CERUS CORP, S-1/A, 1996-10-29

CERUS CORP
S-1/A, 1996-10-29
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1996

REGISTRATION NO. 333-11341

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CERUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
CALIFORNIA (PRIOR TO
REINCORPORATION)
DELAWARE (AFTER REINCORPORATION) 2836 68-0262011
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

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

2525 STANWELL DRIVE, SUITE 300
CONCORD, CA 94520
(510) 603-9071
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

STEPHEN T. ISAACS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CERUS CORPORATION
2525 STANWELL DRIVE, SUITE 300
CONCORD, CA 94520
(510) 603-9071
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:

<TABLE>
<S> <C>
HOWARD G. ERVIN DAVID J. SEGRE
CYDNEY S. POSNER WILSON, SONSINI, GOODRICH & ROSATI,
COOLEY GODWARD LLP PROFESSIONAL CORPORATION
ONE MARITIME PLAZA, 20TH FLOOR 650 PAGE MILL ROAD
SAN FRANCISCO, CA 94111 PALO ALTO, CA 94304
(415) 693-2000 (415) 493-9300
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the 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, please 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, please 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, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement number 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

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)

Issued October 29, 1996

Cerus Corporation
COMMON STOCK
------------------------

ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY CERUS
CORPORATION (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 PER SHARE WILL BE BETWEEN $ AND
$ . SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
APPLICATION HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "CERS."

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

CONTEMPORANEOUSLY WITH THIS OFFERING, SUBJECT TO CERTAIN CONDITIONS, BAXTER
HEALTHCARE CORPORATION ("BAXTER") HAS AGREED TO PURCHASE SHARES OF COMMON
STOCK DIRECTLY FROM THE COMPANY IN A PRIVATE PLACEMENT AT A PRICE PER
SHARE EQUAL TO THE PRICE TO PUBLIC LESS UNDERWRITING
DISCOUNTS AND COMMISSIONS FOR AN AGGREGATE PURCHASE PRICE OF $6.9
MILLION (ASSUMING A TOTAL PRICE TO PUBLIC OF $30 MILLION) (THE
"BAXTER PRIVATE PLACEMENT") PURSUANT TO AN EXISTING AGREEMENT WITH
THE COMPANY. SEE "BUSINESS -- ALLIANCE WITH BAXTER."

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

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON
PAGE 6.
------------------------

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.
------------------------

PRICE $ A SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
</TABLE>

- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional Shares at the price to public less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriters."

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

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters. It is expected that the delivery of the Shares will be made on or
about , 1996, at the office of Morgan Stanley & Co. Incorporated,
New York, N.Y., against payment therefor in immediately available funds.
------------------------

MORGAN STANLEY & CO. ALEX. BROWN & SONS
Incorporated Incorporated

, 1996
<PAGE> 3

[INSERT PICTURE]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 4

NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT 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 BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH OFFER OR SOLICITATION TO SUCH
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT 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.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 7
Use Of Proceeds....................................................................... 16
Dividend Policy....................................................................... 16
Capitalization........................................................................ 17
Dilution.............................................................................. 18
Selected Financial Data............................................................... 19
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations.......................................................................... 20
Business.............................................................................. 24
Management............................................................................ 45
Certain Transactions.................................................................. 50
Principal Stockholders................................................................ 52
Description Of Capital Stock.......................................................... 54
Shares Eligible For Future Sale....................................................... 55
Underwriters.......................................................................... 57
Legal Matters......................................................................... 58
Experts............................................................................... 58
Additional Information................................................................ 59
Index To Financial Statements......................................................... F-1
</TABLE>

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

The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each year
containing interim unaudited financial information.
------------------------

The Company's logo, Cerus Corporation(TM) and Cerus(TM) are trademarks of
the Company. Trade names and trademarks of other companies appearing in this
Prospectus are the property of their respective holders.

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Except as set forth in the financial statements or as
otherwise indicated herein, information in this Prospectus gives effect to (i)
the anticipated reincorporation of the Company from California to Delaware to be
effected prior to the effective date of this offering, (ii) the for
split of the outstanding Common Stock to be effected prior to the
effective date of this offering, (iii) the conversion of each outstanding share
of Preferred Stock into shares of Common Stock, which will occur
automatically upon the closing of this offering, and assumes the exercise of
outstanding warrants to purchase 33,315 shares of capital stock (the "Warrant
Exercise"), which warrants expire upon the closing of this offering, and assumes
that the Underwriters' over-allotment option is not exercised. See "Description
of Capital Stock" and "Underwriters." This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this Prospectus.

THE COMPANY

Cerus Corporation ("Cerus" or the "Company") is developing systems designed
to improve the safety of blood transfusions by inactivating infectious pathogens
in blood components used for transfusion (platelets, fresh frozen plasma ("FFP")
and red blood cells) and inhibiting the leukocyte (white blood cell) activity
that is responsible for certain adverse immune and other transfusion-related
reactions. Preclinical studies conducted by the Company have indicated the
ability of these systems to inactivate a broad array of viral and bacterial
pathogens that may be transmitted in blood component transfusions and to inhibit
leukocyte activity. The Company believes that, as a result of the mechanism of
action of its proprietary technology, its systems also have the potential to
inactivate many new pathogens before they are identified and before tests have
been developed to detect their presence in the blood supply. Because the
Company's systems are being designed to inactivate rather than merely test for
pathogens, the Company's systems also have the potential to reduce the risk of
transmission of pathogens that would remain undetected by testing.

Despite recent improvements in testing and processing of blood, patients
receiving transfusions of blood components face a number of significant risks
from blood contaminants, as well as adverse immune and other transfusion-related
reactions induced by leukocytes. Viruses, such as hepatitis B (HBV), hepatitis C
(HCV), human immunodeficiency virus (HIV), cytomegalovirus (CMV) and human
T-cell lymphotropic virus (HTLV), can present life-threatening risks. In
addition, bacteria, the most common agents of transfusion-transmitted disease,
can cause complications such as sepsis, which can result in serious illness or
death. Although donor screening and diagnostic testing of donated blood have
been successful in reducing the incidence of transmission of many pathogens,
diagnostic testing has a number of limitations, such as the inability to detect
pathogens prior to the generation of antibodies, ineffectiveness in detecting
genetic variants of viruses, and the risk of clerical error. In addition,
emerging or unidentified pathogens for which no tests exist also represent a
threat to the blood supply. The continuing risk of transmission of serious
diseases through transfusion of contaminated blood components from both known
and unknown pathogens, together with the limitations of current approaches to
providing a safe blood supply, have created the need for a new approach to
blood-borne pathogen inactivation that is safe, easy to implement and
cost-effective.

The Company is designing its pathogen inactivation systems to provide
therapeutically functional platelets, FFP and red cells following the
inactivation treatment process. Pathogen inactivation systems being developed by
the Company employ proprietary small molecule compounds that act by preventing
the replication of nucleic acid (DNA or RNA); platelets, FFP and red blood cells
do not contain nuclear DNA or RNA. When the inactivation compounds are
introduced into the blood component for treatment, they cross bacterial cell
walls or viral membranes, then move into the interior of the nucleic acid
structure. When subsequently activated by an energy source, such as light, these
compounds bind to the nucleic acid of the viral or bacterial pathogen,
preventing its replication. A virus, bacteria or other pathogenic cell must
replicate in order to cause infection. The Company's compounds react in a
similar manner with the nucleic acid in

3
<PAGE> 6

leukocytes, thereby inhibiting the leukocyte activity that is responsible for
certain adverse immune and other transfusion-related reactions.

The Company is initially focusing its product development efforts on its
platelet pathogen inactivation system. Platelet transfusions are used to prevent
or control bleeding in platelet-deficient patients, such as those undergoing
cancer chemotherapy or bone marrow transplant. The Company estimates the
production of platelets in 1995 to be 1.8 million transfusion units in North
America, 1.2 million transfusion units in Western Europe and 800,000 transfusion
units in Japan. The Company's platelet pathogen inactivation system applies a
technology to prevent replication of nucleic acid that combines light and the
Company's proprietary inactivation compound, S-59, which is a synthetic small
molecule from a class of compounds known as psoralens. In March 1996, the
Company completed its Phase 1a clinical trial to assess the average post-
transfusion recovery and lifespan of platelets treated with the Company's
platelet pathogen inactivation system. The Company has recently completed a
Phase 1b clinical trial to assess the safety and tolerability of treated
platelets in healthy subjects. The Company is currently conducting a Phase 2
clinical trial to assess post-transfusion platelet recovery and lifespan of
platelets treated with the system including a device designed to reduce the
amount of residual S-59 and S-59 breakdown products. For more information on the
clinical development status of this planned product, see "Business -- Products
Under Development -- Platelet Program -- Development Status."

The Company is also developing pathogen inactivation systems for use with
FFP, which is used to control bleeding, and red blood cells, which are
frequently administered to patients with anemia, trauma, surgical bleeding or
genetic disorders. The Company estimates the production of FFP and red blood
cells in 1995 to be 3.4 million and 13.7 million transfusion units,
respectively, in North America, 4.8 million and 14.3 million transfusion units,
respectively, in Western Europe and 2.0 million and 3.0 million transfusion
units, respectively, in Japan. The Company's FFP pathogen inactivation system is
being designed to employ the S-59 compound and other technology similar to that
used in the platelet pathogen inactivation system. The Company intends to submit
an investigational new drug application to the U.S. Food and Drug Administration
to commence Phase 1 clinical trials for its FFP pathogen inactivation system in
early 1997. The red cell pathogen inactivation system being designed by the
Company is based on the Company's proprietary S-303 compound, which can bind to
nucleic acid in a manner similar to that of S-59, but without the need for the
introduction of light.

The Company has entered into two development and commercialization
agreements with Baxter to develop, manufacture and market pathogen inactivation
systems for platelets, FFP and red blood cells. The agreements provide for
Baxter and the Company to share development expenses. Through July 31, 1996,
Baxter has purchased $7.0 million of equity in the Company and paid the Company
up-front license fees and milestone and development payments totaling $13.7
million under these agreements. These agreements provide for Baxter's exclusive
right and responsibility to market the systems worldwide and for the Company to
receive a share of the gross profits from the sale of the systems.

