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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996

REGISTRATION NO. 333-15415
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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)
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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)
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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)
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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
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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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS (Subject to Completion)

Dated November 18, 1996

3,250,000 Shares

[LOGO of AASTROM BIOSCIENCES INC]

Common Stock

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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."

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THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 OF THIS PROSPECTUS.

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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.

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- ------------------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
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Per Share........................ $ $ $
Total(3)......................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $900,000.
(3) The Company has granted to the Underwriters an option, exercisable within
30 days of the date hereof, to purchase an aggregate of up to 487,500
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional shares
are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
--------------

The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected
that delivery of the certificates for the shares will be made at the offices of
Cowen & Company, New York, New York, on or about , 1996.
--------------

COWEN & COMPANY J.P. MORGAN & CO.

, 1996

[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.

PROSPECTUS SUMMARY

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

THE COMPANY

Aastrom Biosciences, Inc. is developing proprietary process technologies and
devices for a range of cell therapy applications, including stem cell therapies
and gene therapy. The Company's lead product under development, the Aastrom
Cell Production System (the "Aastrom CPS") consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method will
be less costly, less invasive and less time consuming than currently available
stem cell collection methods. The Aastrom CPS is designed as a platform product
which implements the Company's pioneering stem cell replication technology and
which the Company believes can be modified to produce a wide variety of cell
types for emerging therapies. The Aastrom CPS is currently in a pre-pivotal
clinical trial under an Investigational Device Exemption for autologous stem
cell therapy. The Company has entered into a strategic collaboration for the
development of the Aastrom CPS in stem cell therapy with Cobe BCT, Inc., a
subsidiary of Gambro AB and a leading provider of blood cell processing
products. In ex vivo gene therapy, the Company is developing a proprietary
directed motion gene transfer process (the "Aastrom Gene Loader") and the
Aastrom CPS to enable high efficiency genetic modification and production of
cells.

Stem cell therapy is a rapidly growing form of cell therapy used to restore
blood and immune system function to cancer patients following chemotherapy or
radiation therapy. The Company estimates that over 35,000 stem cell therapy
procedures were completed worldwide in 1995 and that the number of such
procedures has been growing at a compound annual rate of over 20%. Other novel
cell therapies are under development by third parties, including stem cell
therapy for the treatment of autoimmune diseases and for augmenting recipient
acceptance of organ transplants. Current stem cell therapy methods, including
bone marrow harvest and peripheral blood progenitor cell mobilization, are
costly, invasive and time-consuming for both medical personnel and patients.
Technologies which facilitate a more readily available source of cells may
contribute to additional growth in cell therapy procedures. Umbilical cord
blood ("UCB") is emerging as a new source of cells for stem cell therapy,
offering additional market opportunity, although the more widespread use of UCB
transplants has been restricted by cell quantity limitations.

The Company believes that the Aastrom CPS will offer significant advantages
over traditional stem cell collection methods. Compared with current methods,
the Aastrom CPS is expected to involve two patient care episodes rather than
approximately eight to 21 care episodes, less than three hours of patient
procedure time rather than approximately 16 to 39 hours of patient procedure
time and approximately four to ten needle sticks rather than 22 or more needle
sticks over the course of collection and infusion. The Aastrom CPS may permit
higher and more frequent doses of chemotherapy to be administered to cancer
patients by enabling the production of multiple doses of therapeutic stem cells
from patient samples taken at the initial collection.

Aastrom is currently conducting a pre-pivotal autologous stem cell therapy
trial. The trial is designed to show that cells produced in the Aastrom CPS can
by themselves safely enable recovery of bone marrow and cells of the blood and
immune systems in accordance with trial endpoints in patients who have received
ablative chemotherapy. Based on the outcome of this and other related trials,
the Company intends to seek FDA approval to begin a multi-center pivotal trial
for use of the Aastrom CPS in stem cell therapy. It is anticipated that the
results of this pivotal trial will be used to support the Company's Pre-Market
Approval ("PMA") submission to the FDA. In the near future, the Company plans
to initiate a stem cell therapy clinical trial in France, the results of which
are expected to be used for the CE Mark registration necessary to market the
Aastrom CPS in Europe.

The Company's business strategy is to: (i) establish a consumable-based
business model; (ii) focus initially on the currently-reimbursed stem cell
therapy market; (iii) leverage Aastrom's cell production technology across
multiple cell therapy market opportunities; and (iv) market through
collaborative relationships.

Aastrom has entered into a strategic collaboration with Cobe BCT to support
the development and marketing of the Aastrom CPS in the field of stem cell
therapy. In 1993, the Company entered into a series of agreements in which Cobe
BCT purchased $15,000,000 of the Company's equity securities and acquired the
worldwide distribution rights to the Aastrom CPS for stem cell therapy. Under
the terms of the collaboration, Aastrom retains manufacturing rights as well as
the majority share of all revenue generated by Cobe BCT's sale of the Aastrom
CPS. Aastrom also retains all marketing and distribution rights to the Aastrom
CPS for other cell types and ex vivo gene therapy applications, including stem
cells. Cobe Laboratories Inc., an affiliate of Cobe BCT, has agreed to purchase
$5,000,000 of Common Stock in this offering at the initial public offering
price per share.

The Company's patent portfolio includes patents relating to both stem and
progenitor cell production, processes for the genetic modification of stem and
other cell types, and cell culture devices for human cells. As of September 30,
1996, the Company had exclusive rights to five issued U.S. and three foreign
patents, and a number of U.S. patent applications and certain corresponding
foreign applications.

THE OFFERING

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

SUMMARY FINANCIAL DATA

THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
--------------------------------------------------------------- ---------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- --------------

STATEMENT OF OPERATIONS
DATA:
Total revenues.......... $ -- $ 784,000 $ 872,000 $ 517,000 $ 1,609,000 $ 211,000 $ 224,000
Costs and expenses:
Research and
development........... 1,090,000 2,600,000 5,627,000 4,889,000 10,075,000 1,195,000 3,160,000
General and
administrative........ 272,000 1,153,000 1,565,000 1,558,000 2,067,000 446,000 452,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses............. 1,362,000 3,753,000 7,192,000 6,447,000 12,142,000 1,641,000 3,612,000
Other income, net....... 94,000 122,000 180,000 213,000 616,000 131,000 115,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss................ $(1,268,000) $(2,847,000) $(6,140,000) $(5,717,000) $(9,917,000) $(1,299,000) $(3,273,000)
=========== =========== =========== =========== =========== =========== ===========
Pro forma net loss per
share(3)............... $ (.32) $ (.49) $ (.82) $ (.66) $ (.98) $ (.13) $ (.32)
=========== =========== =========== =========== =========== =========== ===========
Pro forma weighted
average number of
shares outstanding(3).. 3,919,000 5,840,000 7,461,000 8,644,000 10,103,000 10,094,000 10,107,000
=========== =========== =========== =========== =========== =========== ===========

SEPTEMBER 30, 1996
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ACTUAL AS ADJUSTED(4)
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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

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(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."

RISK FACTORS

In addition to the other information in this Prospectus, prospective
investors should consider the following risk factors in evaluating the Company
and its business before purchasing any of the Common Stock offered hereby.

UNCERTAINTIES RELATED TO PRODUCT DEVELOPMENT AND MARKETABILITY

The Company has not completed the development or clinical trials of any of
its cell culture technologies or product candidates and, accordingly, has not
begun to market or generate revenue from their commercialization. Furthermore,
the Company's technologies and product candidates are based on cell culture
processes and methodologies which are not widely employed. Commercialization
of the Company's lead product candidate, the Aastrom CPS, will require
substantial additional research and development by the Company as well as
substantial clinical trials. There can be no assurance that the Company will
successfully complete development of the Aastrom CPS or its other product
candidates, or successfully market its technologies or product candidates,
which lack of success would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company or its collaborators may encounter problems and delays relating
to research and development, regulatory approval and intellectual property
rights of the Company's technologies and product candidates. There can be no
assurance that the Company's research and development programs will be
successful, that its cell culture technologies and product candidates will
facilitate the ex vivo production of cells with the expected biological
activities in humans, that its technologies and product candidates, if
successfully developed, will prove to be safe and efficacious in clinical
trials, that the necessary regulatory approvals for any of the Company's
technologies or product candidates and the cells produced in such products
will be obtained or, if obtained, will be as broad as sought, that patents
will issue on the Company's patent applications or that the Company's
intellectual property protections will be adequate. The Company's product
development efforts are primarily directed toward obtaining regulatory
approval to market the Aastrom CPS as an alternative to the bone marrow
harvest and peripheral blood progenitor cell ("PBPC") stem cell collection
methods. These stem cell collection methods have been widely practiced for a
number of years, and there can be no assurance that any of the Company's
technologies or product candidates will be accepted by the marketplace as
readily as these or other competing processes and methodologies, or at all.
The failure by the Company to achieve any of the foregoing would have a
material adverse effect on the Company's business, financial condition and
results of operations.

UNCERTAINTIES RELATED TO CLINICAL TRIALS

The approval of the United States Food and Drug Administration (the "FDA")
will be required before any commercial sales of the Company's product
candidates may commence in the United States, and approvals from foreign
regulatory authorities will be required before international sales may
commence. Prior to obtaining necessary regulatory approvals, the Company will
be required to demonstrate the safety and efficacy of its processes and
product candidates and the cells produced by such processes and in such
products for application in the treatment of humans through extensive
preclinical studies and clinical trials. To date, the Company has only tested
the safety of cells produced in the cell culture chamber predecessor of the
Aastrom CPS, and only in a limited numbers of patients. The Company is
currently conducting a pre-pivotal clinical trial to demonstrate the safety
and biological activity of patient-derived cells produced in the Company's
cell culture chamber in a limited number of patients with breast cancer and,
if the results from this pre-pivotal trial are successful, the Company intends
to seek clearance from the FDA to commence its pivotal clinical trial. The
results of preclinical studies and clinical trials of the Company's product
candidates, however, may not necessarily be predictive of results that will be
obtained from subsequent or more extensive clinical trials. Further, there can
be no assurance that pre-pivotal or pivotal clinical trials of any of the
Company's product candidates will demonstrate the safety and efficacy of such
products, or of the cells produced in such products, to the extent necessary
to obtain required regulatory approvals or market acceptance.

The ability of the Company to complete its clinical trials in a timely
manner is dependent upon many factors, including the rate of patient
enrollment. Patient enrollment is a function of many factors, including the
size of the patient population, the proximity of suitable patients to clinical
sites and the eligibility criteria for the

study. The Company has experienced delays in patient accrual in its current
pre-pivotal clinical trial. Further delays in patient accrual, in the
Company's current pre-pivotal clinical trial or in future clinical trials,
could result in increased costs associated with clinical trials or delays in
receiving regulatory approvals and commercialization, if any. Furthermore, the
progress of clinical investigations with the Aastrom CPS and the Company's
other product candidates will be monitored by the FDA, which has the authority
to cease clinical investigations, at any time, due to patient safety or other
considerations. Any of the foregoing would have a material adverse effect on
the Company's business, financial condition and results of operations. See "--
Uncertainty of Regulatory Approval; --Extensive Government Regulation."

The Company's current pre-pivotal trial is designed to demonstrate specific
biological safety and activity of cells produced in the Aastrom CPS, but is
not designed to demonstrate long-term sustained engraftment of such cells. The
patients enrolled in this pre-pivotal trial will have undergone extensive
chemotherapy treatment prior to the infusion of cells produced in the Aastrom
CPS. Such treatments will have substantially weakened these patients and may
have irreparably damaged their hematopoietic systems. Due to these and other
factors, it is possible that one or more of these patients may die or suffer
severe complications during the course of the pre-pivotal trial. Further,
there can be no assurance that patients receiving cells produced with the
Company's technologies and product candidates will demonstrate long-term
engraftment in a manner comparable to cells obtained from current stem cell
therapy procedures, or at all. The failure to adequately demonstrate the
safety or efficacy of the Company's technologies and product candidates,
including long-term sustained engraftment, or the death of, or occurrence of
severe complications in, one or more patients could substantially delay, or
prevent, regulatory approval of such product candidates and have a material
adverse effect on the Company's business, financial condition and results of
operations.

MANUFACTURING AND SUPPLY UNCERTAINTIES; DEPENDENCE ON THIRD PARTIES

The Company does not operate and has no current intention to operate
manufacturing facilities for the production of its product candidates. The
Company currently arranges for the manufacturing of its product candidates and
their components with third parties, and expects to continue to do so in the
forseeable future. The Company has entered into collaborative product
development agreements with SeaMED Corporation ("SeaMED") and Ethox
Corporation ("Ethox") for the collaborative development and manufacture of
certain components of the Aastrom CPS. The Company is also dependent upon
Immunex Corporation ("Immunex"), Life Technologies, Inc., Biowhittaker and
Anchor Advanced Products for the supply of certain cytokines, serum, media and
injection molded materials, respectively, to be used in conjunction with, or
as components of, the Aastrom CPS. With regard to cytokines that are not
commercially available from other sources, Immunex is currently the Company's
sole supplier and few alternative supply sources exist. Apart from SeaMED,
Ethox and Immunex, the Company currently does not have contractual commitments
from any of these manufacturers or suppliers. There can be no assurance that
the Company's supply of such key cytokines, components and other materials
will not become limited, be interrupted or become restricted to certain
geographic regions. Furthermore, the Company currently only has the right to
distribute cytokines obtained from Immunex in the United States and there can
be no assurance that the Company will be able to obtain the worldwide right to
distribute such cytokines or manufacture such cytokines by or for itself in
the event that the Company's agreement with Immunex is terminated. There can
also be no assurance that the Company will be able to obtain alternative
components and materials from other manufacturers of acceptable quality, or on
terms or in quantities acceptable to the Company or that the Company will not
require additional cytokines, components and other materials to manufacture or
use its product candidates. In the event that any of the Company's key
manufacturers or suppliers fail to perform their respective obligations or the
Company's supply of such cytokines, components or other materials become
limited or interrupted, the Company would not be able to market its product
candidates on a timely and cost-competitive basis, if at all, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.

Like SeaMED and Ethox, other suppliers would need to meet FDA manufacturing
requirements and undergo rigorous facility and process validation tests
required by federal and state regulatory authorities. Any significant delays
in the completion and validation of such facilities could have a material
adverse effect on the

ability of the Company to complete clinical trials and to market its products
on a timely and profitable basis, which in turn would have a material adverse
effect on the Company's business, financial condition and results of
operations.

There can also be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis.

HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES

The Company is a development stage company and there can be no assurance
that its product applications for cell therapy will be successful. The Company
has not yet completed the development and clinical trials of any of its
product candidates and, accordingly, has not yet begun to generate revenues
from the commercialization of any of its product candidates. Aastrom was
incorporated in 1989 and has experienced substantial operating losses since
inception. As of September 30, 1996, the Company has incurred net operating
losses totaling approximately $30.3 million. Such losses have resulted
principally from costs incurred in the research and development of the
Company's cell culture technologies and the Aastrom CPS, general and
administrative expenses, and the prosecution of patent applications. The
Company expects to incur significant and increasing operating losses for at
least the next several years, primarily owing to the expansion of its research
and development programs, including preclinical studies and clinical trials.
The amount of future losses and when, if ever, the Company will achieve
profitability, are uncertain. The Company's ability to achieve profitability
will depend, among other things, on successfully completing the development of
its product candidates, obtaining regulatory approvals, establishing
manufacturing, sales and marketing arrangements with third parties, and
raising sufficient funds to finance its activities. No assurance can be given
that the Company's product development efforts will be successful, that
required regulatory approvals will be obtained, that any of the Company's
product candidates will be manufactured at a competitive cost and will be of
acceptable quality, or that the Company will be able to achieve profitability
or that profitability, if achieved, can be sustained.

LIMITED SALES AND MARKETING CAPABILITIES; DEPENDENCE ON COLLABORATIVE
RELATIONSHIPS

The Company has limited internal sales, marketing and distribution
capabilities. If any of the Company's product candidates are successfully
developed and the necessary regulatory approvals are obtained, the Company
intends to market such products through collaborative relationships with
companies that have established sales, marketing and distribution
capabilities. The Company has established a strategic alliance with Cobe
Laboratories, Inc. and Cobe BCT, Inc. (collectively, "Cobe") for the worldwide
distribution of the Aastrom CPS for stem cell therapy and related uses. Cobe
has the right to terminate its Distribution Agreement with the Company upon
twelve months' notice upon a change of control of the Company, other than to
Cobe, or at any time after December 31, 1997, if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely. See "--Consequences of Cobe Relationship."

The amount and timing of resources that Cobe commits to its strategic
alliance activities with the Company are, to a significant extent, outside of
the control of the Company. There can be no assurance that Cobe will pursue
the marketing and distribution of the Company's products, continue to perform
its obligations under its agreements with the Company or that the Company's
strategic alliance with Cobe will result in the successful commercialization
and distribution of the Company's technologies and product candidates. There
can also be no assurance that Cobe will be successful in its efforts to market
and distribute the Company's products for stem cell therapy. The suspension or
termination of the Company's strategic alliance with Cobe or the failure of
the strategic alliance to be successful would have a material adverse effect
on the Company's business, financial condition and results of operations.

Subject to the contractual requirements of the Cobe relationship, the
Company will seek to enter into other agreements relating to the development
and marketing of product candidates and in connection with such

agreements may rely upon corporate partners to conduct clinical trials, seek
regulatory approvals for, manufacture and market its potential products. There
can be no assurance that the Company will be able to establish collaborative
relationships for the development or marketing of the Company's product
candidates on acceptable terms, if at all. The inability of the Company to
establish such collaborative relationships may require the Company to curtail
its development or marketing activities with regard to its potential products
which would have a material adverse effect on the Company's business,
financial condition and results of operations.

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

To date, Aastrom has funded its operations primarily through the sale of
equity securities and corporate collaborations. The Company anticipates that
the net proceeds of this offering, together with the Company's available cash
and expected interest income thereon, will be sufficient to finance its
research and development and other working capital requirements for 18 months
or less. This estimate is based on certain assumptions which could be
negatively impacted by the matters discussed under this heading and elsewhere
under the caption "Risk Factors." In order to grow and expand its business,
and to introduce its product candidates into the marketplace, the Company will
need, among other things, to raise additional funds.

