;
     HEMOGENS                            BRADLEY, S;
                                         PALSSON, BO

38.  SEMINAR:  METABOLIC STUDY IN        DUK JAE OH           8/23/93
     BONE MARROW CULTURE

39.  MINUTES & NOTES, GENE               BERNHARD O.          6/21/93 THRU
     THERAPY PROJECT MEETINGS            PALSSON ET AL        9/28/93

40.  SBIR GRANT APPLICATION:  A          MANFRED R. KOLLER    8/14/92
     CLONAL HEMATOPOIETIC PROGENITOR
     CELL ASSAY

41.  SBIR GRANT APPLICATON:  HIGH        R. DOUGLAS           8/14/92
     TITER RETROVIRAL SUPERNATANTS       ARMSTRONG
</TABLE>
 
  
                                     -7-  


                                       

<PAGE>
 

<TABLE>
<CAPTION>
 
     DESCRIPTION                                 AUTHOR                    DATE
     -----------                                 ------                    ----
PROPOSALS:
<S>                                              <C>                       <C>
1.  American Cancer Society - Development        Bernhard O. Palsson       10/15/92
    of a Clinical Hematopoietic Bioreactor
    System to Improve Bone Marrow Transplan-
    tation

2.  National Science Foundation -                Bernhard O. Palsson       1/27/93
    Hematopoietic Bioengineering and
    Biotechnology

3.  NIH -                                        Bernhard O. Palsson       1/28/93
    Hematopoietic Tissue Engineering

4.  NIH -                                        Bernhard O. Palsson       5/27/93
    Human Hematopoietic Differentiation
    and Lineage Development Ex Vivo 

PAPERS:

5.  The Influence of Extra-Cellular Matrix       Schwartz, R.M.,           Cytotechnology
    and Stroma Remodeling on the Productivity    Caldwell, J., Clarke,     10:217-224
    of Long-Term Human Bone Marrow Cultures      M.F., Emerson, S.G.,      (1993)
                                                 and Palsson, B.O.

6.  Expansion of Human Bone Marrow Progenitor    Palsson, B.O., et al      Bio/Technology
    Cells in a High Cell Density Continuous                                11,368-372
    Perfusion System                                                       (1993)

7.  Large-Scale Expansion of Human Stem and      Koller, M.R., Emerson,    Blood
    Progenitor Cells from Bone Marrow Mono-      S.G., and Palsson, B.O.   82,378-384
    nuclear Cells in Continuous Perfusion                                  (1993)
    Cultures

8.  Retroviral Gene Transfer into Human          Clarke, M.F., et al       The Cancer Bulletin
    Hematopoietic Cells Using Rapidly                                      45:2, 153-158
    Perfused Long-Term Bone Marrow Cultures                                (1993)

9.  Tissue Engineering:  Reconstitution of       Koller, M.R. and          Biotechnology &
    Human Hematopoiesis Ex Vivo                  Palsson, B.O.             Bioengineering 42,
                                                                           in press (1993)
</TABLE>
 

                                     7(a)

<PAGE>
 

<TABLE> 
<CAPTION> 
     
     DESCRIPTION                               AUTHOR                       DATE
     -----------                               ------                       ----
<S>                                            <C>                          <C>
10.  Kinetics of Retroviral Production from    Shen, B.O., Clarke, M.F.,    Biotechnology & Bioengineering
     the Amphotropic VCRIP Murine Producer     Palsson, B.O.                Accepted with revisions
     Cell Line

11.  Microencapsulated Bone Marrow Cultures    Levee, M.G., Lee, G-M.,      Biotechnology & Bioengineering
     as a Potential Assay for Human Hemato-    Paek, S-H.,                  Submitted
     poietic Progenitor Cells

12.  Unilineage Model of Hematopoiesis         Peng, C-A., Koller, M.R.,    Biotechnology & Bioengineering
     Predicts Self-Renewal of Stem and         and Palsson, B.O.            Submitted
     Progenitor Cells from Observed Ex Vivo
     Growth Patterns

13.  Extended Growth of Adult Mononuclear      Oh, D.J., Koller, M.F.       To be submitted
     Human Bone Marrow Cells Through           and Palsson, B.O.
     Repeated Harvesting and Replating

REPORTS:

14.  Development of the HemoGen 106 Bone       B.O. Palsson and S-H Paek    April 15, 1992
     Marrow Expansion System 

15.  Research and Development Program for      B.O. Palsson                 September 22, 1992
     the HemoGen 106 Bioreactor System
     (Unfinished document)

16.  The HemoGen 107/108 Series: Progress      R.M. Schwartz and B.O.       October 27, 1992
     Report                                    Palsson

17.  Progress Report on Residence Time         C-A. Peng and B.O. Palsson   December 17, 1992
     Distribution

18.  Partial Cell Harvesting and Replating     D.J. Oh and B.O. Palsson     December 17, 1992
     Experiments

19.  Oxygen Transport in the HemoGen           C-A. Peng and B.O. Palsson   April 5, 1993
     Bioreactors

20.  Growth Factor Delivery in the HemoGen     B.O. Palsson and C-A. Peng   May 21, 1993
     Bioreactors:

21.  Slides to accompany 16 above              B.O. Palsson                 April 12, 1993

22.  Dynamics of Cell Growth and               B.O. Palsson                 June 7, 1993
     Differentiation in HemoGens
</TABLE>
 
BD
7/20/93
                                     7(b)

<PAGE>
 
Additionally, as specified in the Research Agreement, University hereby licenses
to Aastrom, pursuant to the terms of the License Agreement, all of the
inventions, technology and know-how which are either (i) described in the
Research Projects referenced in the Research Agreement, or (ii) conceived or
reduced to practice as part of said Research Projects, or (iii) conceived or
reduced to practice, whether or not pursuant to or as part of said Research
Projects, by Drs. Stephen G. Emerson, Michael F. Clarke or Bernhard O. Palsson,
or those working under their direction (including without limitation, research
scientists, technicians, and/or post-doctoral training fellows), during the term
of their participation in the Research Projects and Company's funding of the
Research Projects, provided that such inventions, technology and know-how are
related to the work described in said Research Projects.  Further, the parties
hereby acknowledge that Drs. Emerson, Clarke and Palsson serve as consultants to
Company, as well as employees of University, and that inventions, know-how and
technology conceived, reduced to practice or developed by these scientists in
the course of their consulting work for Company shall be included in
subparagraph (iii) above, such that they shall be covered by this License
Agreement as Licensed Technology.

                                      -8-

                                       

<PAGE>
 
                              THIRD AMENDMENT TO
                               LICENSE AGREEMENT

This Third Amendment to License Agreement is entered into as of June 21, 1995,
by and between Aastrom Biosciences, Inc. (formerly Ann Arbor Stromal, Inc., a
Michigan corporation, hereinafter called "Aastrom"), and the Regents of the
University of Michigan, a constitutional corporation of the State of Michigan
(hereinafter called "University").

                                  RECITATIONS

The following is a recital of facts underlying this Agreement.

A.   In August, 1989, the parties hereto entered into a certain Research
     Agreement (the "Research Agreement") pursuant to which Aastrom provided
     funding to the University for the University to conduct a certain research
     project.  On March 2, 1992, the parties extended the term of the Research
     Agreement until June 30, 1993.  Pursuant to a further Extension Agreement
     dated October 20, 1993, and Request Letter dated June 13, 1994, the term of
     the Agreement was further extended to June 30, 1994, and December 31, 1994,
     respectively, and the scope of the research projects and funding under the
     Research Agreement extended accordingly.  As used hereinafter, the term
     "Research Agreement" shall include said Extension Agreements and Letter.
     Pursuant to the Research Agreement, Aastrom is entitled to an exclusive
     license to utilize any and all inventions, technology, and know-how (i)
     resulting from the research projects funded by Aastrom at the University,
     or (ii) related to the research projects (subject to certain
     qualifications).

B.   On March 13, 1992, the parties entered into a certain License Agreement
     (the "License Agreement"), as contemplated by the Research Agreement; and
     on March 13, 1992, the parties also entered into that certain First
     Amendment to License Agreement (the "First Amendment to License Agreement")
     for the purpose of modifying and clarifying certain terms in the original
     License Agreement.  On October 8, 1993, the parties entered into a Second
     Amendment to License Agreement.  As used hereinafter, the term "License
     Agreement" shall include said First and Second Amendments and this Third
     Amendment.