4
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered........................... shares
Common Stock to be outstanding after the
offering..................................... shares(1)
Use of proceeds................................ For research and development activities,
including continuing clinical trials,
general and administrative support, capital
expenditures, working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... CERS
</TABLE>

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

(1) Based upon the number of shares outstanding as of July 31, 1996. Excludes,
as of July 31, 1996, (i) 284,891 shares of Common Stock subject to
outstanding options under the Company's 1996 Equity Incentive Plan and
381,864 shares reserved for future issuance thereunder, (ii) 150,000 shares
of Common Stock reserved for future issuance under the Company's Employee
Stock Purchase Plan and (iii) 35,478 shares of Preferred Stock subject to
outstanding warrants, which will convert into warrants to purchase Common
Stock upon the closing of this offering. See "Management -- Equity
Incentive Plans" and Notes 4 and 7 of Notes to Financial Statements.

5
<PAGE> 8

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -----------------------
1993 1994 1995 1995 1996
------- ------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................... $ 230 $ 4,796 $ 6,799 $ 2,735 $ 2,606
Operating expenses
Research and development............................ 2,485 5,680 8,125 4,963 5,982
General and administrative.......................... 1,210 1,194 1,517 627 1,009
--------
-
------- ------- ------- -------
Loss from operations.................................. (3,465) (2,078) (2,843) (2,855) (4,385)
Other income (expense), net........................... (50) 278 483 234 227
--------
-
------- ------- ------- -------
Net loss.............................................. (3,515) (1,800) (2,360) (2,621) (4,158)
======= ======= ======= ========= =======
Pro forma net loss per share(1)....................... $(0.55) $(0.93)
Shares used in computing pro forma net loss per
share(1)............................................ 4,314,045 4,491,454
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
-------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 8,761 $ 11,761
Working capital................................................ 6,479 9,479
Total assets................................................... 10,281 13,281
Accumulated deficit............................................ (14,156) (14,156)
Stockholders' equity........................................... 7,749 10,948
</TABLE>

- ---------------
(1) See Note 1 of Notes to Financial Statements for a description of the method
used in computing the pro forma net loss per share.

(2) Gives effect to (i) the sale on July 1, 1996 of 190,476 shares of Series E
Preferred Stock at a purchase price of $15.75 per share to Baxter (the "July
Baxter Purchase"), (ii) the Warrant Exercise and (iii) the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock upon the
closing of this offering.

(3) As adjusted to reflect (i) the sale of shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$ per share and receipt of the estimated net proceeds therefrom and
(ii) the Baxter Private Placement. See "Use of Proceeds."

The Company was incorporated under the laws of the State of California in
September 1991 as Steritech, Inc. In September 1996, the Company's corporate
name was changed to Cerus Corporation. The Company intends to reincorporate in
Delaware prior to the closing of this offering. Unless the context otherwise
requires, references in this Prospectus to the "Company" or "Cerus" refer to
Cerus Corporation, a Delaware corporation, and its predecessor in California.
The Company's principal executive offices are located at 2525 Stanwell Drive,
Suite 300, Concord, California 94520, and its telephone number is (510)
603-9071.

6
<PAGE> 9

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Prospectus.

Early Stage of Product Development. The Company's pathogen inactivation
systems are in the research and development stage and will require additional
preclinical and clinical testing prior to submission of any regulatory
application for commercial use. The Company currently does not expect to file a
product approval application with the United States Food and Drug Administration
(the "FDA") or corresponding regulatory filings in Europe for its platelet
pathogen inactivation system or for any of its other planned products prior to
1998. The estimated dates related to the Company's regulatory submissions set
forth herein and elsewhere in this Prospectus are forward-looking statements
that involve risks and uncertainties. There can be no assurance that these
regulatory submissions will not be delayed as a result of certain factors set
forth in this "Risk Factors" section and elsewhere in this Prospectus. The
Company's products are subject to the risks of failure inherent in the
development of pharmaceutical, biological and medical device products and
products based on new technologies. These risks include the possibility that the
Company's approach to pathogen inactivation will not be safe or effective, that
the Company's products will not be easy to use or cost-effective, that third
parties will develop and market superior or equivalent products, that any or all
of the Company's products will fail to receive any necessary regulatory
approvals, that such products will be difficult or uneconomical to manufacture
on a commercial scale, that proprietary rights of third parties will preclude
the Company from marketing such products and that the Company's products will
not achieve market acceptance. As a result of these risks, there can be no
assurance that the Company's research and development activities will result in
any commercially viable products. See "Business -- Products Under Development"
and "-- Government Regulation."

Uncertainty Associated with Preclinical and Clinical Testing. The
regulatory process includes preclinical and clinical testing of each product to
establish its safety and efficacy, and may include post-marketing studies
requiring expenditure of substantial resources. The results from preclinical
studies and early clinical trials conducted by the Company may not be predictive
of results obtained in later clinical trials, and there can be no assurance that
clinical trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain the requisite approvals or that marketable products will
result. The rate of completion of the Company's clinical trials may be delayed
by many factors, including slower than anticipated patient enrollment or any
other adverse event occurring during the clinical trials. Completion of testing,
studies and trials may take several years, and the length of time varies
substantially with the type, complexity, novelty and intended use of the
product. Data obtained from preclinical and clinical activities are susceptible
to varying interpretations, which could delay, limit or prevent regulatory
approval. In addition, delays or rejections may be encountered based upon many
factors, including changes in regulatory policy during the period of product
development. The Company's products require significant additional research and
development efforts. No assurance can be given that any of the Company's
development programs will be successfully completed, that any further
investigational new drug applications ("IND") will become effective or that
additional clinical trials will be allowed by the FDA or other regulatory
authorities, that clinical trials will commence as planned, that required United
States or foreign regulatory approvals will be obtained on a timely basis, if at
all, or that any products for which approval is obtained will be commercially
successful. As a result of FDA reviews or complications that may arise in any
phase of the clinical trial program, there can be no assurance that the proposed
schedules for IND and clinical protocol submissions to the FDA, initiations of
studies and completions of clinical trials can be maintained. Any delays in the
Company's clinical trials or failures to obtain required regulatory approvals
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Products Under
Development" and "-- Government Regulation."

No Assurance of Market Acceptance; Concentrated Market. The Company
believes that market acceptance of the Company's pathogen inactivation systems
will depend, in part, on the Company's ability to

7
<PAGE> 10

provide acceptable evidence of the safety, efficacy and cost-effectiveness of
its products, as well as the ability of blood centers to obtain FDA approval and
adequate reimbursement for such products. The Company believes that market
acceptance of its pathogen inactivation systems also will depend upon the extent
to which physicians, patients and health care payors perceive that the benefits
of using blood components treated with the Company's systems justify the
additional costs and processing requirements in a blood supply that has become
safer in recent years. While the Company believes that its pathogen inactivation
systems are able to inactivate pathogens up to concentrations that the Company
believes are present in contaminated blood components when the blood is donated,
there can be no assurance that contamination will never exceed such
concentrations. The Company does not expect that its planned products will be
able to inactivate all known and unknown infectious pathogens, and there can be
no assurance that the inability to inactivate certain pathogens will not affect
the market acceptance of its products. There can be no assurance that the
Company's pathogen inactivation systems will gain any significant degree of
market acceptance among blood centers, physicians, patients and health care
payors, even if clinical trials demonstrate safety and efficacy and necessary
regulatory approvals and health care reimbursement approvals are obtained.

The Company's target customers are the limited number of national and
regional blood centers, which collect, store and distribute blood and blood
components. In the United States, the American Red Cross collects and
distributes approximately 45% of the nation's supply of blood and blood
components. Other major United States blood centers include the New York Blood
Center and United Blood Services, each of which distributes approximately 6% of
the nation's supply of blood and blood components. In Western Europe and Japan,
various national blood transfusion services or Red Cross organizations collect,
store and distribute virtually all of their respective nations' blood and blood
components supply. As a result, the failure to penetrate even a small number of
these customers could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Marketing, Sales
and Distribution."

Reliance on Baxter. Under the terms of the Company's agreements with
Baxter, the Company relies on Baxter for significant funding, product
development support, the manufacture and supply of certain system components and
the marketing of its planned products. The Company anticipates that, prior to
commencement of product sales, if any, the Company's principal source of revenue
will be payments under its development and commercialization agreements with
Baxter. See "Business -- Alliance with Baxter."

The Baxter agreements provide for joint development by Baxter and the
Company of pathogen inactivation systems that include the Company's proprietary
compounds and processes and Baxter's blood collection, processing and storage
technology, as well as the instrument technology of each party. The development
programs under the Baxter agreements may be terminated by Baxter on 90 days'
notice. If the Company's agreements with Baxter were terminated or if Baxter's
product development efforts were unsuccessful, the Company may need to obtain
additional funding from other sources and would be required to devote additional
resources to the development of its products, delaying the development of its
products. Any such delay would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that disputes will not arise in the future with respect to the Baxter
agreements. Possible disagreements between Baxter and the Company could lead to
delays in the research, development or commercialization of certain planned
products or could require or result in time-consuming and expensive litigation
or arbitration and would have a material adverse effect on the Company's
business, financial condition and results of operations.

Under the terms of the Baxter agreements, Baxter is responsible for
manufacturing the disposable units, such as blood storage containers and related
tubing, as well as any devices associated with the inactivation processes. If
the Company's agreements with Baxter were terminated or if Baxter otherwise
failed to deliver an adequate supply of components, the Company would be
required to identify other third-party component manufacturers. There can be no
assurance that the Company would be able to identify such manufacturers on a
timely basis or enter into contracts with such manufacturers on reasonable
terms, if at all. Any delay in the availability of devices or disposables from
Baxter could adversely affect the timely submission of products for regulatory
approval or the market introduction and subsequent sales of such products and
would have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the inclusion of components
manufactured by others could require the Company to seek new approvals from

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<PAGE> 11

government regulatory authorities, which could result in delays in product
delivery. There can be no assurance that the Company would receive any such
required regulatory approvals. Any such delay would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Manufacturing and Supply."

If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of the Company's pathogen
inactivation systems for blood components worldwide. The Company does not
currently maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to rely on Baxter to market and sell its
pathogen inactivation systems. There can be no assurance that the Company will
be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to the Company. Revenues to be received by
the Company through any marketing and sales arrangement with Baxter will be
dependent on Baxter's efforts, and there can be no assurance that the Company
will benefit from Baxter's present or future market presence or that such
efforts will otherwise be successful. If the Company's agreements with Baxter
were terminated or if Baxter's marketing efforts were unsuccessful, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "Business -- Marketing, Sales and
Distribution."