The Company's future capital requirements will depend upon many factors,
including, but not limited to, continued scientific progress in its research
and development programs, costs and timing of conducting clinical trials and
seeking regulatory approvals and patent prosecutions, competing technological
and market developments, possible changes in existing collaborative
relationships, the ability of the Company to establish additional
collaborative relationships, and effective commercialization activities and
facilities expansions if and as required. Because of the Company's potential
long-term funding requirements, it may attempt to access the public or private
equity markets if and whenever conditions are favorable, even if it does not
have an immediate need for additional capital at that time. There can be no
assurance that any such additional funding will be available to the Company on
reasonable terms, or at all. If adequate funds are not available, the Company
may be required to delay or terminate research and development programs,
curtail capital expenditures, and reduce business development and other
operating activities. If the Company is not successful in finding, entering
into and maintaining arrangements with collaborative partners, its development
efforts could be delayed. Furthermore, there can be no assurance that the
Company will be able to implement collaborative development agreements under
acceptable terms, if at all. Any of the foregoing capital constraints would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

UNCERTAINTY OF REGULATORY APPROVAL; EXTENSIVE GOVERNMENT REGULATION

The Company's research and development activities, preclinical studies,
clinical trials, and the anticipated manufacturing and marketing of its
product candidates are subject to extensive regulation by the FDA and other
regulatory authorities in the United States. These activities are also
regulated in other countries where the Company intends to test and market its
product candidates. The approval of the FDA will be required before any
commercial sales of the Company's product candidates may commence in the
United States. Additionally, the Company will be required to obtain approvals
from foreign regulatory authorities before international sales may commence.

The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, or as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS for stem cell therapy as a Class III
medical device through the Center for Biologics Evaluation and Research.
However, there can be no assurance that the FDA will ultimately regulate the
Aastrom CPS for stem cell therapy as a medical device or that regulatory
approval for such product will be obtained in a timely fashion or at all.

Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products, and recently proposed a new type of license for autologous
cells manipulated ex vivo and

intended for structural repair or reconstruction; autologous cells are cells
obtained from, and administered to, the same patient. This proposal may
indicate that the FDA will impose a similar approval requirement on other
types of autologous cellular therapies, such as autologous cells for stem cell
therapy. Any such additional regulatory or approval requirement could
significantly delay the introduction of the Company's product candidates to
the market, and have a material adverse effect on the Company's business,
financial condition and results of operations. Until the FDA issues definitive
regulations covering the Company's product candidates, the regulatory
requirements for approval of such product candidates will continue to be
subject to significant uncertainty.

Before marketing, the Aastrom CPS or other product candidates developed by
the Company must undergo an extensive regulatory approval process. The
regulatory process, which includes preclinical studies and clinical trials to
establish safety and efficacy, takes many years and requires the expenditure
of substantial resources. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent FDA approval. In addition, delays or rejections may be encountered
based upon changes in FDA policy for medical product approvals during the
period of product development and FDA regulatory review of applications
submitted by the Company for product approval. Similar delays may also be
encountered in foreign countries. There can be no assurance that, even after
the expenditures of substantial time and financial resources, regulatory
approval will be obtained for any products developed by the Company. Moreover,
if regulatory approval of a product is obtained, such approval may be subject
to limitations on the indicated uses for which it may be marketed. Further,
even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions
on such product or manufacturer, including a withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements can,
among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. Further,
additional government regulation may be established which could prevent or
delay regulatory approval of the Company's products. See "Business--Government
Regulation."

CONSEQUENCES OF COBE RELATIONSHIP

Following the completion of this offering, Cobe will be the largest single
shareholder of the Company, beneficially owning approximately 23.1% of the
outstanding Common Stock. In addition, Cobe has certain preemptive rights to
maintain its relative percentage ownership and voting interest in the Company
following this offering, and has the option, for a period of three years
following this offering, to purchase from the Company an amount of Common
Stock equal to 30% of the Company's fully diluted shares after the exercise of
such option, at a purchase price equal to 120% of the public market trading
price of the Company's Common Stock. If such option is exercised, Cobe would
significantly increase its ownership interest in the Company and, as a
consequence of such share ownership, obtain effective control of the Company.
Such effective control would include the ability to influence the outcome of
shareholder votes, including votes concerning the election of directors, the
amendment of provisions of the Company's Restated Articles of Incorporation or
Bylaws, and the approval of mergers and other significant transactions. Cobe
also has been granted a "right of first negotiation" in the event that the
Company determines to sell all, or any material portion, of its assets to
another company or to merge with another company. Furthermore, the Company has
agreed to use reasonable and good faith efforts to cause a nominee designated
by Cobe to be elected to the Board of Directors for as long as Cobe owns at
least 15% of the outstanding Common Stock. In addition, Edward C. Wood, Jr.,
the President of Cobe BCT, is a director of the Company. The existence of the
foregoing rights or the exercise of such control by Cobe could have the effect
of delaying, deterring or preventing certain takeovers or changes in control
of the management of the Company, including transactions in which shareholders
might otherwise receive a premium for their shares over then current market
prices. See "Description of Capital Stock--Rights of Cobe."

UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS

Aastrom's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes,
preserve its trade secrets, defend and enforce its rights against infringement
and

operate without infringing the proprietary rights of third parties, both in
the United States and in other countries. The validity and breadth of claims
in medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. No assurance can be given that any patents
based on pending patent applications or any future patent applications of the
Company or its licensors will be issued, that the scope of any patent
protection will exclude competitors or provide competitive advantages to the
Company, that any of the patents that have been or may be issued to the
Company or its licensors will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held or licensed by the Company. Furthermore, there can be
no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
that have been or may be issued to the Company or its licensors. Since patent
applications in the United States are maintained in secrecy until patents
issue, the Company also cannot be certain that others did not first file
applications for inventions covered by the Company's and its licensors'
pending patent applications, nor can the Company be certain that it will not
infringe any patents that may issue to others on such applications. The
Company relies on certain licenses granted by the University of Michigan and
Dr. Cremonese for the majority of its patent rights. If the Company breaches
such agreements or otherwise fails to comply with such agreements, or if such
agreements expire or are otherwise terminated, the Company may lose its rights
under the patents held by the University of Michigan and Dr. Cremonese, which
would have a material adverse effect on the Company's business, financial
condition and results of operation. See "Business--Patents and Proprietary
Rights--University of Michigan Research Agreement and License Agreement" and
"--Patents and Proprietary Rights--License Agreement with J.G. Cremonese." The
Company also relies on trade secrets and unpatentable know-how which it seeks
to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets or unpatentable know-how
will not otherwise become known or be independently developed by competitors.

The Company's success will also depend in part on its ability to develop
commercially viable products without infringing the proprietary rights of
others. The Company has not conducted freedom of use patent searches and no
assurance can be given that patents do not exist or could not be filed which
would have an adverse effect on the Company's ability to market its products
or maintain its competitive position with respect to its products. If the
Company's technology components, devices, designs, products, processes or
other subject matter are claimed under other existing United States or foreign
patents or are otherwise protected by third party proprietary rights, the
Company may be subject to infringement actions. In such event, the Company may
challenge the validity of such patents or other proprietary rights or be
required to obtain licenses from such companies in order to develop,
manufacture or market its products. There can be no assurance that the Company
would be able to obtain such licenses or that such licenses, if available,
could be obtained on commercially reasonable terms. Furthermore, the failure
to either develop a commercially viable alternative or obtain such licenses
could result in delays in marketing the Company's proposed products or the
inability to proceed with the development, manufacture or sale of products
requiring such licenses, which could have a material adverse effect on the
Company's business, financial condition and results of operations. If the
Company is required to defend itself against charges of patent infringement or
to protect its own proprietary rights against third parties, substantial costs
will be incurred regardless of whether the Company is successful. Such
proceedings are typically protracted with no certainty of success. An adverse
outcome could subject the Company to significant liabilities to third parties,
and force the Company to curtail or cease its development and sale of its
products and processes. See "Business--Patents and Proprietary Rights."

NO ASSURANCE OF THIRD PARTY REIMBURSEMENT

The Company's ability to successfully commercialize its product candidates
will depend in part on the extent to which payment for the Company's products
and related treatments will be available from government healthcare programs,
such as Medicare and Medicaid, as well as private health insurers, health
maintenance organizations and other third party payors. Government and other
third-party payors are increasingly attempting to contain health care costs,
in part by challenging the price of medical products and services.
Reimbursement by third-party payors depend on a number of factors, including
the payor's determination that use of the product

is safe and effective, not experimental or investigational, medically
necessary, appropriate for the specific patient and cost-effective. Since
reimbursement approval is required from each payor individually, seeking such
approvals is a time-consuming and costly process which will require the
Company to provide scientific and clinical support for the use of each of the
Company's products to each payor separately. Significant uncertainty exists as
to the payment status of newly approved medical products, and there can be no
assurance that adequate third-party payments will be available to enable the
Company to establish or maintain price levels sufficient to realize an
appropriate return on its investment in product development. If adequate
payment levels are not provided by government and third-party payors for use
of the Company's products, the market acceptance of those products will be
adversely affected.

There can be no assurance that reimbursement in the United States or foreign
countries will be available for any of the Company's product candidates, that
any reimbursement granted will be maintained, or that limits on reimbursement
available from third-party payors will not reduce the demand for, or
negatively affect the price of, the Company's products. The unavailability or
inadequacy of third-party reimbursement for the Company's product candidates
would have a material adverse effect on the Company. Finally, the Company is
unable to forecast what additional legislation or regulation relating to the
healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation would have on the
Company's business.

COMPETITION AND TECHNOLOGICAL CHANGE

The Company is engaged in the development of medical products and processes
which will face competition in a marketplace characterized by rapid
technological change. Many of the Company's competitors have significantly
greater resources than the Company, and have developed and may develop product
candidates and processes that directly compete with the Company's products.
Moreover, competitors that are able to achieve patent protection, obtain
regulatory approvals and commence commercial sales of their products before
the Company, and competitors that have already done so, may enjoy a
significant competitive advantage. The Company's product development efforts
are primarily directed toward obtaining regulatory approval to market the
Aastrom CPS for stem cell therapy. That market is currently dominated by the
bone marrow harvest and PBPC collection methods. The Company's clinical data,
although early, is inconclusive as to whether or not cells expanded in the
Aastrom CPS will enable hematopoietic recovery within the time frames
currently achieved by the bone marrow harvest and PBPC collection methods. In
addition, the bone marrow harvest and PBPC collection methods have been widely
practiced for a number of years and, recently, the patient costs associated
with these procedures have begun to decline. There can be no assurance that
the Aastrom CPS method, if approved for marketing, will prove to be
competitive with these established collection methods on the basis of
hematopoietic recovery time, cost or otherwise. The Company also is aware of
certain other products manufactured or under development by competitors that
are used for the prevention or treatment of certain diseases and health
conditions which the Company has targeted for product development. In
particular, the Company is aware that competitors such as Amgen, Inc.,
CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp. and Rhone-
Poulenc Rorer Inc. ("RPR") are in advanced stages of development of
technologies and products for use in stem cell therapy and other market
applications currently being pursued by the Company. In addition, Cobe, a
significant shareholder of the Company, is a market leader in the blood cell
processing products industry and, accordingly, a potential competitor of the
Company. There can be no assurance that developments by others will not render
the Company's product candidates or technologies obsolete or noncompetitive,
that the Company will be able to keep pace with new technological developments
or that the Company's product candidates will be able to supplant established
products and methodologies in the therapeutic areas that are targeted by the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition and results of operations.

HAZARDOUS MATERIALS

The Company's research and development activities involve the controlled use
of hazardous materials, chemicals and various radioactive compounds. The
Company is subject to federal, state and local laws and

regulations governing the use, manufacture, storage, handling and disposal of
such materials and certain waste products. In the event of any contamination
or injury from these materials, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company. Furthermore, the failure to comply with current or future regulations
could result in the imposition of substantial fines against the Company,
suspension of production, alteration of its manufacturing processes or
cessation of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with any such laws and
regulations in the future, or that such laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Any failure by the Company to control the use,
disposal, removal or storage of, or to adequately restrict the discharge of,
or assist in the cleanup of, hazardous chemicals or hazardous, infectious or
toxic substances could subject the Company to significant liabilities,
including joint and several liability under certain statutes. The imposition
of such liabilities would have a material adverse effect on the Company's
business, financial condition and results of operations.

POTENTIAL PRODUCT LIABILITY; AVAILABILITY OF INSURANCE

The Company is, and will continue to be, subject to the risk of product
liability claims alleging that the use of its products has adverse effects on
patients. This risk exists for product candidates tested in human clinical
trials as well as products that are sold commercially, if any. Further, given
the medical conditions for which the Aastrom CPS is expected to be utilized,
any product liability claim could entail substantial compensatory and punitive
damages. The assertion of product liability claims against the Company could
result in a substantial cost to, and diversion of efforts by, the Company.
There can be no assurance that the Company would prevail in any such
litigation or that product liability claims, if made, would not result in a
recall of the Company's products or a change in the indications for which they
may be used. The Company maintains product liability insurance coverage in the
aggregate of $5,000,000 for claims arising from the use of its product
candidates in clinical trials. There can be no assurance that the Company will
be able to maintain such insurance or obtain product liability insurance in
the future to cover any of its product candidates which are commercialized or
that such existing or any future insurance and the resources of the Company
would be sufficient to satisfy any liability resulting from product liability
claims. Consequently, a product liability claim or other claim with respect to
uninsured or underinsured liabilities could have a material adverse effect on
the Company's business, financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

The success of the Company depends in large part upon the Company's ability
to attract and retain highly qualified scientific and management personnel.
The Company faces competition for such personnel from other companies,
research and academic institutions and other entities. There can be no
assurance that the Company will be successful in hiring or retaining key
personnel. See "Business--Employees" and "Management."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market following
this offering could adversely affect the prevailing market price of the Common
Stock and the Company's ability to raise capital in the future. Upon
completion of this offering, the Company will have a total of 13,235,734
shares of Common Stock outstanding, of which the 3,250,000 shares offered
hereby will be freely tradeable without restriction under the Securities Act
of 1933, as amended (the "Securities Act") by persons other than "affiliates"
of the Company, as defined under the Securities Act. The remaining 9,985,734
shares of Common Stock outstanding are "restricted securities" as the term is
defined by Rule 144 promulgated under the Securities Act (the "Restricted
Shares"). Of the 9,985,734 Restricted Shares, 6,996,920 shares may be sold
under Rule 144, subject in some cases to certain volume restrictions and other
conditions imposed thereby. An additional 152,056 shares will become eligible
for sale 90 days after completion of the offering pursuant to Rule 144 and
701. The remaining 2,836,758 shares will be eligible for sale upon the
expiration of their respective holding periods as set forth in Rule 144. The
Securities and Exchange Commission has proposed certain amendments to Rule 144
that would reduce by one year the holding periods required for shares subject
to Rule 144 to become eligible for resale in

the public market. This proposal, if adopted, would permit earlier resale of
shares of Common Stock currently subject to holding periods under Rule 144. No
assurance can be given concerning whether or when the proposal will be adopted
by the Securities and Exchange Commission. Furthermore, 9,947,757 of the
Restricted Shares are subject to lock-up agreements expiring 180 days
following the date of this Prospectus. Such agreements provide that Cowen &
Company may, in its sole discretion and at any time without notice, release
all or a portion of the shares subject to these lock-up agreements. Upon the
expiration of the lock-up agreements, 7,148,976 of the 9,985,734 Restricted
Shares may be sold pursuant to Rule 144 or 701, subject in some cases to
certain volume restrictions imposed thereby. Certain existing shareholders
have rights to include shares of Common Stock owned by them in future
registrations by the Company for the sale of Common Stock or to request that
the Company register their shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Following the date of this Prospectus,
the Company intends to register on one or more registration statements on Form
S-8 approximately 1,837,160 shares of Common Stock issuable under its stock
option and stock purchase plans. Of the 1,837,160 shares issuable under its
stock option and stock purchase plans, 336,254 shares are subject to
outstanding options as of September 30, 1996, all of which shares are subject
to lock-up agreements. Shares covered by such registration statements will
immediately be eligible for sale in the public market upon the filing of such
registration statements. The Company also has issued warrants to purchase
69,444 shares of Common Stock which become exercisable 90 days after the
closing of this offering and, upon the effective date of this offering, will
grant an immediately exercisable option to purchase 333,333 shares of Common
Stock. The shares issuable upon exercise of such warrants and the shares
issuable upon exercise of such option will be subject to lock-up agreements.
In addition, Cobe has agreed to purchase $5,000,000 of Common Stock in this
offering at the initial public offering price per share, all of which shares
will be subject to a lock-up agreement. See "Management--Benefit Plans,"
"Certain Transactions" and "Shares Eligible for Future Sale."

CONTROL BY EXISTING MANAGEMENT AND SHAREHOLDERS

Upon completion of this offering, the Company's directors, executive
officers, and certain principal shareholders, including Cobe, affiliated with
members of the Board of Directors and their affiliates will beneficially own
approximately 44% of the Common Stock (approximately 42% if the Underwriters'
over-allotment option is exercised in full). Accordingly, such shareholders,
acting together, may have the ability to exert significant influence over the
election of the Company's Board of Directors and other matters submitted to
the Company's shareholders for approval. The voting power of these holders may
discourage or prevent certain takeovers or changes in control of the
management of the Company unless the terms are approved by such holders. See
"Principal Shareholders."

NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY

Prior to this offering there has been no public market for the Common Stock,
and an active public market for the Common Stock may not develop or be
sustained. The initial public offering price will be determined through
negotiation between the Company and the Representatives of the Underwriters
based on several factors that may not be indicative of future market prices.
See "Underwriting" for a discussion of the factors considered in determining
the initial public offering price. The trading price of the Common Stock and
the price at which the Company may sell securities in the future could be
subject to wide fluctuations in response to announcements of clinical results,
research activities, technological innovations or new products by the Company
or competitors, changes in government regulation, developments concerning
proprietary rights, variations in the Company's operating results,
announcements by the Company of regulatory developments, litigation, disputes
concerning patents or proprietary rights or public concern regarding the
safety, efficacy or other implications of the products or methodologies to be
developed by the Company or its collaborators or enabled by the Company's
technology, general market conditions, the liquidity of the Company or its
ability to raise additional funds, and other factors or events. In addition,
the stock market has experienced extreme fluctuations in price and volume.
This volatility has significantly affected the market prices for securities of
emerging biotechnology companies for reasons frequently unrelated to or
disproportionate to the operating performance of the specific companies. These
market fluctuations as well as general fluctuations in the stock markets may
adversely affect the market price of the Common Stock.