C.   Subsequent to entering into the First and Second Amendments to License
     Agreement, some additional patent rights, technology, know-how and other
     intellectual property rights have been identified which are to be licensed
     to Aastrom pursuant to the License Agreement.  This Third Amendment is
     being entered into for the purpose of identifying said additional rights.

     NOW THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:


<PAGE>
 
     1.   LICENSED TECHNOLOGY.  In addition to all other Licensed Technology (as
          defined in the License Agreement) which is already identified as being
          covered by the License Agreement, the Licensed Technology shall also
          include the additional patent-related matters identified in Exhibit A
          attached hereto, as well as the additional technology and know-how
          identified in the documents described in Exhibits B (1) and B(2)
          attached hereto, to the extent such technology and know-how are
          described by Section E of the Extension Agreement.

     2.   EFFECT.  Excepting only as otherwise expressly set forth above, all
          other terms and provisions of the License Agreement shall remain in
          full force and effect.

     IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute and deliver this Third Amendment as of the date set
forth above.

FOR:                                     FOR:
 
                                         THE REGENTS OF
AASTROM BIOSCIENCES, INC.                THE UNIVERSITY OF MICHIGAN

BY: /s/ R. DOUGLAS ARMSTRONG             BY: /s/ ROBERT L. ROBB 
- ------------------------------           ---------------------------------
R. Douglas Armstrong, Ph.D.
President and CEO                        ITS: Director, Technology Management 
                                              Office


                                      -2-

<PAGE>
 
                                   EXHIBIT A

                                 Patent Matters

All of the following patent applications and patent matters, including all
related foreign patent rights and all patents issued and patent rights related
thereto:


<TABLE>
<CAPTION>
<C>  <S>
A.   U.S. APPLICATION NO. 08/100,337
     Filed:  7/30/93;  (Continuation to U.S. App. #07/628,343)

B.   U.S. APPLICATION NO. 08/164,779
     Filed:  12/10/93;  (Continuation to U.S. App. #07/737,024)
     Amendment filed:  8/1/94
 
C.   AMENDMENT TO U.S. APP. #07/740,590
     Filed:  8/9/94
 
D.   U.S. APP. NO. 08/178,433
     Filed: 1/6/94 (Continuation to U.S. App. #07/845,969)

E.   U.S. APPLICATION, SER. #08/143,751

     Methods and Compositions for the ex vivo Replication of Stem Cells, for the
     Optimization of Hematopoietic Progenitor Cell Cultures, and for Increasing
     the Metabolism, GM-CSF Secretion and/or IL-6 Secretion of Human Stromal
     Cells

     Filed:  11/1/93 as a divisional of 07/845,969 (ex vivo mitotic stem cells)
     ------

F.   U.S. APPLICATION, SER. #08/187,509

     Methods and Compositions for the ex vivo Replication of Stem Cells, for the
     Optimization of Hematopoietic Progenitor Cell Cultures, and for Increasing
     the Metabolism, GM-CSF Secretion and/or IL-6 Secretion of Human Stromal
     Cells

     Filed:  1/28/94 as a continuation of 8/100,337, 7/628,343, 7/366,639; to
     ------
     declare interference with Gillis et al patents.

G.   U.S. APPLICATION, SER. #08/307,862

     Stabilized Virus for Gene Therapy
     Filed:  9/15/94
     ------

H.   U.S. APPLICATION, SER. #08/353,531

     Methods, Compositions and Apparatus for Cell Transfection
     Filed:  12/9/94
     ------
</TABLE>
 
                                      -3-


<PAGE>
 
                                 EXHIBIT B (1)

                         KNOW-HOW AND TECHNOLOGY ITEMS

ALL OF THE FOLLOWING AND ATTACHED GRANT PROPOSALS, PAPERS, ABSTRACTS AND OTHER
DOCUMENTS, TOGETHER WITH ALL INVENTIONS, KNOW-HOW AND/OR TECHNOLOGY DESCRIBED
THEREIN TO THE EXTENT DESCRIBED BY SECTION E OF THE EXTENSION AGREEMENT:


<TABLE>
<CAPTION>
DESCRIPTION                     AUTHOR                           DATE
<S>                             <C>                              <C>
1.  NIH GRANT APPLICATION:      MICHAEL F. CLARKE                1/11/94
    ANALYSIS OF HEMATOPOIETIC
    CELL DIVISION BY RETROVIRUS
    TAGGING*