There can be no assurance that Baxter will not elect to pursue alternative
technologies or product strategies, or that its corporate interests and plans
will remain consistent with those of the Company. Under the terms of the
agreement covering the development of pathogen inactivation systems for FFP and
red blood cells, Baxter has reserved the right to market competing products not
within the field of psoralen or Anchor-Linker-Effector ("ALE") inactivation. The
Company is aware that Baxter is developing an alternative pathogen inactivation
system for FFP based on a compound known as methylene blue. Other companies are
currently marketing methylene blue-based pathogen inactivation systems for FFP
in Europe. The development and commercialization of the Company's pathogen
inactivation systems could be materially adversely affected by competition with
Baxter or by Baxter's election to pursue alternative strategies or technologies
in lieu of those of the Company. See "Business -- Competition."

Government Regulation. All of the Company's products under development and
anticipated future products are or will be subject to extensive and rigorous
regulation by the federal government, principally the FDA, and state, local and
foreign governments. Such regulations govern, among other things, the
development, testing, manufacturing, labeling, storage, pre-market clearance or
approval, advertising, promotion, sale and distribution of such products. The
process of obtaining regulatory approvals or clearances is generally lengthy,
expensive and uncertain. To date, none of the Company's products has been
approved for sale in the United States or any foreign market. Satisfaction of
pre-market approval or clearance or other regulatory requirements of the FDA, or
similar requirements of foreign regulatory agencies, typically takes several
years, and may take longer, depending upon the type, complexity, novelty and
intended purpose of the product. There can be no assurance that the FDA or any
other regulatory agency will grant approval or clearance for any product being
developed by the Company on a timely basis, if at all. The Company believes
that, in deciding whether a pathogen inactivation system is safe and effective,
the FDA is likely to take into account whether it adversely affects the
therapeutic efficacy of blood components as compared to the therapeutic efficacy
of blood components not treated with the system, and that the FDA will weigh the
safety and other risks against the benefits of using the system in a blood
supply that has become safer in recent years.

The Company's clinical development plan assumes that only data from in
vitro studies, not from human clinical studies, will be required to demonstrate
the system's efficacy in inactivating pathogens and that human clinical studies
will instead focus on demonstrating therapeutic efficacy, safety and
tolerability of blood components treated with the system. Although the Company
has had discussions with the FDA concerning the Company's proposed clinical
plan, there can be no assurance that these means of demonstrating safety and
efficacy will ultimately be acceptable to the FDA or that the FDA will continue
to believe that this clinical protocol is appropriate. Moreover, even if the FDA
considers these means of demonstrating safety and efficacy to be acceptable in
principle, there can be no assurance that the FDA will find the data submitted
sufficient to demonstrate safety and efficacy. In particular, there can be no
assurance that the FDA will consider in vitro data an appropriate means of
demonstrating efficacy of pathogen inactivation, and any requirement to provide

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<PAGE> 12

other than in vitro data would adversely affect the timing and could affect the
success of the Company's efforts to obtain regulatory approval.

If regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which a product may be marketed. For
example, the Company does not believe that it will be able to make any labeling
claims that the Company's pathogen inactivation systems may inactivate any
pathogens for which it does not have in vitro data supporting such claims.
Further, even if regulatory approval is obtained, later discovery of previously
unknown problems with a product may result in restrictions on the product,
including withdrawal of the product from the market. The policies of the FDA and
foreign regulatory bodies may change, and additional regulations may be
promulgated, which could prevent or delay regulatory approval of the Company's
planned products. Delay in obtaining or failure to obtain regulatory approvals
could have a material adverse effect on the Company's business, financial
condition and results of operations. Among the conditions for FDA approval of a
pharmaceutical, biologic or device is the requirement that the manufacturer's
quality control and manufacturing procedures conform to current Good
Manufacturing Practices ("cGMP"), which must be followed at all times. The FDA
enforces cGMP requirements through periodic inspections. There can be no
assurance that the FDA will determine that the facilities and manufacturing
procedures of Baxter or any other third-party manufacturer of the Company's
planned products will conform to cGMP requirements. See
"Business -- Manufacturing and Supply."

Blood centers and others that ship blood and blood products interstate will
likely be required to obtain approved license supplements from the FDA before
shipping products processed with the Company's pathogen inactivation systems.
This requirement and/or FDA delays in approving such supplements may deter some
blood centers from using the Company's products, and blood centers that do
submit supplements may face disapproval or delays in approval that could provide
further disincentives to use the systems. The regulatory impact on potential
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.

In addition, transfusion units of random donor platelets, which currently
represent approximately one-half of the platelets transfused in the United
States, contain platelets pooled from six different donors. Because of the risk
of bacterial growth, current FDA rules require that pooled platelets be
transfused within four hours of pooling and, as a result, most pooling occurs at
hospitals. However, the Company's platelet pathogen inactivation system is being
designed to be used at blood centers, not at hospitals, and requires a
processing time of approximately eight hours. Therefore, in order for the
Company's platelet pathogen inactivation system to be effectively implemented
and accepted at blood centers as planned, the FDA-imposed limit on the time
between pooling and transfusion would need to be lengthened or eliminated for
blood products treated with the Company's system, which are being designed to
inactivate bacteria that would otherwise contaminate pooled platelets. There can
be no assurance, however, that the FDA will change this requirement and, if such
a change is not made, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business -- Government
Regulation."

Rapid Technological Change; Significant Competition. The biopharmaceutical
field is characterized by rapid and significant technological change.
Accordingly, the Company's success will depend in part on its ability to respond
quickly to medical and technological changes through the development and
introduction of new products. Product development involves a high degree of
risk, and there can be no assurance that the Company's product development
efforts will result in any commercially successful products. Technological
developments may result in the Company's products becoming obsolete or
non-competitive before the Company is able to generate any significant revenue.
Any such occurrence could have a material adverse effect on the Company's
business, financial condition and results of operations.

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<PAGE> 13

other regulatory approval procedures. The Company's ability to compete
successfully will depend, in part, on its ability to develop proprietary
products, develop and maintain products that reach the market first, are
technologically superior to and/or are of lower cost than other products on the
market, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals, and manufacture, market and sell any product that it
develops. In addition, other technologies or products may be developed that have
an entirely different approach or means of accomplishing the intended purposes
of the Company's products, or that might render the Company's technology and
products uncompetitive or obsolete. Furthermore, there can be no assurance that
the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's ability to use the
Company's technology or commercialize products that may be developed.

Several companies are developing technologies which are, or in the future
may be, the basis for products that will directly compete with or reduce the
market for the Company's pathogen inactivation systems. A number of companies
are specifically focusing on alternative strategies for pathogen inactivation in
various blood components. Under the terms of the agreement covering the
development of pathogen inactivation systems for FFP and red blood cells, Baxter
has reserved the right to market competing products not within the field of
psoralen or ALE inactivation. The Company is aware that Baxter is developing an
alternative pathogen inactivation system for FFP based on a compound known as
methylene blue. Other companies are currently marketing methylene blue-based
pathogen inactivation systems for FFP in Europe. Other groups are developing
synthetic blood product substitutes or products to stimulate the growth of
platelets. If any of these technologies is successfully developed, it could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Alliance with Baxter" and
"-- Competition."

Dependence on Key Employees. The Company is highly dependent on the
principal members of its management and scientific staff. The loss of the
services of one or more of these employees could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled scientific and managerial
personnel. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting and retaining such personnel
and the failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of the stock options currently held by many of the Company's
key employees are vested and may be fully vested over the next several years
before the Company achieves significant revenues or profitability. The Company
intends to grant additional options and provide other forms of incentive
compensation to attract and retain such key personnel. See "Management."

Patent and License Uncertainties. The Company's success depends in part on
its ability to obtain patents, to protect trade secrets, to operate without
infringing upon the proprietary rights of others and to prevent others from
infringing on the proprietary rights of the Company. The Company's policy is to
seek to protect its proprietary position by, among other methods, filing United
States and foreign patent applications related to its proprietary technology,
inventions and improvements that are important to the development of its
business. Proprietary rights relating to the Company's planned and potential
products will be protected from unauthorized use by third parties only to the
extent that they are covered by valid and enforceable patents or are effectively
maintained as trade secrets. There can be no assurance that any patents owned
by, or licensed to, the Company will afford protection against competitors or
that any pending patent applications now or hereafter filed by, or licensed to,
the Company will result in patents being issued. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.

The patent positions of biopharmaceutical companies involve complex legal
and factual questions and, therefore, their enforceability cannot be predicted
with certainty. There can be no assurance that any of the Company's patents or
patent applications, if issued, will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company against competitors with
similar technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. Because of the extensive time required for development, testing
and regulatory review of a potential product, it

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<PAGE> 14

is possible that, before any of the Company's products can be commercialized,
any related patent may expire or remain in existence for only a short period
following commercialization, thus reducing any advantage of the patent, which
could adversely affect the Company's ability to protect future product
development and, consequently, its operating results and financial position.

Because patent applications in the United States are maintained in secrecy
until patents issue and because publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
issued or pending patent applications or that it was the first to file patent
applications for such inventions. There can be no assurance the Company's
planned or potential products will not be covered by third-party patents or
other intellectual property rights, in which case continued development and
marketing of such products would require a license under such patents or other
intellectual property rights. There can be no assurance that such required
licenses will be available to the Company on acceptable terms, if at all. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or could find
that the development, manufacture or sale of products requiring such licenses is
foreclosed. Litigation may be necessary to defend against or assert such claims
of infringement, to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company or to determine the scope and validity
of the proprietary rights of others. In addition, interference proceedings
declared by the United States Patent and Trademark Office may be necessary to
determine the priority of inventions with respect to patent applications of the
Company. Litigation or interference proceedings could result in substantial
costs to and diversion of effort by the Company, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that these efforts by the Company would be
successful.

The Company may rely, in certain circumstances, on trade secrets to protect
its technology. However, trade secrets are difficult to protect. The Company
seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
To the extent that the Company's employees or its consultants or contractors use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.
See "Business -- Patents, Licenses and Proprietary Rights."