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."

THE COMPANY

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

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock offered hereby are estimated to be $26,302,500 ($30,382,875 if
the Underwriters exercise their over-allotment option in full), at an assumed
initial public offering price of $9.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.

The net proceeds from this offering are expected to be used to fund product
development of the Aastrom CPS, other research and development activities,
including pre-pivotal and pivotal clinical trials of the Aastrom CPS, and for
working capital and other general corporate purposes, including scheduled
repayments of obligations under equipment leases. The Company has $339,000 of
outstanding equipment lease commitments as of September 30, 1996 with final
payments due between November 1996 and May 1999 and bear interest ranging from
9.7% to 12.1%.

The Company anticipates that the net proceeds of this offering, together
with the Company's available cash and expected interest income thereon, should
be sufficient to finance the Company's research and development and other
working capital requirements for approximately 18 months. This estimate is
based on certain assumptions which could be negatively impacted by the matters
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending such uses, the net proceeds will be invested in short-
term, interest bearing investment grade securities.

DIVIDEND POLICY

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

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."

SEPTEMBER 30, 1996
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- ------------

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
=========== ============

- --------
(1) See Note 7 of Notes to Financial Statements.

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:

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
=====

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:

SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- -------------

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%
========== === =========== ===

- --------

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.

SELECTED FINANCIAL DATA

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

THREE MONTHS
YEAR ENDED JUNE 30, ENDED SEPTEMBER 30,
--------------------------------------------------------------- ------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------

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

JUNE 30, SEPTEMBER 30,
------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1996
---------- ---------- ----------- ----------- ----------- -------------

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

- --------
(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.

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

OVERVIEW

Since inception, the Company has been in the development stage and engaged
in research and product development, conducted both on its own behalf and in
connection with various collaborative research and development agreements with
other entities. The Company expects that its revenue sources for at least the
next several years will continue to be limited to grant revenues and research
funding, milestone payments and licensing fees from potential future corporate
collaborators. The timing and amount of such future revenues, if any, will be
subject to significant fluctuations, based in part on the success of the
Company's research activities and the timing of the achievement of certain
milestones. Substantially all of the Company's revenues from product sales, if
any, will be subject to royalty payments ranging from 2% to 5%. Further, under
the Company's Distribution Agreement with Cobe, Cobe will perform marketing
and distribution activities and in exchange will receive from 38% to 42% of
the Company's product sales in the area of stem cell therapy, subject to
negotiated discounts and volume-based adjustments. Research and development
expenses may fluctuate due to the timing of expenditures for the varying
stages of the Company's research and clinical development programs. Research
and development expenses will increase as product development programs and
applications of the Company's products progress through research and
development stages. Under the Company's License Agreement with Immunex, annual
renewal fees of $1,000,000 are payable in each of the next four years. Under
the Company's Distribution Agreement with Cobe, regulatory approval activities
for the Company's products for stem cell therapies outside of the United
States will be conducted, and paid for, by Cobe. As a result of these factors,
the Company's results of operations have, and are expected to continue to,
fluctuate significantly from year to year and from quarter to quarter and
therefore may not be comparable to or indicative of the results of operations
for other periods.

Over the past several years, the Company's net loss has primarily increased,
consistent with the growth in the Company's scope and size of operations. In
the near term, the Company plans additional moderate growth in employee
headcount necessary to address increasing requirements in the areas of product
development, research, clinical and regulatory affairs and administration.
Assuming capital is available to finance such growth, the Company's operating
expenses will continue to increase as a result. At least until such time as
the Company enters into arrangements providing research and development
funding, the net loss will continue to increase as well. The Company has been
unprofitable since its inception and does not anticipate having net income for
several years. Through September 30, 1996, the Company had an accumulated
deficit of $30,298,000. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis, if at all.

This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results could differ materially from the results discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include those discussed under this caption, as well as those discussed under
the caption "Risk Factors" and elsewhere in this Prospectus.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

Total revenues were $224,000 for the three months ended September 30, 1996
compared to $211,000 for the same period in 1995. These revenues consist
primarily of research and development revenue under the Company's research
collaboration with RPR, which was terminated in September 1996. See "Certain
Transactions."

Total costs and expenses were $3,612,000 for the three months ended
September 30, 1996 compared to $1,641,000 for the same period in 1995. The
increase in costs and expenses in 1996 is primarily the result of an increase
in research and development expenses to $3,160,000 in 1996 from $1,195,000 in
1995 and to a lesser extent by general and administrative expenses, which
increased to $452,000 for the three months ended September 30, 1996 from
$446,000 for the same period in 1995.

Interest income was $126,000 for the three months ended September 30, 1996
compared to $149,000 for the same period in 1995 and reflects a decrease in
the levels of cash, cash equivalents and short-term investments in 1996.

The Company's net loss increased to $3,273,000 for the three months ended
September 30, 1996 from $1,299,000 for the same period in 1995, primarily as a
result of increased costs and expenses in 1996.

YEARS ENDED JUNE 30, 1996, 1995 AND 1994

Total revenues were $1,609,000 in 1996, $517,000 in 1995, and $872,000 in
1994. Grant revenues increased to $267,000 in 1996 from $121,000 in 1995,
which had decreased from $823,000 in 1994, reflecting the timing of grant
awards and related research activities and funding under the grants. Grant
revenues accounted for 17%, 23% and 94% of total revenues for the years ended
June 30, 1996, 1995 and 1994, respectively. Revenues from research and
development agreements totaled $1,342,000 in 1996, $396,000 in 1995 and
$49,000 in 1994, reflecting research funding received by the Company under its
collaboration with RPR which commenced in September 1995. Revenues from RPR
accounted for 83% and 48% of such revenue in 1996 and 1995, respectively. In
September 1996, the Company's research collaboration with RPR terminated.

Total costs and expenses were $12,142,000 in 1996, $6,447,000 in 1995, and
$7,192,000 in 1994. The increase in 1996 costs and expenses, compared with
1995, is primarily the result of an increase in research and development
expense to $10,075,000 in 1996 from $4,889,000 in 1995. The increase in
research and development expense reflects an increase in research, clinical
development and product development activities. The decrease in costs and
expenses in 1995, compared with 1994, is primarily the result of a decrease in
research and development expense to $4,889,000 in 1995 from $5,627,000 in
1994. General and administrative expenses were $2,067,000 in 1996, $1,558,000
in 1995 and $1,565,000 in 1994. The increase in general and administrative
expenses in 1996 is the result of increasing finance, legal and other
administrative and marketing expenses which are expected to continue to
increase in support of the Company's increasing product development and
research activities. The decrease in general and administrative expense in
1995 is reflective of generally lower spending in 1995 as compared to 1994.

Interest income was $678,000 in 1996, $279,000 in 1995, and $245,000 in
1994. The increases in interest income in 1996 and 1995 are due primarily to
corresponding increases in the levels of cash, cash equivalents and short-term
investments for such periods. Interest expense was $62,000 in 1996, $66,000 in
1995, and $65,000 in 1994, reflecting varying amounts outstanding under
capital leases during the periods.

The Company's net loss was $9,917,000 in 1996, $5,717,000 in 1995, and
$6,140,000 in 1994. The Company expects to report substantial net losses for
at least the next several years.

The Company has not generated any net income to date and therefore has not
paid any federal income taxes since inception. At June 30, 1996, the Company
had deferred tax assets totaling $9,650,000 consisting primarily of net
operating loss and research tax credits that begin to expire from 2004 through
2011, if not utilized. A full valuation allowance for deferred tax assets has
been provided. Utilization of federal income tax carryforwards is subject to
certain limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. The completion of this offering is likely to limit the Company's
ability to utilize federal income tax carryforwards under Section 382. The
annual limitation could result in expiration of net operating losses and
research and development credits before their complete utilization.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily through
private placements of Preferred Stock and other equity investments, which from
inception, have totaled approximately $37,916,000, and to a lesser degree,
through grant funding, payments received under research agreements and
collaborations, interest

earned on cash, cash equivalents, and short-term investments, and funding
under equipment leasing agreements. These financing sources have historically
allowed the Company to maintain adequate levels of cash and other liquid
investments.

The Company's combined cash, cash equivalents and short-term investments
totaled $10,967,000 at June 30, 1996, a decrease of $101,000 from June 30,
1995. The primary uses of cash, cash equivalents and short-term investments
during the year ended June 30, 1996 included $8,967,000 to finance the
Company's operations and working capital requirements, $445,000 in capital
equipment additions and $270,000 in scheduled debt payments. During the year
ended June 30, 1996, the Company received $3,500,000 in equity payments from
RPR and $5,965,000 in net proceeds from the sale of Series E Convertible
Preferred Stock. The Company plans to continue its policy of investing excess
funds in short-term, investment-grade, interest-bearing instruments.

The Company's combined cash, cash equivalents and short-term investments
totaled $7,108,000 as of September 30, 1996 compared to $10,967,000 at June
30, 1996. The decrease was primarily attributable to the use of $3,614,000 to
fund operations and working capital requirements during the period and to a
lesser degree by $173,000 in capital equipment purchases and $73,000 in
scheduled debt payments.

In October 1996, the Company executed a financing commitment to provide the
Company with up to $5,000,000 in additional equity funding from Cobe and
$5,000,000 under a convertible loan agreement with another current investor.
In connection with the convertible loan agreement, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made hereby; or (b) 85% of the fair market value
of the Company's Common Stock at the time of exercise. As of the date of this
Prospectus, the Company has not obtained any financing under these
commitments. These funding commitments expire upon the closing of this
offering.

The Company's future cash requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of clinical trials, the time and costs
involved in obtaining regulatory approvals, the costs involved in filing,
prosecuting and enforcing patents, competing technological and market
developments and the cost of product commercialization. The Company does not
expect to generate a positive cash flow from operations for several years, if
at all, due to the expected increase in spending for research and development
programs and the expected cost of commercializing its product candidates. The
Company may seek additional funding through research and development
agreements with suitable corporate collaborators and through public or private
financing transactions. The Company anticipates that the net proceeds of this
offering, together with the Company's available cash and expected interest
income thereon, will be sufficient to finance its research and development and
other working capital requirements for 18 months or less. This estimate is
based on certain assumptions which could be negatively impacted by the matters
discussed under this heading and elsewhere under the caption "Risk Factors."
The Company expects that its primary sources of capital for the foreseeable
future will be through collaborative arrangements and through the public or
private sale of its equity securities. There can be no assurance that such
collaboration arrangements, or any public or private financing transaction,
will be available on acceptable terms, if at all, or can be sustained on a
long-term basis. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
research and development programs, which may have a material adverse effect on
the Company's business. See "Risk Factors--Future Capital Needs; Uncertainty
of Additional Funding" and Notes to Financial Statements.

RECENT PRONOUNCEMENTS

During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which
establishes a fair value based method of accounting for stock-based
compensation and incentive plans and requires additional disclosures for those
companies that elect not to adopt

the new method of accounting. Adoption of the new accounting pronouncement is
required for the Company's fiscal year beginning July 1, 1996 and the Company
intends to provide the additional disclosures required by the pronouncement in
its financial statements for the year ended June 30, 1997.

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

BUSINESS

OVERVIEW

Aastrom is developing proprietary process technologies and devices for a
range of cell therapy applications, including stem cell therapies and gene
therapy. The Company's lead product under development, the Aastrom Cell
Production System (the "Aastrom CPS"), consists of a clinical cell culture
system with disposable cassettes and reagents for use in the rapidly growing
stem cell therapy market. The Company believes that the Aastrom CPS method
will be less costly, less invasive and less time consuming than currently
available stem cell collection methods. The Aastrom CPS is designed as a
platform product which implements the Company's pioneering stem cell
replication technology and which the Company believes can be modified to
produce a wide variety of cell types for emerging therapies. The Aastrom CPS
is currently in a pre-pivotal clinical trial under an IDE for autologous stem
cell therapy. The Company has entered into a strategic collaboration for the
development of the Aastrom CPS in stem cell therapy with Cobe BCT, Inc., a
subsidiary of Gambro AB and a leading provider of blood cell processing
products. Additionally, Aastrom is developing products and processes for the
delivery of ex vivo gene therapy that are designed to address the production
of gene-modified cells.

CELL THERAPY

Cell therapy is the use of human cells to treat a medical disorder. The most
common types of cell therapy, blood and platelet transfusions, have been
widely used for many decades. More recently, bone marrow-derived cells have
been used to restore the bone marrow and the blood and immune system cells
which are damaged by chemotherapy and radiation therapy during the treatment
of many cancers. Transplantation of these cells is known as stem cell therapy.
Other cell therapies have recently been used for generating skin and cartilage
tissue and additional cell therapies are being developed by various companies
and researchers to restore immune system cells as well as bone, kidney, liver,
vascular and neuronal tissues.

Cell therapies require the collection of cells, either from the patient or a
suitably matched donor. These cells are typically processed and stored for
administration to the patient. Although cell therapy is being developed for
use in an increasing number of diseases, widespread application of new cell
therapies remains limited by the difficulties and expense associated with
current cell collection and processing procedures. The problems of current
cell collection techniques are exemplified in the area of stem cell therapy
where the patient or donor undergoes invasive, time-consuming and costly
procedures to collect the large volume of cells currently required for
effective treatment. The Company believes an alternative to collecting the
required therapeutic dose of cells is to grow these cells ex vivo from a small
starting volume. However, ex vivo cell expansion, when biologically possible,
has typically required costly techniques, facilities and operations to comply
with FDA good manufacturing practices ("GMP"), which are not generally
available in hospitals. As a result, cells needed for such therapies often
require specialized cell production facilities which use labor-intensive,
manual cell culture techniques.

There are numerous forms of cell therapy at an early stage of development.
One such example is ex vivo gene therapy, in which genes are introduced into
target cells in order to selectively correct or modulate disease conditions,
or to modify cells for production of a therapeutic protein. The Company
believes that the successful practice of ex vivo gene therapy will require the
development of processes and products for the reliable, high-efficiency
transfer of genes into cells and a means to produce the necessary dose of the
genetically modified cells under GMP conditions.

STEM CELL THERAPY

Stem cell therapy is used to treat cancer patients who undergo chemotherapy
or radiation therapy at dose levels that are toxic to the hematopoietic
system, which is comprised of the bone marrow and cells of the blood and
immune systems. The objective of stem cell therapy is to restore the
hematopoietic system via the infusion and subsequent engraftment of healthy
cells to replace bone marrow and result in the rapid recovery of neutrophils
and platelets that have been destroyed by chemotherapy and radiation therapy.
Stem cell therapy

reduces the risk of life-threatening infections and bleeding episodes
following cancer treatments. In order to treat many cancers, high intensity
chemotherapy or radiation is often required, which may severely destroy
("myeloablation") or partially destroy ("myelosuppression") the patient's
hematopoietic system.

Cells required for effective stem cell therapy include stem cells, to
replenish depleted bone marrow and provide a long-term ongoing source of the
multilineage progenitor cells of the blood and immune systems, and early and
late stage hematopoietic progenitor cells, to provide for rapid neutrophil and
platelet recoveries. Stromal accessory cells are believed to further augment
the growth of bone marrow. In the adult, all of these cell types originate in
the bone marrow. These cells are currently collected from the donor or patient
directly through multiple syringe aspirations under anesthesia, known as bone
marrow collection, or through blood apheresis following treatment with drugs
which cause cells to be released or mobilized from the bone marrow into the
blood. This latter technique is known as a peripheral blood progenitor cell
("PBPC") collection. See "--Current Stem Cell Collection Methods." Recently,
it has been demonstrated that the blood cells found in the umbilical cord of
newborn infants include cells effective for stem cell therapy. This source of
cells is being explored by physicians as a major new direction in stem cell
therapy, but is currently limited by difficulties in obtaining sufficient
quantities of these cells.

Once collected, the stem cell mixture is infused intravenously and the stem
and stromal accessory cells migrate into the bone cavity where they engraft to
form a new marrow. The hematopoietic progenitor cell components of the cell
mixture provide early restoration of circulating white blood cells and
platelets. The replenished bone marrow will normally provide long-term
hematopoietic function, but complete restoration of bone marrow may take years
following myeloablative cancer therapy. When the patient's hematopoietic
system is malignant, such as in the case of leukemia, cells from a suitable
donor are generally required in order to avoid reintroducing the disease
during cell infusion. Such donor derived transplants are termed "allogeneic"
transplants. Procedures using cells derived from the patient are termed
"autologous" transplants.

STEM CELL THERAPY MARKET OPPORTUNITY

The benefits of stem cell therapy in the treatment of cancer patients have
been well established over the past two decades. Stem cell therapy, in the
form of bone marrow transplantation, was originally used in patients who had
received treatment for blood and bone marrow cancers such as leukemia, and
genetic diseases of the blood. However, because stem cell therapy has been
shown to promote the rapid recovery of hematopoietic function, it is now being
increasingly used to enable patients with other forms of cancer to receive
high dose or multicycle chemotherapy and radiation treatments. These high-
intensity therapies have a greater probability of eradicating dose-sensitive
cancers but, because of their hematopoietic toxicity, cannot generally be
given without stem cell therapy. As a result, some patients are treated with
lower and less effective doses, and fewer cycles, of therapy than might
otherwise be used.

The Company estimates that over 35,000 stem cell therapy procedures were
completed worldwide in 1995, and that the number of such procedures has been
growing at a compound annual rate of over 20%. This growth has been driven by
encouraging clinical results in the treatment of dose-sensitive solid tumors,
such as breast and ovarian cancers. The Company expects that stem cell therapy
procedures will continue to grow due to increased incidence and prevalence of
cancer, continued clinical demand for myelotoxic cancer treatment, and the
increased cost effectiveness of stem cell therapy treatments.

Stem cell therapy may also enhance the effectiveness of blood cell growth
factors. The timing and extent of additional cycles of chemotherapy is often
limited by the recovery of a patient's white blood cells and platelets because
a delayed recovery of these cells can leave the patient susceptible to life-
threatening infection and bleeding episodes, and this limitation may allow for
the regrowth of residual tumor cells. Many cancer patients are routinely
treated with growth factors including G-CSF, such as Neupogen and GM-CSF, such
as Leukine, which enhance the development of mature circulating white blood
cells and platelets from the early progenitor bone-marrow derived cells,
thereby decreasing the time between cycles of therapy and the probability of
infection. However, during high dose or multicycle therapy, the stem and
progenitor cells on which these growth

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.