2.  PAPER:                      EIPERS,P; KRAUSS,J;              REC'D. 8/1/94
    RETROVIRAL-MEDIATED GENE    PALSSON,B; EMERSON,S; TODD,R;
    TRANSFER IN HUMAN BONE      CLARKE, M.
    MARROW CELLS GROWN IN
    CONTINUOUS PERFUSION
    CULTURE VESSEL*

3.  PAPER:  TISSUE              BERNHARD PALSSON                 REC'D. 11/21/93
    ENGINEERING:  ENGINEERING
    CHALLENGES

4.  PAPER:  GROWTH FACTOR       BERNHARD PALSSON                 1/20/94
    CONSUMPTION AND PRODUCTION
    IN AASTROM'S PERFUSION
    BIOREACTOR SYSTEMS

5.  MANUSCRIPT:  KINETICS OF    ANDREADIS, STYLIANOS;            7/8/94
    RETROVIRAL INFECTION AND    PALSSON, BERNHARD O.
    THE INFLUENCE OF CELL
    CYCLE:  IMPLICATIONS FOR
    GENE THERAPY

6.  FOLDER:  ALICE CURRY        ALICE CURRY                      5/31/94
    NOTES (75 PAGES)

7.  PROGRESS REPORTS            ALICE M. CURRY                   NOV, 1993;
                                                                 JAN. & FEB,
                                                                 1994

8.  ABSTRACT:  LTC-IC           KOLLER,M.R.; PALSSON, M.A.;      ASH, 1994
    EXPANSION REQUIRES RAPID    MANCHEL,I; NEWSOM,B.S.;
    MEDIUM EXCHANGE COMBINED    PALSSON, BERNHARD O.
    WITH THE PRESENCE OF
    STROMAL AND OTHER ACCESSORY
    CELLS

9.  ABSTRACT:  EXPANSION        KOLLER,M.R.; MANCHEL, I;         ASH, 1994
    POTENTIAL OF CD34+ CELLS    PALSSON, M.A.; BROTT,D.A.;
    FROM PATIENTS IS LOWER AND  SILVER,S.M.; PALSSON,B.O.
    MORE STROMAL-DEPENDENT THAN
    FROM NORMAL DONORS
</TABLE>


*These materials especially may include some inventions, know-how and technology
not described by Section E of the Extension Agreement (and thus not included in
Licensed Technology); including inventions, know-how and technology developed by
or under the direction of Dr. Robert Todd related to leukocyte adhesion
deficiency disease.

                                      -4-


<PAGE>
 

<TABLE>
<CAPTION>
<S>                             <C>                       <C>
10. SBIR GRANT APPLICATION:     BERNHARD O. PALSSON       4/14/94
    NOVEL APPROACHES TO                                   (PHASE I)
    ENHANCING RETROVIRAL
    STABILITY
 
11. SBIR GRANT APPLICATION:     BERNHARD O. PALSSON       4/14/94
    HEMATOPOIETIC CELL                                    (PHASE II)
    EXPANSION SYSTEM
 
12. ATP GRANT APPLICATION:      R. DOUGLAS ARMSTRONG      6/21/94
    GENE TRANSFER SYSTEM FOR
    ENABLEMENT OF HUMAN GENE
    THERAPY

13. SEMINAR:  CD18 CELL         PETER EIPERS              10/25/93
    EXPANSION*

14. THESIS: MEETING             ALICE CHUCK               6/29/94
    PRESENTATION

15. THESIS: MEETING             ALICE CHUCK               9/28/93
    PRESENTATION

16. PAPER:  GROWTH FACTOR       M.R.KOLLER, M.S.          SUBMITTED TO EXP.
    CONSUMPTION AND PRODUCTION  BRADLEY, B.O.PALSSON      HEMATOLOGY, 9/28/94
    IN PERFUSION BIOREACTOR
    CULTURES OF HUMAN BONE
    MARROW CORRELATES WITH
    SPECIFIC CELL PRODUCTION