Limited Operating History; History of Losses and Expectation of Future
Losses. The Company's net losses in fiscal years 1992, 1993, 1994 and 1995 and
in the six months ended June 30, 1996 were $2.3 million, $3.5 million, $1.8
million, $2.4 million and $4.2 million, respectively. As of June 30, 1996, the
Company had an accumulated deficit of approximately $14.2 million. The Company
has not received any revenues from product sales, and all revenues recognized by
the Company to date have resulted from the Company's agreements with Baxter and
federal research grants. All of the Company's planned pathogen inactivation
systems are in the research and development stage. The Company will be required
to conduct significant research, development, testing and regulatory compliance
activities on these products that, together with anticipated general and
administrative expenses, are expected to result in substantial losses at least
through 1998. The estimates above and elsewhere in this Prospectus of the period
during which the Company expects to incur continuing losses are forward-looking
statements that involve risks and uncertainties. There can be no assurance that
the Company will not incur substantial losses beyond such period as a result of
certain factors set forth in this "Risk Factors" section and elsewhere in this
Prospectus. The Company expects that the amount of such losses will fluctuate
from quarter to quarter as a result of differences in the timing of expenses
incurred and potential revenues from its agreements with Baxter and such
fluctuations may be significant. The Company's ability to achieve a profitable
level of operations will depend on successfully completing development,
obtaining regulatory approvals and achieving market acceptance of its pathogen
inactivation systems. There can be no assurance that the Company will ever
achieve a profitable level of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Reliance on Third-Party Manufacturing; Dependence on Key Suppliers. The
Company has in the past utilized, and intends to continue to utilize, third
parties to manufacture and supply the inactivation compounds

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<PAGE> 15

for its systems and Baxter for other system components for use in clinical
trials and for the potential commercialization of its products in development.
The Company has no experience in manufacturing products for commercial purposes
and does not have any manufacturing facilities. Consequently, the Company is
dependent on contract manufacturers for the production of compounds and on
Baxter for other system components for development and commercial purposes.

Under the Company's agreements with Baxter, the Company is responsible for
supplying compounds to Baxter for inclusion in the pathogen inactivation
systems. The Company has contracted with two manufacturing facilities that have
provided sufficient amounts of S-59 to address the anticipated clinical trial
requirements of both the platelet and FFP pathogen inactivation systems. Only
one of the manufacturers has increased its production capabilities to produce
S-59 in commercial quantities. If such manufacturer is unable to continue to
produce S-59 in commercial quantities, the Company could experience material
delays and shortfalls in compound supply while the alternative manufacturer
increased its production capabilities or while the Company identified another
manufacturer and such manufacturer prepared for production. There can be no
assurance that the existing manufacturers or any new manufacturer will be able
to provide commercial quantities of S-59 needed for the Company's pathogen
inactivation systems in the future.

The Company has produced S-303 for use in its red cell pathogen
inactivation system in only limited quantities for its research and preclinical
development requirements. No assurance can be given that an appropriate clinical
or commercial-scale manufactuer of S-303 will be identified or that the Company
will be able to enter into arrangements for the manufacture of S-303 on
reasonable terms, if at all.

In the event that the Company is unable to obtain or retain third-party
manufacturing, it will not be able to commercialize its products as planned. The
Company's dependence upon third parties, including Baxter, for the manufacture
of critical portions of its pathogen inactivation systems may adversely affect
the Company's operating margins and its ability to develop, deliver and sell
products on a timely and competitive basis. Failure of any third-party
manufacturer to deliver the required quantities of products on a timely basis
and at commercially reasonable prices would materially adversely affect the
Company's business, financial condition and results of operations. In addition,
inclusion of components manufactured by other third parties could require the
Company to seek new approvals from government regulatory authorities, which
could result in delays in product delivery. There can be no assurance that such
approval would be obtained. In the event the Company undertakes to establish its
own commercial manufacturing capabilities, it will require substantial
additional funds, manufacturing facilities, equipment and personnel.

The Company purchases certain key components of its compounds from a
limited number of suppliers. While the Company believes that there are
alternative sources of supply for these components, establishing additional or
replacement suppliers for any of the components in the Company's compounds, if
required, may not be accomplished quickly and could involve significant
additional costs. Any failure by the Company to obtain any of the components
used to manufacture the Company's compounds from alternative suppliers, if
required, could limit the Company's ability to manufacture its compounds and
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing and Supply"
and "-- Government Regulation."

Risk of Product Liability. The testing, marketing and sale of the
Company's products will entail an inherent risk of product liability, and there
can be no assurance that product liability claims will not be asserted against
the Company. The Company intends to secure limited product liability insurance
coverage prior to the commercial introduction of any product, but there can be
no assurance that the Company will be able to obtain product liability insurance
on acceptable terms or that insurance subsequently obtained will provide
adequate coverage against any or all potential claims. Any product liability
claim against the Company, regardless of its merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.

Environmental Regulation; Use of Hazardous Substances. The Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens and
wastes. There can be no assurance that the Company will not be required to incur
significant costs to comply with environmental

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<PAGE> 16

and health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, including
certain hazardous chemicals and radioactive materials. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.

Uncertainty Regarding Health Care Reimbursement and Reform. The future
revenues and profitability of biopharmaceutical and related companies as well as
the availability of capital to such companies may be affected by the continuing
efforts of the United States and foreign governments and third-party payors to
contain or reduce costs of health care through various means. In the United
States, given recent federal and state government initiatives directed at
lowering the total cost of health care, it is likely that the U.S. Congress and
state legislatures will continue to focus on health care reform and the cost of
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While
the Company cannot predict whether any such legislative or regulatory proposals
will be adopted, the announcement or adoption of such proposals could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of the products and related treatment of blood components are obtained from
governmental authorities, private health insurers and other organizations, such
as health maintenance organizations ("HMOs"). Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend toward managed health care in the United States and other countries
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for the Company's products.
The cost containment measures that health care payors and providers are
instituting and the effect of any health care reform could materially adversely
affect the Company's ability to operate profitably. See "Business -- Health Care
Reimbursement and Reform."

Control by Existing Stockholders. Upon the closing of this offering and
the Baxter Private Placement, the Company's present directors and executive
officers and their respective affiliates will beneficially own approximately
% of the outstanding Common Stock. In addition, Baxter will own
approximately % of the outstanding Common Stock. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of ownership may also
have the effect of delaying, preventing or deterring a change in control of the
Company. See "Principal Stockholders" and "Description of Capital
Stock -- Antitakeover Effects of Provisions of Charter Documents and Delaware
Law."

Need for Additional Funds. Through June 30, 1996, Baxter has provided
funding to the Company in the form of equity investments, research funding,
license fees and milestone payments, aggregating approximately $16.9 million. In
July 1996, Baxter provided additional funding to the Company in the form of an
equity investment of approximately $3.0 million and a development payment of
approximately $803,000. The Company's cash requirements may vary materially from
those now planned as a result of additional research and development, product
testing results, regulatory requirements, competitive pressures and
technological advances. In addition, the Company may require substantial funds
for its long-term product development, marketing programs and operating
expenses. There can be no assurance that any required funds will be available on
acceptable terms, if at all. If additional funds are raised by issuing equity
securities, substantial dilution to existing stockholders may result. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Shares Eligible for Future Sale. Sales of substantial numbers of shares of
Common Stock in the public market following this offering could adversely affect
the market price of the Common Stock. Upon the closing of this offering and the
Baxter Private Placement, the Company will have outstanding an aggregate of
shares of Common Stock, based upon the number of shares outstanding as of
July 31, 1996. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless such shares
are held by "affiliates" of the

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<PAGE> 17

Company as that term is defined in Rule 144 under the Securities Act
("Affiliates"), in which case they will be subject to the volume, manner of sale
and other conditions of Rule 144. The remaining 4,329,600 shares of Common Stock
held by existing stockholders (the "Restricted Shares") and the shares sold
pursuant to the Baxter Private Placement are "restricted securities" as that
term is defined in Rule 144. Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 promulgated under the Securities Act. As a result of
contractual restrictions and the provisions of Rule 144 and Rule 701, additional
shares will be available for sale in the public market as follows: (i) no
Restricted Shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 4,183,413 Restricted Shares, 109,292 shares of Common Stock
issuable upon exercise of currently outstanding options and 35,478 shares of
Common Stock issuable upon exercise of currently outstanding warrants will be
eligible for sale upon expiration of certain lock-up agreements 180 days after
the date of this Prospectus and (iii) the remainder of the Restricted Shares
will be eligible for sale from time to time thereafter upon expiration of their
respective two-year holding periods. Pursuant to an agreement between the
Company and the holders (or their permitted transferees) of approximately
3,070,423 shares of Common Stock (plus shares sold pursuant to the
Baxter Private Placement), these holders are entitled to certain rights with
respect to the registration of such shares under the Securities Act. See
"Description of Capital Stock" and "Shares Eligible for Future Sale."

Effects of Certain Charter and Bylaw Provisions. The Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") authorizes
the Board of Directors to issue up to five million shares of Preferred Stock and
to determine the price, rights, preferences and privileges, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The Restated Certificate and Bylaws, among other
things, provide for a classified Board of Directors, require that stockholder
actions occur at duly called meetings of the stockholders, limit who may call
special meetings of stockholders, do not permit cumulative voting in the
election of directors and require advance notice of stockholder proposals and
director nominations. These provisions contained in the Company's charter
documents and certain applicable provisions of Delaware law could serve to
depress the Company's stock price. In addition, these and other provisions could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, discourage a hostile
bid or delay, prevent or deter a merger, acquisition or tender offer in which
the Company's stockholders could receive a premium for their shares, or a proxy
contest for control of the Company or other change in the Company's management.
See "Management" and "Description of Capital Stock."

Lack of Prior Public Market; Possible Volatility of Stock Price. Prior to
this offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained.
The initial public offering price for the Common Stock to be sold in this
offering will be determined by agreement between the Company and the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after the closing of this offering. The market price of the shares of
Common Stock, like that of the common stock of many other companies in similar
industries, is likely to be highly volatile. Factors such as the announcements
of scientific achievements or new products by the Company or its competitors,
governmental regulation, health care legislation, developments in patent or
other proprietary rights of the Company or its competitors, including
litigation, fluctuations in the Company's operating results and market
conditions for health care stocks in general could have a significant impact on
the future price of the Common Stock. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations, which may be
unrelated to the operating performance of particular companies. In the past,
securities class action litigation has often been instituted following periods
of volatility in the market price for a company's securities. Such litigation
could result in substantial costs and a diversion of management attention and
resources, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Underwriters."