Recently, products to implement a cell isolation method known as CD34
selection have been developed by other companies in conjunction with bone
marrow harvest and PBPC collections. CD34 selection is a process designed to
isolate specific types of cells in order to decrease storage and infusion
problems associated with the large volume of fluids collected in bone marrow
or multiple apheresis procedures. CD34 selection is used after the initial
collection of stem and progenitor cells and, therefore, does not address the
difficulties or costs associated with the basic cell collection procedures. To
date, the CD34 selection procedure has demonstrated limited therapeutic
benefit to the patient, but substantially increases the costs of the
procedure. A future objective of CD34 selection is to assist in depleting
tumor cells from the transplant cells collected, thereby expanding the
availability of stem cell therapy to new patient populations.

UMBILICAL CORD BLOOD

Umbilical cord blood ("UCB"), which is collected directly from the umbilical
cord after delivery, without pain or risk to the infant or the mother, is
emerging as a new source of cells for stem cell therapy. UCB has been reported
to have stem cell concentrations that are much higher than that typically
obtained from traditional bone marrow and PBPC collection methods. After
collection, UCB is typically frozen for later use in a stem cell therapy
procedure. Storage of UCB samples involves small volumes of cells, compared to
typical bone marrow or PBPC storage. Accordingly, the costs of collection and
storage of UCB cells are comparatively low. This source of cells is also
"tumor-free," such that UCB would be preferred for many current stem cell
therapy procedures in metastatic cancer patients. Before UCB can become a
major supply source for stem cell therapy, a coordinated UCB banking system
must emerge. In this regard, several organized UCB banking institutions have
been established to date, and the group is growing in both number and size.

One current disadvantage of UCB is the relatively low number of available
cells. Unlike bone marrow or PBPC harvest, where the collection of more cells
to meet a particular treatment is typically achievable, the number of cells
available from a UCB donor is limited. This problem is exacerbated by the
required cryopreservation of the cells, which causes significant cell loss.
The resultant low cell number is believed to be responsible for the longer
hematopoietic recovery times observed with UCB transplants, as compared with
bone marrow or PBPC transplants. Further, because of the low cell number, UCB
transplants are typically restricted to small patients. Therefore, increasing
the number of therapeutic cells from a UCB sample would facilitate the more
widespread use of UCB transplants. Aastrom believes that providing the
transplant site with the capability to carry out the UCB cell expansion will
be a major factor in the increased use of UCB for stem cell therapy and a
significant business opportunity.

AASTROM TECHNOLOGY

Aastrom is developing proprietary process technologies that are pioneering
the ex vivo production of human stem and progenitor cells. The Company has
also developed a proprietary cell culture device that mimics the biological
and physical environment necessary for the growth of certain human cells and
tissues, including bone marrow. The Company's initial product candidate, the
Aastrom CPS, utilizes the Company's process technology and is designed to
enable the ex vivo production of human stem and progenitor cells as an
alternative to the bone marrow harvest and PBPC mobilization methods and as an
enhancement to the UCB collection method. The Company believes that the
Aastrom CPS may be used for other cell production processes which are being
developed by third parties and, in combination with the Company's proprietary
gene transfer process, may have application in the developing field of ex vivo
gene therapy.

CORE TECHNOLOGY

Stem Cell Growth Process

Aastrom has developed proprietary process technologies for ex vivo
production of therapeutic stem and progenitor cells as well as other key cells
found in human bone marrow. The Company's proprietary process entails the
placement of a stem cell mixture in a culture environment that mimics the
biology and physiology of

natural bone marrow. This process enables the stem and early and late-stage
progenitor cells needed for an effective stem cell therapy procedure to be
concurrently expanded. Growth factors can be added to stimulate specific cell
lineages to grow or to increase cell growth to meet a particular therapeutic
objective. The stem cell growth process can best be completed with little or
no additional stem cell selection or purification procedures. This stem cell
replication process can also enable or augment the genetic modification of
cells by providing the cell division step needed for new genes to integrate
into the stem cell DNA. Currently available cell culture methods tend to
result in a loss of stem cells, either through death or through
differentiation into mature cells. The Company has exclusive licenses to two
U.S. patents and additional applications that cover these processes. See "--
Additional Stem Cell and Other Cell Therapies."

Aastrom Cell Culture Chamber

Aastrom has developed a proprietary cell culture chamber to implement the
Company's process technology. The culture chamber produces cells on a clinical
scale, and allow for simple, sterile recovery of the cells for therapeutic
use. The Company believes that the Aastrom cell culture chamber may also be
used for growing other human therapeutic cells, such as T-Cells used for
lymphocyte therapies, chondrocytes for cartilage replacement, and mesenchymal
tissues for bone and cartilage replacement. The Company holds exclusive
licenses to two U.S. patents and additional applications for its cell culture
chamber device technology. See "--Additional Stem Cell and Other Cell
Therapies."

Efficient Gene Transfer

Aastrom has developed proprietary processes and device technology that
enables increased efficiency of vector-mediated gene transfer into cells as
compared to conventional procedures. This directed-motion gene transfer or
gene loading technology is intended to have applications for most cell and
tissue types and most vector technologies. The Company intends to develop
products based upon its gene loading technology that it believes will
facilitate the advancement of numerous gene therapy protocols into the clinic
and ultimately the market. The Company is the exclusive licensee of a U.S.
Patent, and has additional applications pending, for this technology. See
"Aastrom Product Candidates For Ex Vivo Gene Therapy."

THE AASTROM CPS

The Aastrom CPS is the Company's lead product under development for multiple
cell therapy applications, including stem cell therapy. The Aastrom CPS is a
proprietary system that the Company believes will enable the large scale ex
vivo production of a variety of therapeutic cells at health care facilities,
independent laboratories, transplant centers and blood banks, and has been
designed to implement Aastrom's stem cell growth process as well as processes
for the production of other cell types.

The Aastrom CPS is comprised of several components, including single-use
disposable cassettes and reagents and microprocessor-controlled instruments,
which are at various stages of development. The Cell Cassette is a single-use
disposable cartridge which contains the Aastrom cell culture chamber and the
related media supply waste reservoirs and harvest bag. The microprocessor-
controlled instruments include the Incubator which controls the culture
conditions for the operation of the Cell Cassette, and the Processor which
automates the priming and harvesting of the cells from the Cell Cassette. The
System Manager is a user interface computer that is being developed to
simultaneously track and monitor the cell production process in over thirty
CPS Incubators and record relevant process variables and operator actions.
Prototype components of the Aastrom CPS are currently being used in a clinical
trial and ongoing development activities are directed at completing other
production level components of the Aastrom CPS.

The Aastrom CPS is designed to be operated with minimal operator activity by
a medical or laboratory technician and can implement clinical scale cell
production at the patient care site. The end product of the Aastrom process is
a blood-bag container with the cell product. The control and documentation
features of the Aastrom CPS have been designed to meet GMP requirements for
the therapeutic production of cells.

AASTROM CPS FOR STEM CELL THERAPY

The Company's initial application for the Aastrom CPS is expected to be in
the growing field of stem cell therapy, where the Company believes that the
Aastrom CPS may address many of the limitations of existing procedures. The
Aastrom CPS is based on a comparatively simple process in which a small volume
of bone marrow cells are collected from the patient or donor using a needle
aspiration procedure typically under a local anesthetic or sedative. This cell
mixture is quantified, and an appropriate volume of cells is then inoculated
into one or more Cell Cassettes with the necessary growth media. Therapeutic
growth-factor-stimulated cells are produced using the Aastrom CPS in
approximately 12 to 13 days, with no further patient involvement. Depending
upon the cell quantity necessary for a therapeutic application, single or
multiple Cell Cassettes may be required, with a different volume requirement
of starting cells. The Aastrom CPS has been designed to minimize operator
involvement during the cell production process, and the steps required before
and after the Aastrom CPS are standard laboratory procedures.

Advantages of Aastrom CPS

The Company believes that the Aastrom CPS, if approved for commercial sale
by the FDA and foreign regulatory agencies, will provide improvements and
efficiencies over traditional cell collection and infusion processes. The
following table, which sets forth the Company's estimates based on a 1996
survey of 11 U.S. transplant institutions, illustrates some potential
advantages of the Aastrom CPS compared to estimated patient care episodes,
procedure time and needle sticks in connection with currently established cell
collection and infusion techniques:

CARE PROCEDURE TIME
CELL SOURCE EPISODES(1) (HOURS)(1) NEEDLE STICKS(2)
----------- ----------- -------------- ----------------

Bone Marrow Harvest(3)........... 8 16 103
PBPC Mobilization and Collec-
tion(4)......................... 21 39 22
Aastrom CPS(5)................... 2 1-3 4-10

--------
(1) Includes all outpatient, inpatient, and home care episodes.

(2) Includes bone marrow aspirates, blood samples, catheter placements and
other venous access, and subcutaneous injections.

(3) Includes operating room procedure and all preparatory and recovery
procedures.

(4) Based on an average of three rounds of apheresis following cell
mobilization injections.
(5) Based on data accumulated during the Company's clinical trials.

Reduced Cost. The Company believes the Aastrom CPS has the potential to
replace more costly, labor intensive and invasive cell collection and infusion
procedures currently employed for stem cell therapy and to reduce physician,
staff and patient time requirements.

Reduced Patient and Physician Burden. Cell production with the Aastrom CPS
is expected to require the collection of a small volume of starting material
compared to current collection procedures, eliminating the requirement for
general surgical anesthesia, multiple drug injections and blood apheresis.
Patient benefits are expected to include fewer needle sticks than with current
cell collection and infusion methods and a reduction in overall patient
procedure time. Additionally, Aastrom's process for cell expansion is expected
to minimize the time requirement for physicians compared with bone marrow
harvest.

Enhanced Multicycle High-Dose Chemotherapy. The long restoration period for
the hematopoietic system following myeloablative therapy effectively limits
patients to one opportunity for cell collection prior to cancer therapy. The
Aastrom CPS may enhance the practice of multicycle, high-dose chemotherapy by
providing the ability to produce a therapeutic dose of cells from a small
starting volume. The initial cell collection can be divided into multiple
samples and stored frozen until expansion at a later time is required.

Reduced Quantity of Lymphocytes. The Company believes its approach to stem
cell therapy may provide an additional benefit over current methods by
depleting potentially harmful cells such as T-cells and B-cells. These cells
are believed to be primarily responsible for graft-versus-host disease, a
common manifestation of allogeneic transplants in which the grafted donor's
cells attack the host's tissues and organs.

Tumor Cell Purging. Cancer patients with tumor metastases, in which the
cancer has spread to the blood and bone marrow, have not traditionally been
candidates for autologous stem cell transplants because transplant may
reintroduce cancer cells into the patient. Additionally, patients may have
undetected tumor cells in their marrow or PBPC transplant, which can
reestablish the cancer in the patient following transplant. The Aastrom CPS
process may offer benefits for these groups of patients. The Company and other
investigators have shown that some primary human tumor cells die or do not
grow during hematopoietic cell culture. Further, the smaller volume of
starting cells used for the Aastrom CPS compared with bone marrow harvest or
PBPC transplants may provide approximately 10 to 70 fold less tumor cells in a
transplant. This combination of passive depletion during culture with the
lower starting volume of tumor cells may result in a tumor-free or tumor-
reduced cell product for transplant. The benefit of such tumor depletion, if
any, will vary depending upon the type of cancer and state of disease.

CLINICAL DEVELOPMENT

The Company's clinical development plan is initially to obtain regulatory
approval in the United States to market the Aastrom CPS for autologous stem
cell therapy and in Europe for more general cell therapy applications. The
Company also intends to pursue approval of the Aastrom CPS for additional
clinical indications.

The Company believes that the Aastrom CPS for stem cell therapy will be
regulated as a medical device and that the Company will be required to submit
a PMA application to, and obtain approval from, the FDA to allow it to market
this product in the United States. In order to obtain PMA approval, the
Company will be required to complete clinical trials under an IDE. See "--
Government Regulation--Devices."

In a dose-ranging study conducted by the University of Michigan (the
"University") in 1993, ex vivo produced cells utilizing the Company's
proprietary cell production technology were infused into seven patients with
non-Hodgkin's lymphoma after they received myeloablative chemotherapy. These
patients also received cells obtained from either an autologous bone marrow
harvest or PBPC procedure. No safety issues attributable to the infused cells
were observed in this trial and the patients exhibited recovery profiles
consistent with traditional transplantation techniques.

Aastrom completed the first feasibility trial of its cell production system
technology under an IDE at the MD Anderson Cancer Center in October 1995. In
this trial, ten breast cancer patients, who were subjected to myeloablative
chemotherapy, were treated with cells obtained from a bone marrow harvest and
with cells produced from a sample of such cells with a predecessor of the
Aastrom CPS. The patients exhibited standard clinical recoveries, providing
evidence of the clinical safety of cells obtained from the Company's cell
production process and of the feasibility of cell production with a
predecessor of the Aastrom CPS by clinical personnel at an investigational
site.

Aastrom is currently conducting a pre-pivotal stem cell therapy clinical
trial under an IDE reviewed with the FDA. This clinical trial is designed to
demonstrate that cells produced using the Aastrom CPS can provide
hematopoietic recovery in accordance with trial endpoints in breast cancer
patients who have received myeloablative chemotherapy. Bone marrow obtained
from the patient by traditional methods will be available for precautionary
reasons at defined clinical stages. The results from the five patients accrued
at the first trial site have provided evidence of the clinical safety of the
Aastrom CPS-produced cells in patients and that the hematopoietic recovery
endpoints specified for the trial are achievable. The patients at this trial
site were Stage IV breast cancer patients who had received significant prior
cytotoxic therapies for their cancer. Four of these five patients received the
precautionary back-up marrow pursuant to the trial protocol. Preliminary
results from the first trial site were reviewed with the FDA, and the IDE was
amended to expand the trial to a second site. The amended IDE provided for the
enrollment of Stage II, III and IV patients, and a delayed use of the
precautionary back-up bone marrow. As of the date of this Prospectus, patient
accrual is ongoing and patient data from this site provides further evidence
that the hematopoietic recovery endpoints specified for the trial are
achievable.

The objective of the current and anticipated future trials is to establish
the protocol for the pivotal trial of the Aastrom CPS in autologous stem cell
therapy. Provided that these pre-pivotal trials provide evidence of
feasibility and safety of the cells produced in the Aastrom CPS, the Company
anticipates initiating a pivotal clinical trial at multiple sites, with the
patient enrollment typical to support a PMA filing. See "Risk Factors--
Uncertainties Related to Preclinical and Clinical Testing."

Aastrom, in partnership with Cobe, intends to initiate a clinical trial in
France in early 1997 to evaluate the use of Aastrom CPS cells to promote
hematopoietic recovery in breast cancer patients undergoing aggressive
myelosuppressive chemotherapy. The Company intends to seek approval to market
the Aastrom CPS in Europe through CE Mark Registration. See "--Government
Regulation--Regulatory Process in Europe."

The preliminary results of the Company's pre-pivotal trial may not be
predictive of results that will be obtained from subsequent patients in the
trial or from more extensive trials. Further, there can be no assurance that
the Company's pre-pivotal or pivotal trial will be successful, or that PMA
approval or required foreign regulatory approvals for the Aastrom CPS will be
obtained in a timely fashion, or at all.

BUSINESS STRATEGY

Aastrom's objective is to build a leadership position in cell therapy
process technology. The primary elements of the Company's business strategy
are as follows:

Establish Consumable Based Business Model. Aastrom's strategy is to sell the
Aastrom CPS to institutions, hospitals, and other clinical care or commercial
cell production facilities that are administering cell therapy. The Company
plans to obtain ongoing revenue from the sale of single-use disposable Cell
Cassettes and related cell culture media and reagents, which are utilized in
individual cell therapy applications. After cells are cultured in the Cell
Cassette, the cassette is discarded and a new cassette is utilized for a
subsequent patient. Along with ongoing revenue from the sale of instruments
and disposables for cell therapy applications, the Company believes it will be
able to obtain license revenue from its stem cell therapy applications for its
proprietary stem cell processes.

Focus Initially on Established and Reimbursed Therapies. Aastrom will seek
to establish the use of the Aastrom CPS in the field of stem cell therapy for
the treatment of toxicity resulting from many cancer therapies, including
those for breast cancer, lymphoma, ovarian cancer, germ cell cancers,
leukemias and aplastic anemias. Stem cell therapy is a well-established and
growing treatment modality in cancer therapy, and current cell collection
procedures are widely reimbursed by third party payors.

Leverage Platform Technology Across Multiple Market Opportunities. In
addition to stem cell therapy applications, the Company believes that the
Aastrom CPS may serve as a platform product that can be used to produce a
variety of other cells for multiple therapeutic applications, such as T-cells
for use in lymphocyte therapies, chondrocytes for cartilage replacement, and
mesenchymal cells for use in certain solid tissue therapies. The Company
believes that if the Aastrom CPS is well established as a method for cell
production for use in stem cell therapy, the system will be positioned for
commercialization of new cell and ex vivo gene therapies that are under
development.

Market Through Collaborative Relationships. The Company plans to reach end-
user markets through collaborative relationships with companies that have
established positions in those markets. In 1993, the Company formed a
strategic partnership with Cobe, a leading provider of blood cell processing
equipment and disposables. Cobe is the Company's exclusive, worldwide
distributor of the Aastrom CPS for stem cell therapy applications, not
including stem cell gene therapy. The Company will seek to establish
additional collaborations for other cell therapies as those therapies and the
Company's product lines develop. See "Business--Strategic Relationships."

ADDITIONAL STEM CELL AND OTHER CELL THERAPIES

The Company believes that the Aastrom CPS hardware and disposables may be
developed to serve as platform products for application in a variety of other
cell therapies in addition to stem cell therapy. The Company believes that the
Aastrom CPS has the potential to supplant current manual cell culture methods
to produce therapeutic quantities of cell types such as T-cells, chondrocytes,
mesenchymal cells, keratinocytes, neuronal cells and dendritic cells.
Currently such cells are often produced in specialized facilities generally
using manual cell culture techniques which limit the effective
commercialization of these cell types for therapy. Potential advantages of the
Aastrom CPS in these therapies may include: (i) reducing labor and capital
costs; (ii) enhancing process reliability; (iii) automating quality assurance;
and (iv) reducing the need for environmentally controlled facilities.