17. ABSTRACT:                   M.R.KOLLER, B.NEWSOM,     KEYSTONE CONFERENCE,
    CHARACTERIZATION OF HUMAN   C.E.ROGERS, G.VAN         TAOS, NM, 2/94
    STEM AND PROGENITOR CELL    ZANT, S.G.EMERSON,
    EXPANSION IN BIOREACTORS    B.O.PALSSON

18. PAPER:  GROWTH FACTOR       M.R.KOLLER, B.O.PALSSON   6/13/94
    CONSUMPTION AND PRODUCTION
    IN PERFUSION BIOREACTOR
    CULTURES OF HUMAN BONE
    MARROW
 
19. INTERNAL REPORT:            TIMOTHY M. EISFELD        8/29/94; REVISED
    RETROVIRUS PRODUCTION AND                             8/30/94
    CONCENTRATION PROJECT:
    EXPERIENCE WITH THE
    OPTICELL SYSTEM; FILE NO.
    4.3.1-001

20. INTERNAL REPORT:            TIMOTHY M. EISFELD        8/22/94
    SUMMARY REPORT ON VIRUS
    STABILIZATION PROJECT:
    JANUARY 1994 TO PRESENT;
    FILE NO. 4.3.2-001

21. PAPER:  BIOREACTOR          KOLLER,M.R.               SUBMITTED TO BLOOD,
    EXPANSION OF HUMAN BONE                               1994 (MANUSCRIPT NO.
    MARROW: COMPARISON OF                                 1-94-5-192)
    UNPROCESSED,
    DENSITY-SEPARATED, AND
    CD34-ENRICHED CELLS
</TABLE>
 

*These materials especially may include some inventions, know-how and technology
not described by Section E of the Extension Agreement (and thus not included in
Licensed Technology); including inventions, know-how and technology developed by
or under the direction of Dr. Robert Todd related to leukocyte adhesion
deficiency disease.
                                      -5-

<PAGE>
 

<TABLE> 
<CAPTION> 
<S>                             <C>                       <C> 
22. PAPER: IL-1A REGULATES      JERRY CALDWELL,           BLOOD 84 (10),
    EXPRESSION OF THE 75 KDA    STEPHEN G. EMERSON        SUPPLEMENT 1,
    BUT NOT THE 55 KDA TNF                                11/15/94
    RECEPTOR BY CDCL STROMAL                              (NO. 1109)
    CELLS: IMPLICATIONS FOR
    IL-1/TNF SYNERGY.
</TABLE>


*These materials especially may include some inventions, know-how and technology
not described by Section E of the Extension Agreement (and thus not included in
Licensed Technology); including inventions, know-how and technology developed by
or under the direction of Dr. Robert Todd related to leukocyte adhesion
deficiency disease.

                                      -6-


<PAGE>
 
                                                                    EXHIBIT B(2)

<TABLE> 
<CAPTION> 
DESCRIPTION                                               AUTHOR                               DATE
- -----------                                               ------                               ----
<S>                                                       <C>                                  <C>
PEER-REVIEWED PAPERS:

2.  Microencapsulated Human Bone Marrow Cultures: A       M. Levee, G.M. Lee, S.H. Paek,       Biotechnology & Bioengineering 
    Potential Culture System for the Clonal Outgrowth     B.O. Palsson                         43, 734-739 (1994)
    of Hemalopoietic Progenitor Cells

3.  Retroviral Infection is Limited by Brownian Motion    A.S. Chuck, C.A. Peng, M.F. Clarke   Submitted to Science Dec. 1993
                                                          B.O. Palsson

4.  Frequent Harvesting from Perfused Bone Marrow         D.J. Oh, M.R. Koller, B.O. Palsson   Biotechnology & Bioengineering
    Cultures Results in Increased Overall Cell and                                             44, 609-616 (1994)
    Progenitor Expansion

5.  Replating of Bioreactor-Expanded Human Bone Marrow    D.J. Oh, B.O. Palsson, M.R. Koller   Submitted to Experimental 
    Results in Extended Growth of Primitive and Mature                                         Hematology
    Cells                                                                                      May 1994

6.  Bioreactor Expansion of Human Bone Marrow:            M.R. Koller, I. Manchel et al        Submitted to J. Hematotherapy
    Comparison of Unprocessed, Density-Separated                                               9/6/94
    and CD34-enriched Cells