Dilution. Purchasers of the Common Stock offered hereby will suffer an
immediate dilution in the net tangible book value per share. Such purchasers
will experience additional dilution upon the exercise of outstanding stock
options and warrants. Future capital funding transactions may also result in
dilution to purchasers in this offering. See "Dilution."

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USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $ per share are estimated to be approximately $
($ if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. Pursuant to the Baxter Private Placement, the
Company plans to sell directly to Baxter shares of its Common Stock for an
aggregate purchase price of $ million pursuant to an existing agreement
with the Company.

The Company expects to use approximately $ to $ million
of the proceeds of this offering and the Baxter Private Placement for research
and development and funding of clinical trials in support of its pathogen
inactivation systems, approximately $ to $ million for general
and administrative expenses and approximately $ to $ million
for capital expenditures. The Company intends to use the remaining $ to
$ million for working capital and general corporate purposes. A portion
of the net proceeds may also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
There are no present understandings, commitments or agreements with respect to
any material acquisition of other businesses, products or technologies. The
amounts and timing of the Company's actual expenditures for each purpose may
vary significantly depending upon numerous factors, including the status of the
Company's product development efforts, regulatory approvals, competition,
marketing and sales activities and the market acceptance of any products
introduced by the Company. Pending such uses, the Company intends to invest the
net proceeds of this offering in short-term, investment-grade, interest-bearing
securities.

DIVIDEND POLICY

The Company has not declared or paid any cash dividends since its
inception. The Company currently intends to retain any future earnings to
finance the growth and development of its business and does not intend to pay
any cash dividends in the foreseeable future. Future dividends, if any, will be
determined by the Board of Directors.

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis after giving effect
to the July Baxter Purchase, the Warrant Exercise, the conversion of all
outstanding shares of Preferred Stock into Common Stock and the authorization of
5,000,000 shares of undesignated Preferred Stock upon the closing of this
offering, and (iii) as adjusted to give effect to the Baxter Private Placement
and the sale of shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $ per share (after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company). This table 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," appearing elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligations, less current portion........... $ 36 $ 36 $
Stockholders' equity:
Preferred Stock, $.001 par value; 3,199,942 shares
authorized, 2,811,154 shares issued and outstanding,
actual; 5,000,000 shares authorized, no shares issued
and outstanding, pro forma and as adjusted(1)........ 3 --
Common Stock, $.001 par value, 4,681,833 shares
authorized, 1,294,655 shares issued and outstanding,
actual; 50,000,000 shares authorized, 4,329,600
shares issued and outstanding, pro forma; and
shares issued and outstanding, as
adjusted(1).......................................... 1 4
Additional paid-in capital................................ 22,426 25,625
Notes receivable from stockholders........................ (80) (80)
Deferred compensation..................................... (445) (445)
Accumulated deficit....................................... (14,156) (14,156)
------ ------- -------
Total stockholders' equity........................... 7,749 10,948
------ ------- -------
Total capitalization................................. $ 7,785 $ 10,984 $
====== ======= =======
</TABLE>

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

(1) Excludes as June 30, 1996: (i) 284,891 shares of Common Stock subject to
outstanding options under the Company's 1996 Equity Incentive Plan and
381,864 shares reserved for future issuance thereunder, (ii) 150,000 shares
of Common Stock reserved for future issuance under the Company's Employee
Stock Purchase Plan and (iii) 35,478 shares of Preferred Stock subject to
outstanding warrants, which will convert into warrants to purchase Common
Stock upon the closing of this offering. See "Management -- Equity Incentive
Plans" and Notes 4 and 7 of Notes to Financial Statements.

17
<PAGE> 20

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996
was approximately $ , or $ per share. Pro forma net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the pro forma number of shares of
Common Stock outstanding, after giving effect to the July Baxter Purchase, the
Warrant Exercise and the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of this offering. After giving effect to the
Baxter Private Placement and the sale by the Company of shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share (after deducting underwriting discounts and commissions and
estimated offering expenses), the pro forma net tangible book value at June 30,
1996 would have been $ , or approximately $ per share. This
represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders (including Baxter) and an
immediate dilution of $ per share to new investors of Common Stock in
this offering, as illustrated by the following table:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $
Pro forma net tangible book value per share before the
offering.............................................. $
Increase attributable to the Baxter Private Placement....
--------
Pro forma net tangible book value per share after Baxter
Private
Placement.............................................
Increase per share attributable to new investors......... $
--------
Pro forma net tangible book value per share after the
offering.................................................
------------
Dilution per share to new investors........................ $
============
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996
(after giving effect to the July Baxter Purchase, the Warrant Exercise and the
conversion of all outstanding shares of Preferred Stock into Common Stock upon
the closing of this offering), the difference between the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by existing stockholders (including Baxter) and by
the new investors, before deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, at an assumed initial public
offering price of $ per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... % $ % $
New investors...................
------- ----- -------- -----
Total................. 100.0% 100.0%
======= ===== ======== =====
</TABLE>

The calculation of pro forma net tangible book value per share and the
other above computations assumes no exercise of outstanding stock options to
purchase 284,891 shares of Common Stock at a weighted average exercise price of
$3.18 per share and warrants to purchase 35,478 shares of Preferred Stock at a
weighted average exercise price of $5.56 per share, which will convert into
warrants to purchase Common Stock upon the closing of this offering. If all such
outstanding options and warrants were exercised for cash, the pro forma net
tangible book value per share immediately after the closing of this offering
would be $ per share. This represents an immediate dilution in pro
forma net tangible book value of $ per share to new investors. See
"Management -- Equity Incentive Plans" and Note 4 of Notes to Financial
Statements.

18
<PAGE> 21

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the Company's Financial Statements and the Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the years ended
December 31, 1993, 1994 and 1995 and the balance sheet data as of December 31,
1994 and 1995 are derived from financial statements of the Company that have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The statement of operations data for the period
from September 19, 1991 (inception) through December 31, 1992 and the balance
data sheet as of December 31, 1992 and 1993 are derived from financial
statements of the Company audited by Ernst & Young LLP that are not included
herein. The statement of operations data for the six months ended June 30, 1995
and 1996 and the balance sheet data as of June 30, 1996 are derived from
unaudited financial statements included elsewhere in this Prospectus. The
unaudited financial statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's operating results and financial position for
such periods. The operating results for the six months ended June 30, 1996 are
not necessarily indicative of the results to be expected for any other interim
period or the current or any future fiscal year.

<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 19,
1991
(INCEPTION) SIX MONTHS
THROUGH YEARS ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ----------------------------- -------------------
1992(1) 1993 1994 1995 1995 1996
------------- ------- ------- --------- ------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................... $ -- $ 230 $ 4,796 $ 6,799 $ 2,735 $ 2,606
Operating expenses:
Research and development................ 1,479 2,485 5,680 8,125 4,963 5,982
General and administrative.............. 905 1,210 1,194 1,517 627 1,009
------- ------- ------- --------- ------- ---------
Total operating expenses........... 2,384 3,695 6,874 9,642 5,590 6,991
------- ------- ------- --------- ------- ---------
Loss from operations...................... (2,384) (3,465) (2,078) (2,843) (2,855) (4,385)
Other income (expense), net............... 61 (50) 278 483 234 227
------- ------- ------- --------- ------- ---------
Net loss.................................. $(2,323) $(3,515) $(1,800) $ (2,360) $(2,621) $ (4,158)
======= ======= ======= ========= ======= =========
Pro forma net loss per share(2)........... $ (0.55) $ (0.93)
Shares used in computing pro forma net loss
per share(2).............................. 4,314,045 4,491,454
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996
------------- ------- ------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 225 $ 6,076 $ 7,802 $ 9,659 $ 8,761
Working capital........................... 23 3,884 5,865 7,263 6,479
Total assets.............................. 821 6,807 9,684 11,349 10,281
Capital lease obligations,
less current portion.................... -- -- 94 32 36
Accumulated deficit....................... (2,323) (5,838) (7,638) (9,998) (14,156)
Total stockholders' equity (deficit)...... 532 (516) 5,439 8,663 7,749
</TABLE>

- ---------------
(1) The Company's financial data is not presented separately for 1991 as the
Company did not commence operations until subsequent to December 31, 1991.

(2) See Note 1 of Notes to Financial Statements for a description of the method
used in computing the pro forma net loss per share.

19
<PAGE> 22

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ significantly from
those discussed in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.

OVERVIEW

Since its inception in 1991, Cerus has devoted substantially all of its
efforts and resources to the research, development and clinical testing of
techniques and systems for inactivating pathogens in transfusion blood
components. The Company has been unprofitable since inception and, as of June
30, 1996, had an accumulated deficit of approximately $14.2 million. All of the
Company's planned pathogen inactivation systems are in the research and
development stage. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on these products
that, together with anticipated general and administrative expenses, are
expected to result in substantial losses at least through 1998. The Company's
ability to achieve a profitable level of operations will depend on successfully
completing development, obtaining regulatory approvals and achieving market
acceptance of its pathogen inactivation systems. There can be no assurance that
the Company will ever achieve a profitable level of operations. To date, the
Company's principal sources of capital have been private equity financings and
funds provided by Baxter under development and commercialization agreements, as
well as United States government grant funding, interest income and lease
financings.

In December 1993, Cerus entered into a development and commercialization
agreement with Baxter to develop a system for inactivation of pathogens in
platelets used for transfusions. The agreement provides for Baxter to share
costs associated with research and development, preclinical studies and clinical
trials for the system. The agreement also provides for a sharing of revenues
after each party is reimbursed its cost of goods above a specified level. Under
this agreement, Baxter purchased 125,000 shares of Series C Preferred Stock
(convertible into shares of Common Stock) for an aggregate purchase
price of $1.0 million and paid the Company up-front license fees and milestone
and development payments totaling $5.2 million. The Company recognizes the
license fees as revenue as the milestones are achieved. Through July 31, 1996,
approximately $2.0 million of the license fees have been recognized as revenue,
and approximately $1.8 million in milestone payments have been received and
recognized as revenue. In January and July 1995, Cerus received approximately
$2.6 million from Baxter in connection with interim funding agreements related
to the development of pathogen inactivation systems for FFP and red blood cells.
In April 1996, Cerus entered into a second development and commercialization
agreement with Baxter, principally focused on the FFP and red blood cell
pathogen inactivation systems. Under this agreement, the Company and Baxter are
to share gross profits from sales of inactivation system disposables, after
deducting from such gross profits a specified percentage allocation to be
retained by the marketing party for marketing and administration expenses. Under
this agreement, Baxter purchased $6.0 million in Series E Preferred Stock of
Cerus in April and July 1996. In addition, this agreement provides for Baxter to
make additional investments in the Common Stock of the Company of up to $15
million, at 120% of the market price at the time of each investment, subject to
the achievement of certain milestones. See "Business -- Alliance with Baxter"
and Note 2 of Notes to Financial Statements.