Modification of such processes and application of the Company's products to
the expansion of other cell types may require substantial additional
development of specialized culture environments and which may need to be
incorporated within the Company's existing cell cassettes. There can be no
assurance that the Company will be able to successfully modify or develop
existing or future products to enable such additional cell production
processes. Furthermore, other than a limited application of chondrocyte
therapy, novel cell therapies are still in early stages of development by
third parties. The Company's business opportunity is dependent upon successful
development and regulatory approval of these novel cell therapies. No
assurance can be given that such novel therapies will be developed or approved
or that the Company's processes or product candidates will find successful
application in such therapies. See "--Business Strategy" and "--Clinical
Development" and "Use of Proceeds."

Immunotherapies

Immunotherapy involves using cells of the immune system to eradicate a
disease target. T-cell lymphocytes and dendritic cells are being actively
investigated by other companies for this purpose, and these procedures require
ex vivo cell production.

T-cells, a class of lymphocyte white blood cells, play a critical role in
the human immune system and are responsible for the human immune response in a
broad spectrum of diseases, including cancers and infectious diseases.
Cytotoxic T-lymphocytes ("CTLs") is a new process that involves collecting T-
cells from a patient and culturing them in an environment resulting in T-cells
with specificity for a particular disease target. Clinical trials by third
parties have been initiated to demonstrate CTL effectiveness. The ex vivo
production of these cells under conditions for use in medical treatment
represents a critical step in the advancement of this therapy.

Dendritic cells (the potent antigen presenting cells) are believed to play
an important role in the function of the immune system. Researchers believe
that cultured dendritic cells could augment the natural ability of a patient
to present antigens from the infectious agents to the immune system and aid in
the generation of a cytotoxic T-cell response to the infectious agent. The
Company intends to explore application of its products and processes for the
expansion of dendritic cells.

Solid Tissue Cell Therapies

One of the newest areas of cell therapy involves the production of
chondrocytes for the restoration of cartilage. Chondrocyte therapy involves
the surgical removal of a small amount of tissue from the patient's knee and a
therapeutic quantity of chondrocytes is produced from this surgical biopsy.
The cells are then implanted into the patient's knee. Published reports
indicate that such cells then reestablish mature articular cartilage.
Currently, this cell production process is completed in highly specialized
laboratory facilities using trained scientists and manual laboratory
procedures. The Company believes that the Aastrom CPS has the potential to
reduce costs associated with the cell production procedure and may eventually
facilitate the transfer of the cell production capability away from
specialized facilities directly to the clinical care sites.

Other Stem Cell Therapies

Autoimmune Diseases. Stem cell therapy is under clinical investigation for
the treatment of other diseases. Clinical studies have suggested a potential
role for stem cell therapy in treatment of autoimmune diseases such as
rheumatoid arthritis, multiple sclerosis and lupus erythematosus. The generic
cause of these diseases is a malfunctioning immune system, including T-
lymphocytes. Clinical trials in which the patient receives treatment resulting
in immune ablation (usually involving myelotoxic cancer drugs or radiation),
followed by stem cell therapy to restore the bone marrow and cells of the
blood and immune system, have demonstrated remission of the autoimmune disease
in some patients.

Organ Transplantation. Recently, a number of academic and corporate
researchers and companies have identified the potential use of stem cell
therapy to facilitate successful solid organ and tissue transplants between
human donors and recipients, as well as using organs from non-human species
for transplantation into humans. These proposed applications are based on the
observation that donor-specific bone marrow, infused concurrent with or prior
to the organ transplant, can provide for reduction of the normal immune
rejection response by the transplant recipient (e.g. heart, lung, liver or
kidney transplants).

A major limitation to the use of stem cell therapy in solid organ transplant
is the limited availability of sufficient amounts of bone marrow to obtain a
desired therapeutic response of immune tolerization. This limitation is
particularly problematic when cadaveric donor organs are available, which has
traditionally been the source of cells for these procedures. Bone marrow is
also often available from the cadaveric donor, but only in a limited amount.
Normally this amount may be sufficient for one transplant, but a donor might
provide multiple organs for transplant into multiple recipients. Aastrom
believes that the ability to expand the available bone marrow ex vivo will
enhance the use of stem cell therapy for such transplant procedures.

AASTROM PRODUCT CANDIDATES FOR EX VIVO GENE THERAPY

A novel form of cell therapy is ex vivo gene therapy. For this type of cell
therapy, cells procured from the patient or a donor are genetically modified
prior to their infusion into the patient. Analogous to other cell therapies,
the ability to produce a therapeutic dose of these gene-modified cells is a
major limitation to the commercialization of these cell therapies. This
limitation is further exacerbated by the additional requirement that the cells
be genetically modified under conditions that are sterile and comply with GMP.

Gene therapy is a therapeutic modality that holds the potential to
significantly impact the delivery of healthcare and the delivery of
therapeutically useful protein-based drugs within the body. Gene therapies are
generally targeted at the introduction of a missing normal gene into otherwise
defective human tissue, or the introduction of novel biologic capability into
the body via the introduction of a gene not ordinarily present (for example,
genes providing for the enhanced recognition and destruction or inhibition of
the HIV-1 virus). The major developmental focus of the ex vivo gene therapy
industry has been to identify the therapeutic gene of interest, insert it into
a suitable vector that can be used to transport and integrate the gene into
the DNA of the target cell, and then cause the gene to become expressed. The
Company believes that for ex vivo gene therapy to progress to clinical
applications, a process to produce a sufficient quantity of therapeutic cells
is required as is an efficient means to insert the gene vector into target
cells. Gene therapy is still in an early stage of development by third
parties. The Company's business opportunity is dependent upon the successful
development and regulatory approval of individual gene therapy applications.
No assurance can be given that such applications will be developed or approved
or that the Company's processes or product candidates will find successful
applications in such therapies.

THE AASTROM CPS FOR GENE THERAPY (GT-CPS)

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

anticipates that its proprietary stem cell production process technology
implemented by the Aastrom CPS will provide the conditions for clinical scale
stem cell division, and enable or enhance the introduction of therapeutic
genes into stem cell DNA. The Company believes that its technology may also
enable expansion of more mature progeny of these stem cells to create a gene
therapy cell product with potential short and long term therapeutic effect.

The Company has two principal objectives for the development of Aastrom GT-
CPS: (i) the enablement of stem cell gene therapies for a variety of
hematologic and other disorders, based on the GT-CPS's ability to enable large
scale stem cell division ex vivo; and (ii) the enablement of gene transfer and
therapeutic cell production by local and regional primary patient care
facilities and ancillary service laboratories.

THE AASTROM GENE LOADER

The Aastrom Gene Loader product technology, which is under development, is
being designed to transfer new therapeutic genes, which are carried by vectors
into the target cell. This process, which is typically inefficient in many
human cells, has represented a major hurdle preventing many ex vivo gene
therapies from moving forward in the clinic. The Aastrom Gene Loader will
incorporate the Company's proprietary directed motion gene transfer technology
and is expected to incorporate single-use sterile disposables, operated by
dedicated instrumentation.

A major product objective of the Aastrom Gene Loader is the enhancement of
gene transfer efficiencies and reliability. Improving gene vector efficiencies
may enable a wide spectrum of gene therapies currently unable to realize
clinical application.

The Company believes that these issues represent a general bottleneck for
other companies pursuing ex vivo gene therapy clinical applications. The
Company's technology may favorably influence these gene therapy applications,
the development of which are impeded due to low transduction efficiencies and
the resultant need for use of extreme quantities of gene vectors and/or target
"delivery" tissues.

STRATEGIC RELATIONSHIPS

On October 22, 1993, the Company entered into a Distribution Agreement (the
"Distribution Agreement") with Cobe for Cobe to be the Company's exclusive,
worldwide distributor of the Aastrom CPS for stem cell therapy applications
(the "Stem Cell Therapy Applications"). The Company has retained the right to
market the Aastrom CPS for uses outside the Stem Cell Therapy Applications,
such as for all gene therapy applications and for production of other cells
and tissues. The initial term of the Distribution Agreement expires on October
22, 2003, and Cobe has the option to extend the term for an additional ten-
year period. The Company is responsible for the expenses to obtain FDA and
other regulatory approval in the United States, while Cobe is responsible for
the expenses to obtain regulatory approval in foreign countries to allow for
worldwide marketing of the Aastrom CPS for Stem Cell Therapy Applications. See
"Risk Factors--Consequences of Cobe Relationship."

Under the terms of the Distribution Agreement, the Company will realize
approximately 60% and 58% of the net sales price at which Cobe ultimately
sells the Aastrom CPS in the United States and Europe, respectively, for Stem
Cell Therapy Applications, subject to certain negotiated discounts and volume-
based adjustments. The Company is also entitled to a premium on United States
sales in any year in which worldwide sales exceed specified levels.

The Distribution Agreement may be terminated by Cobe upon twelve (12) months
prior notice to the Company in the event that any person or entity other than
Cobe beneficially owns more than 50% of the Company's outstanding Common Stock
or voting securities. The Distribution Agreement may also be terminated by
Cobe at any time after December 31, 1997 if Cobe determines that
commercialization of the Aastrom CPS for stem cell therapy on or prior to
December 31, 1998 is unlikely.

In conjunction with the Distribution Agreement, the Company also entered
into a Stock Purchase Agreement with Cobe (the "Cobe Stock Agreement"),
whereby Cobe acquired certain option, registration, preemptive and other
rights pertaining to shares of the Company's stock. Pursuant to such
preemptive rights, Cobe has elected to purchase $5,000,000 of Common Stock in
this offering at the initial public offering price per share. See "Description
of Capital Stock--Rights of Cobe" and "Certain Transactions."

MANUFACTURING

The Company has no current intention of internally manufacturing its product
candidates and, accordingly, is developing relationships with third party
manufacturers which are FDA registered as suppliers for the manufacture of
medical products.

On May 10, 1994, the Company entered into a Collaborative Product
Development Agreement with SeaMED Corporation, ("SeaMED"). Pursuant to this
agreement, the Company and SeaMED will collaborate on the further design of
certain instrument components in the Aastrom CPS, and enable SeaMED to
manufacture pre-production units of the instrument components for laboratory
and clinical evaluation. The Company is paying SeaMED for its design and pre-
production work on a "time and materials" basis, utilizing SeaMED's customary
hourly billing rates and actual costs for materials. Subject to certain
conditions, the Company has committed to enter into a manufacturing agreement
with SeaMED for commercial manufacture of the instrument components for three
years after shipment by SeaMED of the first commercial unit pursuant to a
pricing formula set forth in the agreement. The Company retains all
proprietary rights to its intellectual property which is utilized by SeaMED
pursuant to this agreement.

On November 8, 1994, the Company entered into a Collaborative Product
Development Agreement with Ethox Corporation ("Ethox"). Pursuant to this
Agreement, the Company and Ethox will collaborate on the further design of
certain bioreactor assembly and custom tubing kit components of the Aastrom
CPS, and enable Ethox to manufacture pre-production units of such components
for laboratory and clinical evaluation. The Company is paying Ethox for its
design and production work on a "time and materials" basis, utilizing Ethox's
customary hourly billing rates and actual costs for materials. The Company
retains all proprietary rights to its intellectual property which are utilized
by Ethox pursuant to this Agreement.

In April 1996, the Company entered into a five-year License and Supply
Agreement with Immunex to purchase and resell certain cytokines and ancillary
materials for use in conjunction with the Aastrom CPS. The agreement required
the Company to pay Immunex an initial up-front fee of $1,500,000 to be
followed by subsequent annual fee payments equal to $1,000,000 per year during
the term of the agreement in addition to payment for supplies purchased by the
Company. The agreement may be terminated by the Company at any time subject to
the payment to Immunex of a specified amount for liquidated damages. Immunex
may terminate the agreement in the event that the Company fails to purchase a
minimum amount of its forecasted annual needs.

There can be no assurance that the Company will be able to continue its
present arrangements with its suppliers, supplement existing relationships or
establish new relationships or that the Company will be able to identify and
obtain the ancillary materials that are necessary to develop its product
candidates in the future. The Company's dependence upon third parties for the
supply and manufacture of such items could adversely affect the Company's
ability to develop and deliver commercially feasible products on a timely and
competitive basis. See "Risk Factors--Manufacturing and Supply Uncertainties;
Dependence on Third Parties."

PATENTS AND PROPRIETARY RIGHTS

The Company's success depends in part on its ability, and the ability of its
licensors, to obtain patent protection for its products and processes. The
Company and its licensors are seeking patent protection for technologies
related to (i) human stem and progenitor cell production processes; (ii)
bioreactors and systems for stem and progenitor cell production and production
of other cells; and (iii) gene transfer devices and processes. The Company has
exclusive license rights to five issued United States patents that present
claims to (i) certain methods for ex vivo stem cell division as well as ex
vivo human hematopoietic stem cell stable genetic

transformation and expanding and harvesting a human hematopoietic stem cell
pool; (ii) certain apparatus for cell culturing, including a bioreactor
suitable for culturing human stem cells or human hematopoietic cells; and
(iii) certain methods of infecting or transfecting target cells with vectors.
Patents equivalent to two of these United States patents have also been issued
in other jurisdictions: one in Australia and another in Canada and under the
European Patent Convention. These eight issued patents are due to expire
beginning in 2006, through 2013. In addition, the Company and its exclusive
licensors have filed applications for patents in the United States and
equivalent applications in certain other countries claiming other aspects of
the Company's products and processes, including five United States patent
applications and corresponding applications in other countries related to
various components of the Aastrom CPS. Of these pending patent applications,
the Company has received notices of allowance for certain claims in a United
States application relating to methods for obtaining ex vivo stem cell
division, and claims in a European Patent Convention application and in a
United States application relating to methods for efficient proliferation of
hematopoietic cells in culture.

The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain.
No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company or its licensors
will be issued, that the scope of any patent protection will exclude
competitors or provide competitive advantages to the Company, that any of the
patents that have been or may be issued to the Company or its licensors will
be held valid if subsequently challenged or that others will not claim rights
in or ownership of the patents and other proprietary rights held or licensed
by the Company. Furthermore, there can be no assurance that others have not
developed or will not develop similar products, duplicate any of the Company's
products or design around any patents that have been or may be issued to the
Company or its licensors. Since patent applications in the United States are
maintained in secrecy until patents issue, the Company also cannot be certain
that others did not first file applications for inventions covered by the
Company's and its licensors' pending patent applications, nor can the Company
be certain that it will not infringe any patents that may issue to others on
such applications.

The Company relies on certain licenses granted by the University of Michigan
and Dr. Cremonese for the majority of its patent rights. If the Company
breaches such agreements or otherwise fails to comply with such agreements, or
if such agreements expire or are otherwise terminated, the Company may lose
its rights under the patents held by the University of Michigan and Dr.
Cremonese, which would have a material adverse effect on the Company's
business, financial condition and results of operations. See "--University of
Michigan Research Agreement and License Agreement" and "--License Agreement
with J.G. Cremonese."

The Company also relies on trade secrets and unpatentable know-how which it
seeks to protect, in part, by confidentiality agreements. It is the Company's
policy to require its employees, consultants, contractors, manufacturers,
outside scientific collaborators and sponsored researchers, and other advisors
to execute confidentiality agreements upon the commencement of employment or
consulting relationships with the Company. These agreements provide that all
confidential information developed or made known to the individual during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific limited
circumstances. The Company also requires signed confidentiality or material
transfer agreements from any company that is to receive its confidential data.
In the case of employees, consultants and contractors, the agreements
generally provide that all inventions conceived by the individual while
rendering services to the Company shall be assigned to the Company as the
exclusive property of the Company. There can be no assurance, however, that
these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets or unpatentable
know-how will not otherwise become known or be independently developed by
competitors.

proprietary rights, the Company may be subject to infringement actions. In
such event, the Company may challenge the validity of such patents or other
proprietary rights or be required to obtain licenses from such companies in
order to develop, manufacture or market its products. There can be no
assurances that the Company would be able to obtain such licenses or that such
licenses, if available, could be obtained on commercially reasonable terms.
Furthermore, the failure to either develop a commercially viable alternative
or obtain such licenses could result in delays in marketing the Company's
proposed products or the inability to proceed with the development,
manufacture or sale of products requiring such licenses, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. If the Company is required to defend itself against
charges of patent infringement or to protect its own proprietary rights
against third parties, substantial costs will be incurred regardless of
whether the Company is successful. Such proceedings are typically protracted
with no certainty of success. An adverse outcome could subject the Company to
significant liabilities to third parties and force the Company to curtail or
cease its development and sale of its products and processes.

Certain of the Company's and its licensors' research has been or is being
funded in part by the Department of Commerce and by a Small Business
Innovation Research Grant obtained from the Department of Health and Human
Services. As a result of such funding, the United States Government has
certain rights in the technology developed with the funding. These rights
include a non-exclusive, paid-up, worldwide license under such inventions for
any governmental purpose. In addition, the government has the right to require
the Company to grant an exclusive license under any of such inventions to a
third party if the government determines that (i) adequate steps have not been
taken to commercialize such inventions, (ii) such action is necessary to meet
public health or safety needs or (iii) such action is necessary to meet
requirements for public use under federal regulations. Additionally, under the
federal Bayh Dole Act, a party which acquires an exclusive license for an
invention that was partially funded by a federal research grant is subject to
the following government rights: (i) products using the invention which are
sold in the U.S. are to be manufactured substantially in the U.S., unless a
waiver is obtained; (ii) if the licensee does not pursue reasonable
commercialization of a needed product using the invention, the government may
force the granting of a license to a third party who will make and sell the
needed product; and (iii) the U.S. government may use the invention for its
own needs.

UNIVERSITY OF MICHIGAN RESEARCH AGREEMENT AND LICENSE AGREEMENT

In August 1989, the Company entered into a Research Agreement (the "Research
Agreement") with the University, pursuant to which the Company funded a
research project at the University under the direction of Stephen G. Emerson,
M.D., Ph.D., as the principal inventor, together with Michael F. Clarke, M.D.,
and Bernhard O. Palsson, Ph.D., as co-inventors. Pursuant to the Research
Agreement, the Company was granted the right to acquire an exclusive,
worldwide license to utilize all inventions, know-how and technology derived
from the research project. By Extension Agreements, the Company and the
University extended the scope and term of the Research Agreement through
December 1994.