7.  Unilineage Model of Hematopoiesis Predicts Self-      C.A. Peng, M.R. Koller, and          Submitted to Biotechnology &
    Renewal of Stem and Progenitor Cells from Observed    B.O. Palsson                         Bioengineering 9/93
    ex vivo Growth Patterns
</TABLE>
 

                                     -7- 




<PAGE>
 
                                                                    EXHIBIT B(2)

<TABLE> 
<CAPTION> 
DESCRIPTION                                             AUTHOR                                     DATE                   
- -----------                                             ------                                     ----
<S>                                                     <C>                                        <C>
CHAPTERS IN BOOKS:

8.  The Role of Physiological Perfusion in the          J. Caldwell, B.O. Palsson, M.F. Clarke,    Johns Hopkins University Press
    Metabolism and Genetic Regulation of Cytokine       and S.G. Emerson                           1993 Baltimore
    Production in Mesenchymal Stromal Cells
    in The Hematopietic Microenvironment:               Eds. M. W. Long and M.S. Wicha
    The Functional and Structural Basis of Blood        
    Cell Development

ABSTRACTS:

9.  Biomedical Expansion of Human Stem and Progenitor   M.R. Koller, B. Newsom, G. Van             NIH Workshop on Hematopoletic
    Cells is More Efficient with Mononuclear Cells      Zant, S.G. Emerson, B.O. Palsson           Stem Cell Purification and
    Than with CD34-Enriched Cells                                                                  Biology, Rockville, MD.,
                                                                                                   9/21/1993

10. Growth Factor Consumption and Production in ex      B.O. Palsson, M.S. Bradley, and            ASH Meeting, St. Louis, MO 
    vivo Perfusion Cultures of Human Bone Marrow        M.R. Koller                                Dec. 1993

11. Extended Growth of Stem and Progenitor Cells from   B.O. Palsson, D.J. Oh, and M.R.            ASH Meeting, St. Louis, MO
    Adult Human Bone Marrow in Sequential Bioreactor    Koller                                     Dec. 1993
    Cultures

12. Bioreactor Expansion of Whole, Density-Separated,   M.R. Koller, B. Newsom, G. Van             ASH Meeting, St. Louis, MO
    and CD34-Enriched Human Bone Marrow                 Zant, S.G. Emerson, B.O. Palsson           Dec. 1993

13. Flow Cytometric Analysis of Bioreactor Expanded     C.E. Rogers, M.S. Bradley, B.O.            ASH Meeting, St. Louis, MO
    Human Bone Marrow:  Erythroid Development and       Palsson, and M.R. Koller                   Dec. 1993
    Correlation with Burst-Forming Unit-Erythroid
    (BFU-E)

14. Clinical Scale Production of Stem and Hemato-       R.D. Armstrong, M.R. Koller, L.            ASH Meeting, St. Louis, MO
    poietic Cells Ex Vivo                               Paul, J. Douville, J. Maluta, R. Fish,     Dec. 1993
                                                        B.O. Palsson, G. Van Zant, S.G. Emerson
</TABLE>
 
                                      
                                      -8-

<PAGE>
 
                                                                    EXHIBIT B(2)

<TABLE> 
<CAPTION> 
DESCRIPTION                                           AUTHORS                          DATE
- -----------                                           -------                          ----
<S>                                                   <C>                              <C>
15.  Hematopoletic Bioreactor Engineering for         B.O. Palsson                     Engineering Foundation Conference:
     Transplantation Rapid Detection and Control                                       Cell Culture Engineering IV, San Diego,
     of Progenitor Cell Production                                                     CA, March 7-12, 1994

16.  Growth Factor Consumption and Production in      B.O. Palsson and M.R. Koller     American Chemical Soc. Spring
     Ex Vivo Perfusion Cultures of Human Bone                                          National Meeting, San Diego, CA
     Marrow                                                                            March 7-12, 1994

</TABLE>
 
Prepared by
Barbara Dunn
8/10/94
                                      -9-




<PAGE>
 
                                                                    EXHIBIT 23.1
                                                                    


 
                      CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 Amendment
No. 3 (File No. 333-15415) of our report dated October 31, 1996, on our audits
of the financial statements of Aastrom Biosciences, Inc. We also consent to the
reference to our firm under the caption "Experts."


/s/ COOPERS & LYBRAND L.L.P.

Detroit, Michigan
January 6, 1997