To date, the Company has not received any revenues from product sales and
it will not derive revenue from product sales unless and until one or more
planned products receives regulatory approval and achieves market acceptance.
The Company anticipates that its sources of revenue until product sales occur
will be limited to payments under development and commercialization agreements
with Baxter in the area of blood component pathogen inactivation, payments from
the United States government under research grant programs, payments from future
collaboration agreements, if any, and interest income. Under the current
agreements with Baxter, all research, development, preclinical and clinical
costs of the pathogen inactivation projects are shared equally by Cerus and
Baxter. Because more of such research and development is typically

20
<PAGE> 23

performed internally at Cerus than at Baxter and because Cerus is generally
responsible for engaging third parties to perform certain aspects of these
projects, Baxter typically has made periodic balancing payments to the Company.
Through June 30, 1996, the Company had recognized approximately $12.3 million in
revenue under its agreements with Baxter, including the license fee and
milestone amounts described above, and approximately $2.2 million under United
States government grants.

The Company's business is subject to significant risks, including, but not
limited to, the risks inherent in its research and development efforts,
including clinical trials, uncertainties associated both with obtaining and
enforcing its patents and with the patent rights of others, the lengthy,
expensive and uncertain process of seeking regulatory approvals, uncertainties
regarding government reforms and of product pricing and reimbursement levels,
technological change and competition, manufacturing uncertainties, and
dependence on Baxter and other third parties. The Company's pathogen
inactivation systems are in the research and development stage and will require
additional preclinical and clinical testing prior to submission of any
regulatory application for commercial use. The Company currently does not expect
to file a product approval application with the FDA or corresponding regulatory
filings in Europe for its platelet pathogen inactivation system or for any of
its other planned products prior to 1998. No assurance can be given that any of
the Company's development programs will be successfully completed, that any
further IND application will become effective or that additional clinical trials
will be allowed by the FDA or other regulatory authorities, that clinical trials
will commence as planned, that required United States or foreign regulatory
approvals will be obtained on a timely basis, if at all, or that any products
for which approval is obtained will be commercially successful.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1995 AND JUNE 30, 1996

Revenue. Revenue for the six months ended June 30, 1995 was approximately
$2.7 million as compared to approximately $2.6 million for the same period in
1996. Revenue from Baxter decreased by approximately $311,000 from approximately
$2.4 million for the six months ended June 30, 1995 to approximately to $2.1
million for the same period in 1996, primarily due to increased research and
development spending by Baxter resulting in a reduced balancing payment to the
Company. Grant revenue increased from approximately $319,000 for the six months
ended June 30, 1995 to approximately $501,000 for the same period in 1996, as a
result of increased activity under existing programs.

Research and Development Expenses. The Company's research and development
expenses increased from approximately $5.0 million for the six months ended June
30, 1995 to approximately $6.0 million for the same period in 1996. The increase
is primarily attributable to costs associated with personnel increases and to
increased third-party costs associated with preclinical studies and clinical
trials for the platelet pathogen inactivation system. The Company anticipates
that research and development expenses will increase in the future as it expands
its pathogen inactivation system development efforts and related clinical
trials.

General and Administrative Expenses. General and administrative expenses
increased from approximately $627,000 for the six months ended June 30, 1995 to
approximately $1.0 million for the same period in 1996. The increase is
primarily the result of increased personnel costs, professional services and
other costs incurred in connection with the April 1996 Baxter agreement, and
general expenses in support of the Company's increased product development
activities. The Company anticipates that general and administrative expenses
will increase in the future as additional personnel are added to support its
business operations.

Other Income (Expense), Net. Other income (expense), net, consists
primarily of interest income on cash balances and interest expense associated
with capital leases, both of which were at approximately the same level for the
six months ended June 30, 1995 and 1996.

YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

Revenue. Revenue earned under agreements with Baxter increased from
$200,000 in 1993 to approximately $3.9 million in 1994 and to approximately $6.0
million in 1995. The increase in 1994 was primarily

21
<PAGE> 24

related to the commencement of the platelet program in late 1993 and includes
approximately $3.9 million in license fees, milestone and development revenue.
The increase in 1995 resulted primarily from revenue associated with the interim
funding agreements for FFP and red blood cells. Government grant revenue
increased from approximately $30,000 in 1993 to approximately $895,000 in 1994
as a result of activity under several grants transferred to Cerus and two grants
awarded to Cerus during 1994. Grant revenue decreased to approximately $751,000
in 1995, primarily due to completion of funding under certain grants during the
year. Revenues from the arrangements with Baxter, as a percentage of total
revenues, were 87% in 1993, 81% in 1994 and 89% in 1995.

Research and Development Expenses. Research and development expenses
increased from approximately $2.5 million in 1993 to approximately $5.7 million
in 1994 and to approximately $8.1 million in 1995. The increase in 1994 was
attributable primarily to increased activity on the platelet pathogen
inactivation program. The increase in 1995 was due principally to toxicology
studies, compound manufacturing development and initiation of clinical trials
for the platelet program, as well as to increased spending devoted to the FFP
and red blood cell programs. A significant portion of the increase was the
result of increased payroll and other personnel expenses, related laboratory
supplies, equipment and facilities expansion.

General and Administrative Expenses. General and administrative expenses
were approximately $1.2 million in each of 1993 and 1994 and approximately $1.5
million in 1995. The increase in 1995 over 1994 and 1993 was primarily
attributable to increased personnel levels associated with the expansion of the
Company's operations.

Other Income (Expense), Net. Interest income was approximately $26,000 in
1993, approximately $321,000 in 1994 and approximately $500,000 in 1995. These
increases were attributable primarily to increased average cash balances related
to proceeds from the Company's financings and funding under the Baxter platelet
agreement. Interest expense was approximately $76,000 in 1993, $43,000 in 1994
and $17,000 in 1995. Interest expense of approximately $76,000 in 1993 and
approximately $33,000 in 1994 related to bridge financings from certain of the
Company's stockholders. The remaining interest expense in 1994 and all interest
expense in 1995 related to lease financings.

LIQUIDITY AND CAPITAL RESOURCES

From inception to June 30, 1996, Cerus has financed its operations
primarily through private placements of preferred and common equity securities
totaling approximately $21.5 million and project funding provided by Baxter
totaling $12.9 million. During that period, the Company received approximately
$2.2 million under United States government grants and approximately $1.1
million in interest income. At June 30, 1996, the Company had cash and cash
equivalents of approximately $8.8 million. In July 1996, the Company received an
additional $3.0 million in proceeds in connection with the July Baxter Purchase
and approximately $803,000 in recent funding from Baxter.

In 1993, net cash provided by operating activities of approximately $1.7
million was the result of $5.2 million in license fees and milestone and
development payments received from Baxter during the year, offset principally by
a $3.5 million net loss for the year. Net cash used in operating activities for
1994, 1995 and the six months ended June 30, 1996, was approximately $2.8
million, $3.4 million and $3.9 million, respectively, resulting primarily from
net losses. From inception through June 30, 1996, net cash used in investing
activities of approximately $1.4 million resulted from purchases of equipment
and furniture and leasehold improvements.

At December 31, 1995, the Company's net operating loss carryforwards were
approximately $7.2 million and $1.8 million for federal and state income tax
purposes, respectively. The Company's federal research and development tax
credit carryforwards were approximately $300,000 for federal income tax purposes
at December 31, 1995. The federal net operating loss and tax credit
carryforwards expire at various dates from 2007 to 2010. The California state
net operating loss expires in 2000. The Tax Reform Act of 1986 and state tax
statutes contain provisions relating to changes in ownership that may limit the
utilization in any given year of available net operating loss carryforwards and
research and development credits. See Note 5 of Notes to Financial Statements.

22
<PAGE> 25

The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including progress of the platelet program
and the related clinical trials, progress of the FFP and red blood cell program,
achievement of milestones leading to milestone payments and equity investments,
regulatory approval and successful commercialization of the Company's pathogen
inactivation systems, costs related to creating, maintaining and defending the
Company's intellectual property position, and competitive developments. The
Company believes that its available cash balances, together with the net
proceeds of this offering and anticipated cash flows from existing Baxter and
grant arrangements, will be sufficient to meet its capital requirements through
1999. This estimate of the period for which the Company expects its available
cash balances, net proceeds and anticipated cash flows to be sufficient to meet
its capital requirements is a forward-looking statement that involves risks and
uncertainties. There can be no assurance that the Company will be able to meet
its capital requirements for this period as a result of certain factors set
forth under "Risk Factors" and elsewhere in this Prospectus. In the event that
additional capital is required, the Company may seek to raise that capital
through public or private equity or debt financings or through additional
collaborative arrangements or government grants. Future capital funding
transactions may result in dilution to purchasers in this offering. There can be
no assurance that such capital will be available on favorable terms, if at all.

23
<PAGE> 26

BUSINESS

OVERVIEW

Cerus is developing systems designed to improve the safety of blood
transfusions by inactivating infectious pathogens in blood components
(platelets, FFP and red blood cells) used for transfusion and inhibiting the
leukocyte activity that is responsible for certain adverse immune and other
transfusion-related reactions. Preclinical studies conducted by the Company have
indicated the ability of these systems to inactivate a broad array of viral and
bacterial pathogens that may be transmitted in blood component transfusions and
to inhibit leukocyte activity. The Company believes that, as a result of the
mechanism of action of its proprietary technology, its systems also have the
potential to inactivate many new pathogens before they are identified and before
tests have been developed to detect their presence in the blood supply. Because
the Company's systems are being designed to inactivate rather than merely test
for pathogens, the Company's systems also have the potential to reduce the risk
of transmission of pathogens that would remain undetected by testing.

INDUSTRY BACKGROUND

Blood Supply Market. Blood transfusions are required to treat a variety of
medical conditions, including anemia, low blood volume, surgical bleeding,
trauma, acquired and congenital bleeding disorders and chemotherapy-induced
blood deficiencies. Worldwide, over 90 million whole blood donations occur each
year. Approximately 39 million of those donations occur in North America,
Western Europe and Japan.