On March 13, 1992, the Company and the University entered into the License
Agreement, as contemplated by the Research Agreement. There have been
clarifying amendments to the License Agreement, dated March 13, 1992, October
8, 1993 and June 21, 1995. Pursuant to this License Agreement, (i) the Company
acquired exclusive worldwide license rights to the patents and know-how for
the production of blood cells and bone marrow cells as described in the
University's research project or which resulted from certain further research
conducted through December 31, 1994, and (ii) the Company is obligated to pay
to the University a royalty equal to 2% of the net sales of products which are
covered by the University's patents. Unless it is terminated earlier at the
Company's option or due to a material breach by the Company, the License
Agreement will continue in effect until the latest expiration date of the
patents to which the License Agreement applies.

LICENSE AGREEMENT WITH J. G. CREMONESE

In July 1992, the Company entered into a License Agreement with Joseph G.
Cremonese pursuant to which the Company obtained exclusive worldwide license
rights for all fields of use, to utilize U.S. Patent No. 4,839,292, entitled
"Cell Culture Flask Utilizing a Membrane Barrier," which patent was issued to

Dr. Cremonese on June 13, 1989, and to utilize any other related patents that
might be issued to Dr. Cremonese. Pursuant to the License Agreement, the
Company has reimbursed Dr. Cremonese for $25,000 of his patent costs. Under
the terms of the License Agreement, the Company is to pay to Dr. Cremonese a
royalty of 3% of net sales of the products which are covered by said patent,
subject to specified minimum royalty payments ranging from $20,000 to $50,000
per year, commencing in calendar year 1997. Unless it is terminated earlier at
the Company's option or due to default by the Company, the License Agreement
will continue in effect until the latest expiration date of the patents to
which the License Agreement applies.

GOVERNMENT REGULATION

The Company's research and development activities and the manufacturing and
marketing of the Company's products are subject to the laws and regulations of
governmental authorities in the United States and other countries in which its
products will be marketed. Specifically, in the United States the FDA, among
other activities, regulates new product approvals to establish safety and
efficacy of these products. Governments in other countries have similar
requirements for testing and marketing. In the U.S., in addition to meeting
FDA regulations, the Company is also subject to other federal laws, such as
the Occupational Safety and Health Act and the Environmental Protection Act,
as well as certain state laws.

REGULATORY PROCESS IN THE UNITED STATES

To the Company's knowledge, it is the first to develop a culture system for
ex vivo human cell production to be sold for therapeutic applications.
Therefore, to a certain degree, the manner in which the FDA will regulate the
Company's products is uncertain.

The Company's products are potentially subject to regulation as medical
devices under the Federal Food, Drug, and Cosmetic Act, and as biological
products under the Public Health Service Act, or both. Different regulatory
requirements may apply to the Company's products depending on how they are
categorized by the FDA under these laws. To date, the FDA has indicated that
it intends to regulate the Aastrom CPS product for stem cell therapy as a
Class III medical device through the Center for Biologics Evaluation and
Research. However, there can be no assurance that FDA will ultimately regulate
the Aastrom CPS as a medical device.

Further, it is unclear whether the FDA will separately regulate the cell
therapies derived from the Aastrom CPS. The FDA is still in the process of
developing its requirements with respect to somatic cell therapy and gene cell
therapy products and has recently issued a draft document concerning the
regulation of umbilical cord blood stem cell products. If the FDA adopts the
regulatory approach set forth in the draft document, the FDA may require
separate regulatory approval for such cells in some cases. The FDA also
recently proposed a new type of license, called a biologic license application
("BLA"), for autologous cells manipulated ex vivo and intended for structural
repair or reconstruction. This proposal may indicate that the FDA will extend
a similar approval requirement to other types of autologous cellular
therapies, such as autologous cells for stem cell therapy. Any such additional
regulatory or approval requirements could significantly delay the introduction
of the Company's product candidates to the market, and have a material adverse
impact on the Company.

Approval of new medical devices and biological products is a lengthy
procedure leading from development of a new product through preclinical and
clinical testing. This process takes a number of years and the expenditure of
significant resources. There can be no assurance that the Company's product
candidates will ultimately receive regulatory approval.

Regardless of how the Company's product candidates are regulated, the
Federal Food, Drug, and Cosmetic Act and other Federal statutes and
regulations govern or influence the research, testing, manufacture, safety,
labeling, storage, recordkeeping, approval, distribution, use, reporting,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in civil penalties, recall, injunction or seizure of
products, refusal of the government to approve or clear product approval
applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution.

DEVICES

In order to obtain FDA approval of a new medical device sponsors must
generally submit proof of safety and efficacy. In some cases, such proof
entails extensive clinical and preclinical laboratory tests. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There can be no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any products it may develop. The FDA may also
require postmarketing testing and surveillance of approved products, or place
other conditions on the approvals. These requirements could cause it to be
more difficult or expensive to sell the products, and could therefore restrict
the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies.

If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of pre-clinical and laboratory testing. If the IDE
application is approved, human clinical trials may commence at a specified
number of investigational sites with the number of patients approved by the
FDA.

The FDA categorizes devices into three regulatory classifications subject to
varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and recordkeeping regulations, GMPs, 510(k) pre-
market notification, and are subject to other general controls. Class II
devices may be subject to additional regulatory controls, including
performance standards and other special controls, such as postmarket
surveillance. Class III devices, which are either invasive or life-sustaining
products, or new products never before marketed (for example, non-
"substantially equivalent" devices), require clinical testing to demonstrate
safety and effectiveness and FDA approval prior to marketing and distribution.
The FDA also has the authority to require clinical testing of Class I and
Class II devices.

If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, the manufacturer or distributor
must submit a PMA application to the FDA. A PMA application must be supported
by extensive data, including preclinical and human clinical trial data, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared filed by the FDA. By regulation, the FDA has 180 days
to review a PMA application once it is filed, although PMA application reviews
more often occur over a significantly protracted time period, and may take
approximately one year or more from the date of filing to complete.

Some of the Company's products may be classified as Class II or Class III
medical devices. The Company has submitted several IDEs for the Aastrom CPS,
and is currently conducting a pre-pivotal clinical study under one of these
IDEs. The Company believes that the Aastrom CPS product will be regulated by
the FDA as a Class III device, although there can be no assurance that the FDA
will not choose to regulate this product in a different manner.

The Company and any contract manufacturer are required to be registered as a
medical device manufacturer with the FDA. As such, they will be inspected on a
routine basis by the FDA for compliance with the FDA's GMP regulations. These
regulations will require that the Company and any contract manufacturer
manufacture products and maintain documents in a prescribed manner with
respect to manufacturing, testing, distribution, storage, design control and
service activities, and that adequate design and service controls are
implemented. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to be
associated with the use of its devices, as well as product malfunctions that
are

likely to cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits a company from promoting an
approved device for unapproved applications and reviews company labeling for
accuracy.

BIOLOGICAL PRODUCTS

For certain of the Company's new products which may be regulated as
biologics, the FDA requires (i) preclinical laboratory and animal testing,
(ii) submission to the FDA of an investigational new drug ("IND") application
which must be effective prior to the initiation of human clinical studies,
(iii) adequate and well-controlled clinical trials to establish safety and
efficacy of the product for its intended use, (iv) submission to the FDA of a
product license application ("PLA") and establishment license application
("ELA") and (v) review and approval of the PLA and ELA as well as inspections
of the manufacturing facility by the FDA prior to commercial marketing of the
product.

Preclinical testing covers laboratory evaluation of product chemistry and
formulation as well as animal studies to assess the safety and efficacy of the
product. The results of these tests are submitted to the FDA as part of the
IND. Following the submission of an IND, the FDA has 30 days to review the
application and raise safety and other clinical trial issues. If the Company
is not notified of objections within that period, clinical trials may be
initiated. Clinical trials are typically conducted in three sequential phases.
Phase I represents the initial administration of the drug or biologic to a
small group of humans, either healthy volunteers or patients, to test for
safety and other relevant factors. Phase II involves studies in a small number
of patients to assess the efficacy of the product, to ascertain dose tolerance
and the optimal dose range and to gather additional data relating to safety
and potential adverse effects. Once an investigational drug is found to have
some efficacy and an acceptable safety profile in the targeted patient
population, multi-center Phase III studies are initiated to establish safety
and efficacy in an expanded patient population and multiple clinical study
sites. The FDA reviews both the clinical plans and the results of the trials
and may request the Company to discontinue the trials at any time if there are
significant safety issues.

The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of a PLA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Additional animal studies or clinical trials may be requested during the FDA
review period that may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to gain approval
for the use of the product for additional indications. The FDA requires that
adverse effects be reported to the FDA and may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.

Under current requirements, facilities manufacturing biological products
must be licensed. To accomplish this, an ELA must be filed with the FDA. The
ELA describes the facilities, equipment and personnel involved in the
manufacturing process. An establishment license is granted on the basis of
inspections of the applicant's facilities in which the primary focus is on
compliance with GMP and the ability to consistently manufacture the product in
the facility in accordance with the PLA. If the FDA finds the inspection
unsatisfactory, it may decline to approve the ELA, resulting in a delay in
production of products. Although reviewed separately, approval of both the PLA
and ELA must be received prior to commercial marketing of a cellular biologic.

As part of the approval process for human biological products, each
manufacturing facility must be registered and inspected by FDA prior to
marketing approval. In addition, state agency inspections and approvals may
also be required for a biological product to be shipped out of state.

REGULATORY PROCESS IN EUROPE

The Company believes that the Aastrom CPS will be regulated in Europe as a
Class IIb medical device, under the authority of the new Medical Device
Directives ("MDD") being implemented by European Union ("EU") member
countries. This classification applies to medical laboratory equipment and
supplies including,

among other products, many devices that are used for the collection and
processing of blood for patient therapy. Certain ancillary products (e.g.,
biological reagents) used with the Aastrom CPS may be considered Class III
medical devices.

The MDD regulations vest the authority to permit affixing of the "CE Mark"
with various "Notified Bodies." These are private and state organizations
which operate under license from the EU to certify that appropriate quality
assurance standards and compliance procedures are followed by developers and
manufacturers of medical device products or, alternatively, that a
manufactured medical product meets a more limited set of requirements.
Notified Bodies are also charged with responsibility for determination of the
appropriate standards to apply to a medical product. Receipt of permission to
affix the CE Mark enables a company to sell a medical device in all EU member
countries. Other registration requirements may also need to be satisfied in
certain countries, although there is a general trend among EU member countries
not to impose additional requirements beyond those specified for CE Mark
certification.

COMPETITION

The biotechnology and medical device industries are characterized by rapidly
evolving technology and intense competition. The Company's competitors include
major pharmaceutical, medical device, medical products, chemical and
specialized biotechnology companies, many of which have financial, technical
and marketing resources significantly greater than those of the Company. In
addition, many biotechnology companies have formed collaborations with large,
established companies to support research, development and commercialization
of products that may be competitive with those of the Company. Academic
institutions, governmental agencies and other public and private research
organizations are also conducting research activities and seeking patent
protection and may commercialize products on their own or through joint
ventures. The Company's product development efforts are primarily directed
toward obtaining regulatory approval to market the Aastrom CPS for stem cell
therapy. That market is currently dominated by the bone marrow harvest and
PBPC collection methods. The Company's clinical data, although early, is
inconclusive as to whether or not cells expanded in the Aastrom CPS will
enable hematopoietic recovery within the time frames currently achieved by the
bone marrow harvest and PBPC collection methods. In addition, the bone marrow
harvest and PBPC collection methods have been widely practiced for a number of
years and, recently, the patient costs associated with these procedures have
begun to decline. There can be no assurance that the Aastrom CPS method, if
approved for marketing, will prove to be competitive with these established
collection methods on the basis of hematopoietic recovery time, cost or
otherwise. The Company is aware of certain other products manufactured or
under development by competitors that are used for the prevention or treatment
of certain diseases and health conditions which the Company has targeted for
product development. In particular, the Company is aware that competitors such
as Amgen, Inc., CellPro, Incorporated, Systemix, Inc., Baxter Healthcare Corp.
and RPR are in advanced stages of development of technologies and products for
use in stem cell therapy and other market applications currently being pursued
by the Company. In addition, Cobe, a significant shareholder of the Company,
is a market leader in the blood cell processing products industry and,
accordingly, a potential competitor of the Company. There can be no assurance
that developments by others will not render the Company's product candidates
or technologies obsolete or noncompetitive, that the Company will be able to
keep pace with new technological developments or that the Company's product
candidates will be able to supplant established products and methodologies in
the therapeutic areas that are targeted by the Company. The foregoing factors
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company's products under development are expected to address a broad
range of existing and new markets. The Company believes that its stem cell
therapy products will, in large part, face competition by existing procedures
rather than novel new products. The Company's competition will be determined
in part by the potential indications for which the Company's products are
developed and ultimately approved by regulatory authorities. In addition, the
first product to reach the market in a therapeutic or preventive area is often
at a significant competitive advantage relative to later entrants to the
market. Accordingly, the relative speed with

which the Company or its corporate partners can develop products, complete the
clinical trials and approval processes and supply commercial quantities of the
products to the market are expected to be important competitive factors. The
Company's competitive position will also depend on its ability to attract and
retain qualified scientific and other personnel, develop effective proprietary
products, develop and implement production and marketing plans, obtain and
maintain patent protection and secure adequate capital resources. The Company
expects its products, if approved for sale, to compete primarily on the basis
of product efficacy, safety, patient convenience, reliability, value and
patent position.

FACILITIES

The Company leases approximately 20,000 square feet of office and research
and development space in Ann Arbor, Michigan under a lease agreement expiring
in May 1998. The lease is renewable at the option of the Company for up to an
additional five-year term. The Company believes that its facilities will be
adequate for its currently anticipated needs. Contract manufacturing or
additional facilities will be required in the future to support expansion of
research and development and to manufacture products.

EMPLOYEES

As of September 30, 1996, the Company employed approximately 61 individuals
full-time. A significant number of the Company's management and professional
employees have had prior experience with pharmaceutical, biotechnology or
medical product companies. None of the Company's employees are covered by
collective bargaining agreements, and management considers relations with its
employees to be good.

LEGAL PROCEEDINGS

The Company is not party to any material legal proceedings, although from
time to time it may become involved in disputes in connection with the
operation of its business.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table provides information concerning directors and executive
officers of the Company as of October 31, 1996:

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

Robert J. Kunze(2)(3)............ 61 Chairman of the Board; Director
R. Douglas Armstrong, Ph.D.(3)... 43 President and Chief Executive Officer; Director
James Maluta..................... 49 Vice President, Product Development
Todd E. Simpson.................. 35 Vice President, Finance & Administration; Chief
Financial Officer; Secretary; and Treasurer
Walter C. Ogier.................. 40 Vice President, Marketing
Thomas E. Muller, Ph.D........... 61 Vice President, Regulatory Affairs
Alan K. Smith, Ph.D.............. 41 Vice President, Research
Stephen G. Emerson, M.D., Ph.D... 43 Director; Scientific Advisor
Albert B. Deisseroth, M.D.,
Ph.D.(2)........................ 55 Director; Scientific Advisor
G. Bradford Jones(1)(3).......... 41 Director
Horst R. Witzel, Dr.-Ing......... 69 Director
Edward C. Wood, Jr.(1)(3)........ 51 Director

- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Executive Committee.

All directors hold office until the next annual meeting of shareholders and
until their successors have been duly elected and qualified. The Company's
Bylaws provide that the Board of Directors will consist of between five and
nine members, and the number of directors is currently set at seven members.
The Bylaws also provide that the Board of Directors will serve staggered
three-year terms, or until their successors are elected and qualified. The
terms of office of the Company's current directors expire as follows: Mr.
Jones, Dr. Deisseroth and Mr. Wood, 1999; Mr. Kunze and Dr. Emerson, 1998; and
Dr. Armstrong and Dr. Witzel, 1997. Officers are elected by and serve at the
discretion of the Board of Directors. There are no family relationships among
the directors or officers of the Company.

Robert J. Kunze a director of the Company since its inception in 1989, is a
founder of the Company and served as its President and Chief Executive Officer
through May 1991. Since 1987, he has been a General Partner of H&Q Life
Science Venture Partners, a venture capital fund specializing in medical
products and biotechnology investments. Previous to that, Mr. Kunze was
Managing Partner of Hambrecht & Quist Venture Partners. Prior to that he
served as a senior executive with W.R. Grace & Co. and General Electric. Mr.
Kunze also serves on the Board of Directors of Escalon Medical Corporation.

R. Douglas Armstrong, Ph.D. joined the Company in June 1991 as a director
and as its President and Chief Executive Officer. From 1987 to 1991, Dr.
Armstrong served in different capacities, including as Executive Vice
President and a Trustee of the La Jolla Cancer Research Foundation ("LJCRF"),
a 250-employee scientific research institute located in San Diego, California.
Dr. Armstrong received his doctorate in Pharmacology and Toxicology from the
Medical College of Virginia, and has held faculty and staff positions at Yale
University, University of California, San Francisco, LJCRF and University of
Michigan. Dr. Armstrong also serves on the Board of Directors of Nephros
Therapeutics, Inc.

James Maluta joined the Company in August 1992 as Vice President, Product
Development. Mr. Maluta has a broad background in the development and
manufacturing of medical devices, with 25 years of experience in the industry,
principally with OHMEDA and with Cobe BCT, Inc. While with Cobe BCT, Inc., Mr.
Maluta was Program Manager for the Cobe Spectra Apheresis System, a device for
blood cell processing and apheresis. Mr. Maluta held other engineering
management positions and also was director of Quality Assurance for Cobe BCT.
Mr. Maluta received his degree in electrical engineering from the University
of Wisconsin.

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

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.

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

ANNUAL COMPENSATION
-------------------------------------
NAME AND 1996 OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) COMPENSATION ($)
------------------ ---- ---------- --------- ---------------- ----------------

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

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

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

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

- --------
(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

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% ($)
---- ------------------ ------------------ ----------- ---------- -------- ---------

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

- --------
(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.

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

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

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

- --------
(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.

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.

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.