Whole blood is composed of plasma, the liquid portion of blood containing
essential clotting proteins, and three cellular blood components: platelets, red
blood cells and white blood cells (leukocytes). Platelets are cellular
components essential to coagulation, while red blood cells carry oxygen to
tissues and carbon dioxide to the lungs. Leukocytes play a critical role in
immune and other defense systems in donors, but can cause harmful immune
transfusion-related reactions in or transmit disease to recipients.

Blood collection centers periodically experience shortages of critical
blood components due to temporary increases in demand, reduced donor
availability during holiday periods and the limited shelf life of cellular blood
components. To efficiently allocate the limited available blood supply and to
optimize transfusion therapy, essentially all donated blood is separated into
its components. Blood components are obtained either by manually processing
donor units of whole blood or by apheresis, a process in which specific blood
components collected from a donor are retained for transfusion, while the other
components are returned to the donor.

Patients requiring transfusions are typically treated with the specific
blood component required for their particular deficiency, except in cases of
rapid, massive blood loss, where whole blood may be transfused. Platelets are
often used to treat cancer patients following chemotherapy or organ
transplantation. Red cells are frequently administered to patients with trauma
or surgical bleeding, acquired chronic anemia or genetic disorders, such as
sickle cell anemia. FFP is generally used to control bleeding. Plasma can also
be "fractionated" or separated into different parts that are used to expand
blood volume, fight infections or treat diseases such as hemophilia.

Blood Supply Contaminants. A primary goal of every blood collection center
is to provide blood components for transfusion that are free of viruses,
bacteria, protozoans and leukocytes. Despite recent improvements in testing and
processing of blood, patients receiving transfusions of blood components face a
number of significant risks from blood contaminants, as well as adverse immune
and other transfusion-related reactions induced by leukocytes. Viruses such as
hepatitis B (HBV), hepatitis C (HCV), human immunodeficiency virus (HIV),
cytomegalovirus (CMV) and human T-cell lymphotropic virus (HTLV) can present
life-threatening risks. Bacteria, the most common agents of
transfusion-transmitted disease, can cause sepsis, which can result in serious
illness or death. Many other agents can transmit disease during transfusion,
including the protozoans that cause malaria and Chagas' disease.

24
<PAGE> 27

Infectious pathogens are not the only cause of adverse events arising out
of the transfusion of blood components. Leukocytes present in a blood unit can
multiply after transfusion, mounting an often fatal "graft-versus-host" immune
response against the recipient. Similarly, alloimmunization, an immune response
that can develop from repeated exposure to transfused leukocytes, can
significantly reduce the efficacy of subsequent transfusions as a result of the
production of antibodies. Moreover, leukocytes themselves may harbor and
transmit bacteria and infectious viruses, such as HIV, CMV and HTLV.

Emerging and unidentified pathogens also present a threat to the blood
supply, a problem illustrated by the recent history of HIV. It is estimated that
HIV was present in the blood supply for at least seven years before it was
identified as the causative agent of AIDS and at least eight years before a test
was commercially implemented to detect the presence of HIV antibodies in donated
blood. During those years, many transfusion recipients were infected with the
virus, including approximately 70% of patients with severe hemophilia.

The risk of transmission of any of these pathogens from an infected donor
is compounded by a number of factors. If a unit of blood contains an infectious
pathogen, dividing the blood into its components may expose three or more
patients to the pathogen in that unit. Similarly, patient populations that
require frequent transfusions, such as patients with cancer, suppressed immune
systems, and kidney and liver disorders, experience a heightened risk of
infection due to multiple exposures.

Current Approaches to Address Blood Supply Contamination. Public awareness
in recent years of the significant rates of hepatitis and HIV transmission from
blood transfusions has led to expanded efforts to improve the safety of the
blood supply. For many years, the only approach available to reduce the risk of
transmission of diseases was donor screening interviews. In addition to required
donor screening, diagnostic tests have been developed to detect the presence of
certain infectious pathogens known to be transmitted in blood. However, there
remain a number of other blood-borne pathogens for which tests have not been
routinely administered or even developed. The table below identifies the
significant infectious pathogens known to be transmitted through transfusions of
platelets, FFP and red cells:

<TABLE>
<S> <C> <C> <C>
----------------------------------------------------------------------------------------------------
ROUTINELY SCREENED
FOR IN THE
UNITED STATES
FAMILY INFECTIOUS PATHOGEN DISEASE
----------------------------------------------------------------------------------------------------
Hepatitis viruses HBV, HCV Hepatitis Yes
HGV Hepatitis No
Retroviruses HIV-1 and -2 AIDS Yes
HTLV-I and -II Malignant lymphoproliferative Yes
disorders, neuropathy
Herpes viruses CMV CMV retinitis, hepatitis, No
pneumonia
EBV Epstein-Barr Syndrome No
Parvoviruses B-19 Aplastic anemia No
Bacteria Gram negative, gram positive Sepsis No
Treponema pallidum Syphilis Yes
Borrelia burgdorferi Lyme disease No
Protozoans T. cruzi Chagas' disease No
B. microti Babesiosis No
L. donovani Leishmaniasis No
Plasmodium sp. Malaria No
----------------------------------------------------------------------------------------------------
</TABLE>

Although donor screening and diagnostic testing of donated blood have been
successful in reducing the incidence of transmission of many of these known
pathogens, testing has a number of limitations. As the preceding table
indicates, tests are currently performed for only a limited number of
blood-borne pathogens. Moreover, these tests occasionally fail, and clerical
errors, such as mistesting or mislabeling, and other mistakes further expose
patients to contaminated blood. All tests currently used in blood centers, with
the exception of the recently developed P-24 antigen test for HIV-1, are
antibody tests, which are intended to

25
<PAGE> 28

detect antibodies directed against a pathogen, rather than to detect the
pathogen itself. All of these tests can fail if performed during the
"infectivity window," that is, early in the course of an infection before
antibodies or P-24 antigen appear in detectable quantities. Similarly, tests for
viral infection may be ineffective in detecting a genetic variant of the virus
that the test was not developed to detect. For instance, certain strains of HIV,
such as Subtype O, are sometimes not detected in the standard HIV tests.
Finally, there are no current tests available to screen effectively for many
emerging pathogens, and testing cannot be performed for pathogens that have yet
to be identified. As a result of these limitations, a number of infectious
pathogens still pass into the blood supply.

The risk of pathogen transmission can be significant when no diagnostic
test to detect the blood-borne pathogen is available, such as in the case of
emerging and unidentified pathogens. The risk associated with untested blood
components is illustrated by the table below, which indicates the approximate
risk (per transfusion unit) in the United States for transmission of HIV and HCV
prior to and after the development of diagnostic tests.

<TABLE>
<CAPTION>
PRE-TESTING POST-TESTING
PATHOGEN DISEASE RISK RISK
- -------- ---------- ----------- -------------
<S> <C> <C> <C>
HIV AIDS 1 in 2,500 1 in 400,000
HCV Hepatitis 1 in 220 1 in 3,300
</TABLE>

In addition, the risk of transmission of pathogens may vary greatly because
of regional or demographic differences. For example, prior to the implementation
of diagnostic testing, the risk of HIV in at least one metropolitan area was as
high as one in 50 per transfusion unit. Furthermore, for patients who receive
multiple blood transfusions, the risk of pathogen transmission increases
approximately in proportion to the number of transfusion units received.

In addition, there are many known pathogens for which tests are not
routinely performed. In the United States, tests are not routinely performed to
detect bacteria, although the risk of transmitting bacteria from a random donor
is estimated to be one in 250. A typical pooled random donor therapeutic dose of
platelets is provided by six random donors, with the risk of transmitting
bacteria estimated to be one in 42. In a study conducted in Hong Kong of bone
marrow transplant patients receiving repeated platelet transfusions, the
incidence of symptomatic septicemia (a potentially fatal infection) was reported
to be one in 16 patients.

In light of these continuing concerns, many patients have attempted to
mitigate the risks of transfusion through "autologous donation," donation of
their own blood for anticipated future use, or, where autologous donation is
impracticable, through the designation of donors such as family members.
Although autologous donations eliminate many risks, the blood collected is still
subject to the risk of bacterial growth during storage and is rarely available
in emergency situations. In addition, the statistical incidence of positive
diagnostic test results from designated donor blood has been found to be as high
as in random donor blood.

Blood centers and health care providers have initiated additional
procedures in an effort to address pathogen transmission issues. For example,
platelet apheresis is sometimes used to limit donor exposure from pooled,
manually collected platelets. In addition, blood centers may quarantine single
donor plasma apheresis units until after the infectivity window has elapsed,
followed by confirmatory retesting of the donor, if the donor is available, to
verify the safety of the donated plasma. However, quarantining plasma can be
unwieldy, expensive and difficult to manage in inventory. Moreover, a quarantine
cannot be used with platelets and red blood cells because these components have
shelf lives that are shorter than the infectivity window related to antibody
production. Although no commercial processes are currently available to
eliminate pathogens in platelets and red cells, a number of pathogen
inactivation methods are used commercially in Europe for FFP, including
treatment with solvent-detergent and methylene blue. Both of these processes can
result in degradation of plasma proteins. In addition, because the
solvent-detergent process pools hundreds of units of plasma, the potential risk
of transmitting pathogens not inactivated by the process, such as parvovirus
B-19, is increased.

The current method used by blood centers to inactivate leukocytes utilizes
gamma (x-ray) irradiation. This nonspecific method for inactivating leukocytes
has a narrow window of efficacy: insufficient treatment can

26
<PAGE> 29

leave viable leukocytes in the blood, while excessive treatment can impair the
therapeutic function of the desirable blood components being transfused.
Leukocyte depletion by filtration decreases the concentration of leukocytes in
transfusion units, but does not inactivate or completely eliminate leukocytes.

Economic Costs of Blood Supply Contamination. In economically developed
countries, many of the tests and inactivation measures described above are
mandated by regulatory agencies, resulting in a safer and more uniform blood
supply, but also significantly increasing costs of processing and delivering
blood products. In the United States, based on a study of eight hospitals and
blood centers conducted in July 1996 on behalf of the Company (the "Cost
Study"), the estimated base cost for a transfusion unit of apheresis platelets
ranges from approximately $400 to $640 and for a transfusion unit of random
donor platelets ranges from approximately $220 to $440. These estimates include
donor screening and diagnostic tests, such as those for HIV, HTLV, HBV and HCV.
The table below indicates, based on the Cost Study, the estimated range of costs
to hospitals for the additional procedures for platelet transfusions described
above for each of apheresis and random donor platelet transfusion units. The
frequency of use and additional charge for each procedure vary widely.