COMPENSATION OF DIRECTORS

Directors of the Company do not receive cash for services provided as a
director, however, directors who are not employees of the Company will receive
annual grants of options to purchase Common Stock in accordance with the
Directors Plan. No stock options or any other form of non-cash compensation
were granted to directors of the Company during the Company's fiscal year
ending June 30, 1996. See "Stock Option and Employee Benefit Plans--1996
Outside Directors Stock Option Plan."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the fiscal year ended June 30, 1996, Robert J. Kunze, formerly an
officer of the Company until 1991, R. Douglas Armstrong, President and Chief
Executive Officer of the Company, and G. Bradford Jones were the members of
the Compensation Committee of the Board of Directors. Dr. Armstrong resigned
from the Compensation Committee and was replaced by Albert B. Deisseroth,
M.D., Ph.D. on April 30, 1996, however, Mr. Kunze continues to be a member of
this committee.

CERTAIN TRANSACTIONS

During the last three fiscal years, the Company sold Preferred Stock to
certain holders of more than 5% of the outstanding shares of the Company, or
to their affiliates, as described below.

In April 1995, the Company sold 775,001 shares of Series D Preferred Stock
at a price per share of $4.00 to the following investors: (i) H&Q Life Science
Technology Fund I purchased 167,001 shares for a purchase price of $668,004,
(ii) H&Q London Ventures purchased 100,000 shares for a purchase price of
$400,000, (iii) Brentwood Associates V, L.P. ("Brentwood") purchased 231,250
shares for a purchase price of $925,000, (iv) Windpoint Partners II, L.P.
purchased 89,250 shares for a purchase price of $357,000, and (v) the State
Treasurer of the State of Michigan ("Michigan") purchased 187,500 shares for a
purchase price of $750,000. In May 1995, Cobe purchased 1,250,000 shares of
Series D Preferred Stock for a purchase price of $5,000,000. Upon the closing
of this offering, each outstanding share of Series D Preferred Stock will be
converted into two-thirds of a share of Common Stock.

In April 1995, Dr. Armstrong and Dr. Emerson agreed to grant to Brentwood an
option to purchase up to 28,000 shares and 14,667 shares of Common Stock,
respectively, and, together with two other shareholders of the Company, an
aggregate of up to 66,667 shares of Common Stock at a purchase price of
$100,000. Brentwood exercised this option in April, 1996 purchasing an
aggregate of 66,667 shares of Common Stock at a purchase price of $100,000
from such shareholders.

In September 1995, the Company and RPR entered into a collaborative
relationship for use of the Aastrom CPS as a component of its lymphoid cell
therapy program. On September 6, 1996, RPR notified the Company that it would
not exercise its option to continue the collaboration. As a result, $3,500,000
of option payments previously paid to the Company by RPR were converted into
205,882 shares of the Company's Series E Preferred Stock.

In October 1995, the Company repurchased 62,500 shares of Series D Preferred
Stock from Brentwood at the original purchase price of $250,000 and in
December 1995 resold these shares to Northwest Ohio Venture Fund, a
shareholder of the Company, for a total purchase price of $250,000.

In January 1996, the Company sold 1,411,765 shares of Series E Preferred
Stock at a price per share of $4.25 to the following investors: (i) Michigan
purchased 470,588 shares for a total purchase price of $1,999,999, and (ii)
SBIC Partners, L.P. purchased 941,777 shares for a total purchase price of
$4,000,002. Upon the closing of this offering, each share of Series E
Preferred Stock will be converted into two-thirds of a share of Common Stock.

On November 18, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to R. Douglas Armstrong under the 1989 Stock
Option Plan, the Company loaned to Dr. Armstrong $120,000 at an interest rate
of 4% per annum pursuant to a full recourse promissory note. Interest on the
note is payable on an annual basis and principal and accrued but unpaid
interest is due on June 30, 1997. Dr. Armstrong is the President and Chief
Executive Officer and is a director of the Company.

On October 20, 1993, in connection with the purchase of Common Stock upon
exercise of stock options granted to Stephen G. Emerson under the 1989 Stock
Option Plan, the Company loaned to Dr. Emerson $47,303 at an interest rate of
6% per annum pursuant to a full recourse promissory note. Interest on the note
is payable on an annual basis and principal and accrued but unpaid interest is
due June 30, 1997. The loan is secured by 258,687 shares of Common Stock held
by Dr. Emerson. Dr. Emerson is a director of the Company.

In October 1996, the Company executed a financing commitment with Cobe to
provide the Company with up to $5,000,000 (the "Equity Commitment") and up to
$5,000,000 in funding from Michigan under a convertible loan commitment
agreement ("Convertible Loan Commitment"). As of the date of this Prospectus,
the Company has not obtained any financing under these commitments. Both the
Equity Commitment and the Convertible Loan Commitment will terminate upon the
consummation of this offering.

Under the terms of the Equity Commitment, the Company has an option to sell
up to $5,000,000 of Series F Preferred Stock at a price of $6.00 per share to
Cobe upon at least ninety days notice, which notice may be given at any time
until September 1, 1997. Cobe's obligation to purchase such shares will
terminate upon the closing of this offering. Although no shares of Series F
Preferred Stock are outstanding as of the date of this Prospectus, any
outstanding shares of Series F Preferred Stock would convert upon the closing
of this offering into Common Stock based upon a conversion price of 80% of the
price of two-thirds of a share of Common Stock sold in this offering. To the
extent shares are sold to Cobe under the Equity Commitment, Cobe's preemptive
right in the Company's next financing and the Company's Put Option to Cobe
would be reduced.

Upon the sale of $5,000,000 of Series F Preferred Stock under the Equity
Commitment, the Company becomes entitled to borrow funds from Michigan under
the Convertible Loan Commitment. The Company may borrow such funds upon at
least 45 days notice, which notice may be given during a period commencing on
October 15, 1996 and ending on November 1, 1997. Upon the completion by the
Company of a Qualifying Financing (as defined in the Convertible Loan
Commitment), the Company has the option to repay outstanding principal and
interest under the Convertible Loan Commitment in cash or to convert such
borrowings into convertible Preferred Stock at a conversion price equivalent
to 90% of the price per share in such financing. Under certain circumstances,
the Convertible Loan Commitment converts or is convertible into Series G
Preferred Stock. Interest accrues at an annual rate of 10% under the
Convertible Loan Commitment, and the Company may repay such principal and
interest at any time without penalty.

The Company has issued warrants to Michigan to purchase 69,444 shares of
Common Stock as consideration for securing the Convertible Loan Commitment and
has agreed to issue additional warrants to purchase 8,333 shares of Common
Stock for each $1,000,000 borrowed under the Convertible Loan Commitment, as
adjusted to the level of borrowing. The warrants become exercisable 90 days
after the closing of this offering. The warrants expire on October 15, 2000 if
not exercised, and may be exercised, in whole or in part, at a price equal to
the lesser of (a) $9.00 per share, which price increases by $3.00 per share
upon each anniversary of the closing of the offering made hereby; and (b) 85%
of the fair market value of the Company's Common Stock at the time of
exercise.

Pursuant to its letter dated November 11, 1996, Cobe has elected to purchase
$5,000,000 of the Company's Common Stock in this offering at the initial
public offering price per share in satisfaction of its preemptive rights under
the Cobe Stock Agreement. In addition, the Company has elected not to exercise
its put option rights under the Cobe Stock Agreement with respect to this
offering. See "Description of Capital Stock--Rights of Cobe."

The Company has entered into employment agreements with certain of its
executive officers. See "Management--Employment Agreements." The Company has
also entered into an Indemnification Agreement with certain of its directors,
officers and other key personnel. See "Management--Limitation of Liability and
Indemnification Matters."

PRINCIPAL SHAREHOLDERS

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

SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING(1) THE OFFERING(1)
----------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ---------------- ------------ ---------- ------------ ----------

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

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

(1) Shares beneficially owned and percentage of ownership are based on
9,985,734 shares of Common Stock outstanding before this offering and
13,235,734 shares of Common Stock outstanding after the closing of this
Offering. Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or disposition power with respect
to securities.
(2) Robert J. Kunze, Chairman of the Board of the Company, is a general
partner of H&Q Life Science Venture Partners. See footnote 8, below.
(3) Does not include 69,444 shares issuable upon exercise of warrants held by
Michigan that are exercisable 90 days after the closing of this offering.
(4) G. Bradford Jones, a director of the Company, is a general partner of
Brentwood Associates V Ventures, L.P., which is the general partner of
Brentwood Associates V, L.P. See footnote 7, below.

(5) The shares attributed to Cobe in the "Shares Beneficially Owned After the
Offering" column include 555,556 shares of Common Stock which Cobe has
agreed to purchase in this offering, assuming the closing of this offering
at an initial public offering price of $9.00 per share. In addition,
pursuant to the Cobe Stock Agreement, Cobe has an option to purchase from
the Company an amount of Common Stock equal to 30% of the Company's fully
diluted shares after the exercise of such option, at a purchase price
equal to 120% of the public market trading price of the Company's Common
Stock for a three-year period following the closing of this offering. Cobe
also has a "right of first negotiation" in the event the Company receives
any proposal concerning, or otherwise decides to pursue, a merger,
consolidation or other transaction in which all or a majority of the
Company's equity securities or all or substantially all of the Company's
assets, or any material portion of the assets of the Company used by the
Company in performing its obligations under the Distribution Agreement
would be acquired by a third party outside of the ordinary course of
business. Edward C. Wood, Jr., a director of the Company, is the President
of Cobe BCT, Inc., an affiliate of Cobe. See footnote 13, below.
(6) Does not include 333,333 shares issuable upon exercise of options held by
Dr. Armstrong that are exercisable upon the effective date of this
offering.
(7) Consists of 745,831 shares held by Brentwood Associates V, L.P. See
footnote 4, above. Mr. Jones, as a general partner of Brentwood Associates
V Ventures, L.P., which is the general partner of Brentwood Associates V,
L.P., may be deemed to beneficially own such shares, but Mr. Jones
disclaims beneficial ownership of all such shares except to the extent of
his pecuniary interest therein.
(8) Consists of 1,061,334 shares held by H&Q Life Science Technology Fund I.
See footnote 2, above. Mr. Kunze, as a general partner of H&Q Life Science
Venture Partners, may be deemed to beneficially own such shares, but Mr.
Kunze disclaims beneficial ownership of all such shares except to the
extent of his pecuniary interest therein.
(9) Includes 16,668 shares issuable upon exercise of options held by Mr.
Maluta that are exercisable within the 60-day period following September
30, 1996. Also includes 66,665 shares held of record by James Maluta and
Deborah Vincent, as Trustees, with shared voting and investment power, of
the James Maluta and Deborah Vincent Living Trust dated October 26, 1993.
(10) Consists of 15,000 shares issuable upon exercise of options held by Dr.
Muller that are exercisable within the 60-day period following September
30, 1996.
(11) Includes 15,833 shares issuable upon exercise of options held by Mr.
Ogier that are exercisable within the 60-day period following September
30, 1996.
(12) Includes 2,237 shares issuable upon exercise of options held by Dr.
Witzel that are exercisable within the 60-day period following September
30, 1996.

(13) The shares attributed to Mr. Wood in the "Shares Beneficially Owned
Before the Offering" column consist of 2,499,999 shares held by Cobe and
the shares attributed to Mr. Wood in the "Shares Beneficially Owned After
the Offering" column consist of such shares and an additional 555,556
shares which Cobe has agreed to purchase in this offering, assuming the
closing of this offering at an initial public offering price of $9.00 per
share. See footnote 5, above. Mr. Wood, as the President of Cobe BCT,
Inc., an affiliate of Cobe, may be deemed to beneficially own such
shares, but Mr. Wood disclaims beneficial ownership of all such shares.

(14) Includes 69,738 shares issuable upon exercise of options that are
exercisable within the 60-day period following September 30, 1996. Does
not include 333,333 shares issuable upon exercise of options that are
exercisable as of the date of this Prospectus.

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, no par value per
share, and 5,000,000 shares of Preferred Stock, no par value per share.

COMMON STOCK

As of September 30, 1996, without giving effect to the conversion of each
share of Preferred Stock into Common Stock upon the closing of this offering,
there were 1,887,312 shares of Common Stock outstanding held of record by 32
shareholders.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may
be applicable to outstanding shares of Preferred Stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of holders of Preferred Stock
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of any shares of any Preferred Stock which the Company
may designate and issue in the future.

PREFERRED STOCK

As of the closing of this offering, no shares of Preferred Stock will be
outstanding. Thereafter, the Board of Directors will be authorized, without
further shareholder approval, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions granted or imposed upon any unissued shares of Preferred Stock
and to fix the number of shares constituting any series and the designations
of such series.

The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. The Company currently has no plans to issue any
shares of Preferred Stock.

MICHIGAN LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Michigan corporation and is subject to certain anti-
takeover provisions of the Michigan Business Corporation Act (the "MBCA")
which could delay or make more difficult a merger or tender offer involving
the Company. Chapter 7A of the MBCA prevents, in general, an "interested
shareholder" (defined generally as a person owning 10% or more of a
corporation's outstanding voting shares) from engaging in a "business
combination" (as defined therein) with a Michigan corporation unless: (a) the
Board of Directors issues an advisory statement, holders of 90% of the shares
of each class of stock entitled to vote approve the transaction, and holders
of two-thirds of the "disinterested" shares of each class of stock approve the
transaction; or (b) the interested shareholder has been an interested
shareholder for at least five years and has not acquired beneficial ownership
of any additional shares of the corporation subsequent to the transaction
which resulted in such shareholder being classified as an interested
shareholder, and meets certain requirements, including, but not limited to,
provisions relating to the fairness of the price and the form of consideration
paid; or (c) the Board of Directors, by resolution, exempts a particular
interested shareholder from these provisions prior to the interested

shareholder becoming an interested shareholder. The MBCA also contains certain
other provisions which could have anti-takeover effects, including, but not
limited to, Section 368, which pertains to "greenmail."

The Company's Bylaws provide that the Board of Directors is divided into
three classes of directors, with each class serving a staggered three-year
term. The classification system of electing directors may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain
control of the Company and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for shareholders to replace
a majority of the directors. The Company's Restated Articles of Incorporation
eliminate the right of shareholders to act without a meeting and do not
provide for cumulative voting in the election of directors. The amendment of
any of these provisions would require approval by holders of at least two-
thirds of the shares of outstanding Common Stock.

The foregoing and other statutory provisions and provisions of the Company's
Restated Articles of Incorporation could have the effect of deterring certain
takeovers or delaying or preventing certain changes in control or management
of the Company, including transactions in which shareholders might otherwise
receive a premium for their shares over then-current market prices.

REGISTRATION RIGHTS

Pursuant to the Amended and Restated Investors Rights Agreement, dated as of
April 7, 1992, as amended (the "Investors Agreement"), certain holders of
outstanding shares of Common Stock, including shares of Common Stock issuable
upon conversion of the Preferred Stock (the "Registrable Securities"), are
entitled to certain demand and incidental registration rights with respect to
such shares, subject to certain customary limitations. Under the Investors
Agreement, subject to certain exceptions, the holders of at least 50% of the
Registrable Securities may require the Company to use its diligent best
efforts to register Registrable Securities for public resale on one occasion
(so long as such registration includes at least 20% of the Registrable
Securities or a lesser percentage if the anticipated aggregate offering price
net of underwriting discounts and commissions would exceed $2 million). In
addition, whenever the Company proposes to register any of its securities
under the Act, holders of Registrable Securities are entitled, subject to
certain restrictions (including customary underwriters "cut back"
limitations), to include their Registrable Securities in such registration.
Subject to certain limitations, the holders of Registrable Securities may also
require the Company to register such shares on Form S-3 no more than once
every twelve months, provided that the anticipated aggregate proceeds would
exceed $500,000. The Company is required to bear all registration and selling
expenses (other than underwriter's discounts and commissions and more than a
single special counsel to the selling shareholders) in connection with the
registration of Registrable Securities in one demand registration and two
piggy-back registrations. The participating investors are required to bear all
expenses in connection with the registration of Registrable Securities on Form
S-3.

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

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

Pursuant to the Cobe Stock Agreement, the Company granted to Cobe certain
stock registration rights for any and all of the Company's Common Stock which
Cobe acquires by conversion or otherwise. Cobe's stock registration rights
commence 30 months following an initial public offering, or earlier in the
event of any termination of the Distribution Agreement. Pursuant to Cobe's
registration rights, Cobe is entitled to two demand registration rights, and
an unlimited number of piggyback registration rights. Cobe's stock
registration rights are subject to

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.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 13,235,734 shares of
Common Stock outstanding, assuming no exercise of any outstanding options
under any of the Company's option plans after September 30, 1996. Of these
shares, the 3,250,000 shares of Common Stock sold in this offering will be
freely transferable without restriction under the Securities Act unless they
are held by the Company's affiliates as that term is used in Rule 144 under
the Securities Act.

The remaining 9,985,734 shares of Common Stock outstanding are "restricted
securities" as the term is defined by Rule 144 promulgated under the
Securities Act (the "Restricted Shares"). Of the 9,985,734 Restricted Shares,
6,996,920 shares may be sold under Rule 144, subject in some cases to certain
volume restrictions and other conditions imposed thereby. An additional
152,056 shares will become eligible for sale 90 days after completion of this
offering pursuant to Rule 144 and 701. The remaining 2,836,758 shares will be
eligible for sale upon the expiration of their respective holding periods as
set forth in Rule 144. The Securities and Exchange Commission has proposed
certain amendments to Rule 144 that would reduce by one year the holding
periods required for shares subject to Rule 144 to become eligible for resale
in the public market. This proposal, if adopted, would permit earlier resale
of shares of Common Stock currently subject to holding periods under Rule 144.
No assurance can be given concerning whether or when the proposal will be
adopted by the Securities and Exchange Commission. Furthermore, 9,947,757 of
the Restricted Shares are subject to lock-up agreements expiring 180 days
following the date of this Prospectus. Such agreements provide that Cowen &
Company may, in its sole discretion and at any time without notice, release
all or a portion of the shares subject to these lock-up agreements. Upon the
expiration of the lock-up agreements, 7,148,976 of the 9,985,734 Restricted
Shares may be sold pursuant to Rule 144 or 701, subject in some cases to
certain volume restrictions imposed thereby. Certain existing shareholders
have rights to include shares of Common Stock owned by them in future
registrations by the Company for the sale of Common Stock or to request that
the Company register their shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Following the date of this Prospectus,
the Company intends to register on one or more registration statements on Form
S-8 approximately 1,837,160 shares of Common Stock issuable under its stock
option and stock purchase plan. Of the 1,837,160 shares issuable under the
Company's stock option and stock purchase plans, 336,254 shares are subject to
outstanding options as of September 30, 1996, all of which shares are subject
to lock-up agreements. Shares covered by such registration statements will
immediately be eligible for sale in the public market upon the filing of such
registration statements. The Company also has issued warrants to purchase
69,444 shares of Common Stock which become exercisable 90 days after the
closing of this offering and, upon the effective date of this offering, will
grant an immediately exercisable option to purchase 333,333 shares of Common
Stock. The shares issuable upon exercise of such warrants and the shares
issuable upon exercise of such option will be subject to lock-up agreements.
In addition, Cobe has agreed to purchase $5,000,000 of Common Stock in this
offering at the initial public offering price per share, all of which shares
will be subject to a lock-up agreement.

In general, under Rule 144, a person (or persons whose shares are
aggregated), shareholders, including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell in broker transactions,
within any three-month period, commencing 90 days after this offering, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding Common Stock (approximately 132,357 shares immediately after this
offering assuming no exercise of the Underwriters' over-allotment option) or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the sale, subject to the filing of a Form 144 with
respect to the sale and other limitations. In general, shares issued in
compliance with Rule 701 may be sold by non-affiliates subject to the manner
of sale requirements of Rule 144, but without compliance with the other
requirements of Rule 144. Affiliates may sell shares they acquired under Rule
701 in compliance with the provisions of Rule 144, except that there is no
required holding period. A person who is not an affiliate, has not been an
affiliate within three months prior to sale and has beneficially owned the
Restricted Shares for at least three years, is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.

The Company has also agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock for a period of 180 days after the date of this Prospectus,
without the prior written consent of the Underwriters, subject to certain
limited exceptions (including exercises of stock options).

Prior to this offering, there has been no public market for the Common Stock
of the Company. No prediction can be made regarding the effect, if any, that
the sale or availability for sale of shares of additional Common Stock will
have on the market price of the Common Stock. Nevertheless, sales of
substantial numbers of shares by existings shareholders or by shareholders
purchasing in their offering could have a negative effect on the market price
of the Common Stock.

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:

NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------

Cowen & Company................................................
J.P. Morgan Securities Inc.....................................
---------
Total........................................................ 3,250,000
=========

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.

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.

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

PAGE
----

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

F-1

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

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

PRO FORMA
SHAREHOLDERS'
JUNE 30, EQUITY AT
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1996
------------------------- ------------- -------------
(UNAUDITED) (UNAUDITED)

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
============ =========== ===========

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

F-3

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

MARCH 24,
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)

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

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

F-4

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY

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

Balance, March
24, 1989
(Inception).... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Non-cash
issuance of
Common Stock... 454,545 --
Issuance of
Series A
Preferred Stock
at $1.00 per
share in August
1989........... 1,500,000 1,500,000
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) $ -- $ --
========= =========== ========= ======== ============ ========= ========== =========

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

Balance, March
24, 1989
(Inception).... $ --
Non-cash
issuance of
Common Stock... --
Issuance of
Series A
Preferred Stock
at $1.00 per
share in August
1989........... 1,500,000
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
===========

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

F-5

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

MARCH 24,
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)

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
=========== =========== =========== ============ =========== =========== ============

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

F-6

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Overview--Aastrom Biosciences, Inc. (the "Company") was incorporated in
March 1989 ("Inception") under the name Ann Arbor Stromal, Inc. The Company
changed its name in 1991 concurrent with the commencement of employee-based
operations. The Company is in the development stage with its principal
business activities being research and product development, conducted both on
its own behalf and in connection with various collaborative research and
development agreements with other companies, involving the development of
processes and instrumentation for the ex-vivo production of human stem cells
and their progeny, and hematopoetic and other tissues. Successful future
operations are subject to several technical and business risks, including
satisfactory product development and obtaining regulatory approval and market
acceptance for its products.

Significant Revenue Relationships--Two companies accounted for 77% of total
revenues for the year ended June 30, 1995 and one company accounted for 83% of
total revenues for the year ended June 30, 1996. These two companies have
accounted for 47% of total revenues for the period from Inception to June 30,
1996. One company accounted for 82% and 87% of total revenues for the three
months ended September 30, 1995 and 1996, respectively, and two companies
accounted for 49% of total revenues for the period from Inception to September
30, 1996. Grant revenues consist of grants sponsored by the U.S. government.

Cash and Cash Equivalents--Cash and cash equivalents include cash and short-
term investments with original maturities of three months or less.

Short-Term Investments--Short-term investments consist of U.S. government
securities and commercial paper with original maturities of over three months
but less than one year. Short-term investments are classified as available-
for-sale, and are carried at market value, in accordance with Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which was adopted July 1, 1994.
Application of this pronouncement results in the inclusion of unrealized gains
and losses on investments in shareholders' equity. Application of this
accounting treatment in prior periods would not have materially changed the
amounts as presented.

Diversity of Credit Risk--The Company invests its excess cash in U.S.
government securities and commercial paper, maintained in U.S. financial
institutions, and has established guidelines relative to diversification and
maturities in an effort to maintain safety and liquidity. The Company plans to
continue to invest its excess funds in short-term, investment grade, interest-
bearing instruments. These guidelines are periodically reviewed and modified
to take advantage of trends in yields and interest rates. The Company has not
experienced any significant losses on its cash equivalents or short-term
investments.

Property--Property is recorded at cost and depreciated or amortized using
the straight-line method over the estimated useful life of the asset
(primarily five years) or the remaining lease term, if shorter, with respect
to leasehold improvements and certain capital lease assets.

Revenue Recognition--Revenue from grants and research agreements is
recognized on a cost reimbursement basis consistent with the performance
requirements of the related agreement. Funding received in advance of costs
incurred is presented as deferred revenue in the accompanying financial
statements.

Research and Development Costs--Research and development costs are expensed
as incurred. Such costs and expenses related to programs under collaborative
agreements with other companies totaled $49,000, $146,000 and $1,294,000 for
the years ended June 30, 1994, 1995 and 1996, respectively, and $1,489,000 for
the period from Inception to June 30, 1996 and $158,000, $117,000 and
$1,606,000 for the three months ended September 30, 1995 and 1996 and for the
period from Inception to September 30, 1996, respectively.

F-7

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

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

might not be recoverable. In certain situations, an impairment loss would be
recognized. SFAS 121 will become effective for the Company's fiscal year
beginning July 1, 1996. Management has studied the effect of implementing SFAS
121 and, based upon its initial evaluation, does not expect it to have a
significant impact on the Company's financial condition or results of
operations.

Unaudited Financial Information--The financial information as of September
30, 1996, and for the three-month periods ended September 30, 1995 and 1996,
and for the period from Inception to September 30, 1996, is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring accruals, necessary for a fair statement of the
results of operations for the interim periods. The results of operations for
the three months ended September 30, 1996, are not necessarily indicative of
the results to be expected for the full year or for any other period.

2. SHORT-TERM INVESTMENTS

All short-term investments are available-for-sale, and have maturities of
one year or less and are summarized as follows:

GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------

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
========== ======== ======== ==========

GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------

September 30, 1996 (Unaudited):
U.S. Government Securities.... $1,200,000 $ -- $ -- $1,200,000
========== ======== ======== ==========

3. PROPERTY

Property consists of the following:

JUNE 30,
---------------------- SEPTEMBER 30,
1995 1996 1996
---------- ---------- -------------
(UNAUDITED)

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
========== ========== ==========

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

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:

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)

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
========== ========= ========= ========= =========== ===========

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

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

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:

OPTIONS
OPTIONS AVAILABLE EXERCISE PRICE
OUTSTANDING FOR GRANT PER SHARE
----------- ---------- --------------

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
==========

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

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

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
========= =========

F-12

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:

JUNE 30,
------------------------
1995 1996
----------- -----------

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)
----------- -----------
$ -- $ --
=========== ===========

Due to the historical losses incurred by the Company, a full valuation
allowance for deferred tax assets has been provided. If the Company achieves
profitability, these deferred tax assets may be available to offset income
taxes. The Company's net operating loss and tax credit carryforwards will
expire from 2004 through 2011, if not utilized.

The Company's ability to utilize its net operating loss and tax credit
carryforwards would be limited in the event of a future change in ownership
for tax purposes. Such a change in ownership may likely occur upon the
completion of an initial public offering of the Company's Common Stock.

6. LICENSES, ROYALTIES AND COLLABORATIVE AGREEMENTS

University of Michigan--In March 1989, the Company entered into a research
agreement with the University of Michigan (the "University") for the
development of an adaptable, high-efficiency blood cell factory and to conduct
related research. Under the terms of this research agreement, as amended, the
Company agreed to reimburse the University for research costs in this regard
through the date of its expiration in December 1994. Payments made to the
University under the aforementioned agreements totaled $316,000, $121,000 and
$2,521,000 for the years ended June 30, 1994, 1995, for the period from
Inception to June 30, 1996. As part of this relationship, the Company issued
to the University 454,545 shares of Common Stock in August 1989. No value has
been assigned to these shares in the accompanying financial statements. In
March 1992, the Company entered into a license agreement for the technology
developed under the research agreement. The license agreement, as amended,
provides for a royalty to be paid to the University equal to 2% of net sales
of products containing the licensed technology sold by the Company.

Cobe BCT, Inc.--In connection with the issuance of the Series C Preferred
Stock to Cobe in October 1993, the Company and Cobe BCT, Inc. ("Cobe BCT"), an
affiliate of Cobe, entered into an agreement which grants to Cobe BCT
exclusive worldwide distribution and marketing rights to the Company's Cell
Production System ("CPS") for stem cell therapy applications ("Distribution
Agreement"). The term of the Distribution Agreement is ten years, with an
option, exercisable by Cobe BCT, to extend the term for an additional ten
years. Pursuant to the Distribution Agreement, Cobe BCT will perform worldwide
marketing and distribution activities of the CPS for use in stem cell therapy
and will receive a share of the resulting net sales, as defined, ranging from
38% to 42%, subject to certain negotiated discounts and volume-based
adjustments.

F-13

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

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:

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

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
========

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

AASTROM BIOSCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)

the Company may sell up to $5,000,000 of preferred stock at $6.00 per share
during a funding period that extends from January 1997 to December 1997. The
conversion rights of such preferred stock will be adjusted to provide for a
conversion at 80% of the per share price in the Company's next financing, as
adjusted for the Reverse Stock Split, and provided that such financing meets
certain minimum requirements ("Qualifying Financing"), such as the proposed
IPO in which these financial statements appear. If such a financing is not
completed by December 1997, then the conversion rights of this class of
preferred stock into Common Stock will be set at $6.98 per share of Common
Stock. To the extent shares are sold to Cobe under the Equity Commitment, its
preemptive right in the Company's next Qualifying Financing and the Company's
Put Option to Cobe is reduced to the extent of its purchase.

Upon the sale of $5,000,000 in preferred stock under the Equity Commitment,
the Company becomes entitled to borrow funds under the Convertible Loan
Commitment. Such funds may be borrowed by the Company during a funding period
that extends from January 1997 to September 1997. Upon the completion of a
Qualifying Financing by the Company, the Company has the option to repay
outstanding borrowings under the Convertible Loan Commitment, in cash, or to
convert such borrowings into preferred stock. The conversion rights of such
class of preferred stock will be adjusted to provide for a conversion at 90%
of the per share price in the Company's next Qualifying Financing, as adjusted
for the Reverse Stock Split. If such financing is not completed by December
1997, then the conversion rights of this class of preferred stock will be set
at $6.98 per share of Common Stock. Interest accrues at 10% on amounts
borrowed under the Convertible Loan Commitment, which is due at maturity, and
may be retired in a manner consistent with principal. The Company may repay
borrowed amounts at anytime prior to the maturity date which is established
for all amounts borrowed as one year from the date of the first borrowing.

In connection with the Convertible Loan Commitment, the Company has issued
warrants to purchase 69,444 shares of Common Stock for securing the
commitment. The Company will issue additional warrants to purchase 8,333
shares of Common Stock for each $1,000,000 borrowed under the Convertible Loan
Commitment, with such additional warrants to be prorated to the level of
borrowing. The warrants expire on October 15, 2000 if not exercised, and may
be exercised, in whole or in part, at a price equal to the lesser of (a) $9.00
per share, which price increases by $3.00 per share on each anniversary of the
closing of the offering being made in the Prospectus to which these financial
statements are included; or (b) 85% of the fair market value of the Company's
Common Stock at the time of exercise.

The Equity Commitment and the Convertible Loan Commitment expire upon the
closing of an initial public offering by the Company.

F-16

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

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

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

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

PAGE
----

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

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

Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.

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

3,250,000 Shares

[LOGO OF AASTROM BIOSCIENCES INC]

Common Stock

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

COWEN & COMPANY

J.P. MORGAN & CO.

, 1996

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

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:

ITEM AMOUNT
---- --------

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
========

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

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.

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

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

10.15** Lease Agreement dated May 18, 1992 between Domino's Farms
Holding, L.P. and the Company and amendments thereto dated
February 26, 1993, October 3, 1994, November 16, 1994 and July
29, 1996.

10.16** Clinical Trial Agreement dated April 19, 1996 between the Company
and the University of Texas M.D. Anderson Cancer Center.

10.17** License Agreement dated March 13, 1992 between the Company and
the University of Michigan and amendments thereto dated March 13,
1992, October 8, 1993 and June 21, 1995.

10.18** Employee Proprietary Information and Invention Agreement
effective June 1, 1991 between the Company and R. Douglas
Armstrong.

10.19** Employment Agreement dated June 19, 1992 between the Company and
James Maluta.

10.20** Employment Agreement dated December 8, 1995 between the Company
and Todd E. Simpson, C.P.A.

10.21** Employment Agreement dated February 10, 1994 between the Company
and Walter C. Ogier.

10.22** Employment Agreement dated April 19, 1994 between the Company and
Thomas E. Muller, Ph.D.

10.23** Employment Agreement dated October 26, 1995 between the Company
and Alan K. Smith, Ph.D.

10.24 Promissory Note dated November 18, 1993 for $120,000 loan by the
Company to R. Douglas Armstrong and amendment thereto dated
October 30, 1996.

10.25** Promissory Note dated October 20, 1993 for $47,303 loan by the
Company to Stephen G. Emerson, M.D., Ph.D and amendment thereto
dated October 30, 1996.

10.26** Consulting Agreement dated June 1, 1995 between the Company and
Stephen G. Emerson, M.D., Ph.D.

10.27** Clinical Trial Agreement dated August 28, 1996 between the
Company and Loyola University Medical Center Cancer Center.

10.28** Stock Purchase Commitment Agreement dated October 29, 1996
between Cobe Laboratories, Inc. and the Company.

10.29** Convertible Loan Commitment Agreement dated October 15, 1996
between the State Treasurer of the State of Michigan and the
Company.

10.30 Form of Subscription Agreement for the purchase of Series D
Preferred Stock (Enterprise Development Fund L.P., Enterprise
Development Fund II, L.P. and Northwest Ohio Venture Fund Limited
Partnership).

10.31 Stock Purchase Agreement dated January 8, 1996 among the Company,
SBIC Partners, L.P. and the State Treasurer of the State of
Michigan.

10.32+ Governance Agreement dated September 15, 1995 between the Company
and Rhone-Poulenc Rorer Inc.

10.33+ License Agreement dated September 15, 1995 between the Company
and Rhone-Poulenc Rorer Inc.

10.34 Stock Purchase Agreement dated September 15, 1995 between the
Company and Rhone-Poulenc Rorer Inc.

10.35 Letter Agreement dated November 11, 1996 between the Company and
Cobe Laboratories, Inc.

10.36 Form of Subscription Agreement for the purchase of Series D
Preferred Stock (Brentwood Associates V, L.P., Candice E.
Appleton Family Trust, Candis J. Stern, Helmut F. Stern, H&Q Life
Science Technology Fund, H&Q London Ventures, State Treasurer of
the State of Michigan and Windpoint Partners II, L.P.).

II-4

10.37 Subscription Agreement dated December 11, 1995 between the
Company and Northwest Ohio Venture Fund Limited Partnership.

10.38 Subscription Agreement dated May 30, 1995 between the Company and
Cobe Laboratories, Inc.

10.39 Termination Agreement dated November 14, 1996 between the Company
and Rhone-Poulenc Rorer Inc.

10.40 Stock Purchase Agreement dated November 14, 1996 between the
Company and Rhone-Poulenc Rorer Inc.

11.1** Statement re computation of pro forma net loss per share.

23.1 The consent of Coopers & Lybrand, L.L.P.

23.2* The consent of Pepper, Hamilton & Scheetz is contained in their
opinion filed as Exhibit 5.1 of the Registration Statement.

23.3 The consent of Oblon, Spivak, McClelland, Maier & Neustadt, P.C.

24.1** Power of Attorney.

27.1** Financial Data Schedule.

27.2** Financial Data Schedule.

27.3** Financial Data Schedule.

27.4** Financial Data Schedule.

27.5** Financial Data Schedule.

27.6** Financial Data Schedule.
- --------
*To be filed by Amendment.

**Previously filed.

+The Company has applied for confidential treatment with respect to certain
portions of these documents.

(b) Financial Statement Schedules

Schedules other than those referred to above have been omitted because they
are not applicable or not required under the instructions contained in
Regulation S-X or because the information is included elsewhere in the
Financial Statements or the notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Ann
Arbor, State of Michigan, on the 18th day of November, 1996.

AASTROM BIOSCIENCES, INC.

/s/ R. Douglas Armstrong
By: ___________________________________
R. Douglas Armstrong, Ph.D.
President and Chief Executive
Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ R. Douglas Armstrong
____________________________________ President, Chief Executive Officer, November 18, 1996
R. Douglas Armstrong, Ph.D. and Director (Principal Executive Officer)

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

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

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

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

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

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

Edward C. Wood*
____________________________________ Director November 18, 1996
Edward C. Wood, Jr.

*By: /s/ R. Douglas Armstrong
-------------------------

R. Douglas Armstrong

Attorney-in-Fact

II-6

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.

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.

10.18** Employee Proprietary Information and Invention Agreement effective
June 1, 1991 between the Company and R. Douglas Armstrong.