<TABLE>
<CAPTION>
ADDED COST PER
----------------------------------------------
APHERESIS RANDOM DONOR
PROCEDURE TRANSFUSION UNIT TRANSFUSION UNIT
---------------------------------------- --------------------------- ----------------
<S> <C> <C>
Gamma irradiation....................... $ 5 to $55 $30 to $325
CMV testing............................. $15 to $35 $90 to $210
Leukocyte filtration.................... $20 to $75 $20 to $ 75
Designated donor........................ $15 to $50 --
</TABLE>

Moreover, the development and widespread use of testing for many unusual or
low-incidence pathogens may not be cost-effective to undertake. For example, the
development of tests to detect the presence of all forms of harmful bacteria
would be extremely expensive. As a result, the only test regularly conducted to
detect the presence of bacteria is the test for the bacterium that causes
syphilis. With managed health care organizations and other third-party payors
increasingly challenging the cost of medical services performed, these cost
limitations may become more pronounced in the future.

The continuing risk of transmission of serious diseases through transfusion
of contaminated blood components from both known and unknown pathogens, together
with the limitations of current approaches to providing a safe blood supply,
have created the need for a new approach to pathogen inactivation that is safe,
easy to implement and cost-effective. To address this need, a successful
approach should have broad application in the effective inactivation of
clinically significant pathogens, whether or not currently identified, while
providing therapeutically functional blood components.

THE CERUS SOLUTION

The Company is developing pathogen inactivation systems to improve the
safety of blood transfusions. These systems employ the Company's proprietary
small molecule compounds. Studies conducted by the Company have indicated the
ability of these compounds to inactivate a broad array of viral and bacterial
pathogens that may be transmitted in blood component transfusions. The Company
believes that, as a result of the mechanism of action of its proprietary
technology, its systems also have the potential to inactivate many new pathogens
before they are identified and before tests are developed to detect their
presence in the blood supply. Because the Company's systems are being designed
to inactivate rather than merely test for pathogens, the Company's systems also
have the potential to reduce the risk of transmission of pathogens that would
remain undetected by testing.

The compounds synthesized by the Company act by preventing the replication
of nucleic acid (DNA or RNA); platelets, FFP and red blood cells do not contain
nuclear DNA or RNA. When the inactivation compounds are introduced into the
blood component for treatment, they cross bacterial cell walls or viral
membranes, then move into the interior of the nucleic acid structure. When
subsequently activated by an energy source, such as light, the compounds bind to
the nucleic acid of the viral or bacterial pathogen,

27
<PAGE> 30

preventing replication of the nucleic acid. A virus, bacteria or other
pathogenic cell must replicate in order to cause infection. The Cerus compounds
react in a similar manner with the nucleic acid in leukocytes. This interaction
inhibits the leukocyte activity that is responsible for certain adverse immune
and other transfusion-related reactions. The Company is designing its pathogen
inactivation systems to provide therapeutically functional platelets, FFP and
red cells following the inactivation treatment process. The Cerus compounds are
being designed to react with nucleic acid only during the pathogen inactivation
process and not after the treated blood component is transfused. The systems are
also being designed to reduce the amount of residual inactivation compound and
breakdown products of the inactivation process prior to transfusion.

The Company's pathogen inactivation systems are being designed to integrate
into current blood collection, processing and storage procedures. Furthermore,
the Company believes that the use of its pathogen inactivation products could,
over time, lead to a reduction in the use of certain costly procedures that are
currently employed in blood component transfusions, such as gamma irradiation,
CMV testing and leukocyte filtration.

CERUS STRATEGY

The Company's objective is to become the global leader in the development
and commercialization of systems to inactivate blood-borne pathogens in blood
components used for transfusions. Key elements of the Company's strategy to
achieve this objective are the following:

Establish Pathogen Inactivation Systems as the Standard of Care. Target
customers for the Company's blood component treatment systems are the fewer than
200 community blood centers collecting approximately 85% of blood in the United
States and there is an even greater concentration in foreign countries. To
achieve its objective of establishing its systems as the standard of care, the
Company has developed strong relationships with prominent transfusion medicine
experts in these centers worldwide. The Company intends to work with these
experts to identify specific needs in blood component treatment technology and
to encourage support for the adoption of its pathogen inactivation systems as
the standard of care.

Leverage Expertise and Core Technology. The Company is using its broad
expertise in nucleic acid chemistry to develop proprietary compounds designed to
inactivate infectious pathogens in blood components. The Company will initially
seek to gain regulatory approval and commercialize its platelet pathogen
inactivation system. The Company's strategy is to build on its core technology
and experience gained in developing its platelet pathogen inactivation system to
develop its FFP and red cell pathogen inactivation systems. The Company believes
that, if regulatory approval of its products is obtained, market penetration
achieved by its platelet product will facilitate the entry into the market of
its FFP and red cell products. In addition, the Company believes that its
platform technology has potential application in a number of health and
research-related fields beyond the initial areas targeted by the Company.

Capitalize on Strategic Alliance with Baxter. The Company intends to
capitalize on the manufacturing, marketing and distribution expertise and
resources of Baxter. The Company believes that Baxter's established position as
a manufacturer and leading supplier of devices, disposables and other products
related to the transfusion of human blood products can provide the Company with
access to an established marketing, sales and distribution network. The pathogen
inactivation systems are being designed to integrate into Baxter's current
product line and into current blood collection, processing and storage
processes. In addition, the economic terms of the Baxter agreements enable the
Company to limit its operating costs and capital expenditures, and thereby
improve its operating margins.

Protect and Enhance Proprietary Position. The Company believes that the
protection of its proprietary technologies is important to its business
prospects and that its intellectual property position may create competitive
barriers to entry into the blood component treatment market. The Company
currently holds issued and allowed patents covering a number of fundamental
aspects of the Company's blood component treatment system technology. The
Company intends to continue to pursue its patent filing strategy and to
vigorously defend its intellectual property position against infringement.

28
<PAGE> 31

PRODUCTS UNDER DEVELOPMENT

The Company is developing treatment systems to inactivate infectious
pathogens in platelets, FFP and red cells and to inactivate leukocytes to reduce
the risk of certain adverse transfusion-related reactions. The following table
identifies the Company's product development programs:

<TABLE>
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------
CERUS PRODUCT
THERAPEUTIC IN INACTIVATION DEVELOPMENT
PROGRAM INDICATION DEVELOPMENT COMPOUND STATUS(1)
-----------------------------------------------------------------------------------------------------
Platelets Surgery, cancer Platelet S-59 Phases 1a and 1b Clinical
chemotherapy, Pathogen Trials completed; Phase 2
transplantation, Inactivation Clinical Trial in process
bleeding disorders System
Plasma (FFP) Surgery, FFP S-59 Preclinical Development;
transplantation, Pathogen IND filing anticipated in
bleeding disorders Inactivation early 1997
System
Red Cells Surgery, Red Cell ALE S-303 Preclinical Development;
transplantation, Pathogen lead compound selected
anemia, cancer Inactivation
chemotherapy, System
trauma
-----------------------------------------------------------------------------------------------------
</TABLE>

(1) Preclinical Development includes conducting in vitro pathogen inactivation
testing and toxicology, formulation and stability testing prior to possible
submission of an IND to the FDA and comparable submissions in Europe.

The Phase 1a Clinical Trial is a clinical trial to determine
post-transfusion platelet recovery and lifespan of treated autologous
platelets in 20 healthy human subjects.

The Phase 1b Clinical Trial is a clinical trial to determine the safety and
tolerability of treated autologous platelets in 10 healthy human subjects.

The Phase 2 Clinical Trial is a clinical trial to determine the
post-transfusion platelet recovery and lifespan of treated autologous
platelets following SRD treatment in 17 healthy human subjects from the
Phase 1a Clinical Trial.

The Phase 1a and Phase 1b Clinical Trials were conducted pursuant to an IND
submitted to the FDA. The Company anticipates that the data from the United
States clinical trials will be used to support similar regulatory
submissions in Europe.

The Company's current estimate of the commencement of various clinical
trials and the planned submission time of regulatory filings included in this
table and elsewhere in this Prospectus are forward-looking statements that
involve risks and uncertainties. The actual clinical trial and submission dates
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the Company's success in
completing preclinical development and the other factors set forth under "Risk
Factors" and elsewhere in this Prospectus. See "-- Government Regulation."

PLATELET PROGRAM

Platelet Usage and Market. Platelets are cellular components of blood that
are an essential part of the clotting mechanism. Platelets facilitate blood
clotting and wound healing by adhering to damaged blood vessels and to other
platelets. Platelet transfusions are used to prevent or control bleeding in
platelet-deficient patients, such as those undergoing cancer chemotherapy or
organ transplant.

The Company estimates the production of platelets in 1995 to be 1.8 million
transfusion units in North America, 1.2 million transfusion units in Western
Europe and 800,000 transfusion units in Japan. A typical transfusion unit
consists of platelets from either a single apheresis donor or six random whole
blood donors. As indicated in the Cost Study, the estimated cost of an apheresis
transfusion unit of platelets ranges from approximately $400 to $640 and the
cost of a pooled random donor transfusion unit of platelets ranges

29
<PAGE> 32

from approximately $220 to $440. A principal motivation for platelet apheresis
is to limit donor exposure from pooled, manually collected platelets. Platelet
transfusions may also require one or more additional procedures with additional
costs which are summarized in a prior table. The Company believes that its
platelet pathogen inactivation system may reduce the need for many of these
procedures and the motivation for single donor apheresis platelets.

Platelet Pathogen Inactivation System. The Company's platelet pathogen
inactivation system applies a technology that combines light and the Company's
proprietary inactivation compound, S-59, which is a synthetic small molecule
from a class of compounds known as psoralens. S-59 was selected from over 100
psoralen derivatives synthesized by the Company, following preclinical studies
conducted by the Company to assess safety and ability to inactivate pathogens
and leukocytes while preserving platelet function.

When illuminated, S-59 undergoes a specific and irreversible chemical
reaction with nucleic acid. This chemical reaction renders the genetic material
of a broad array of pathogenic organisms incapable of replication. A virus,
bacteria or other pathogenic cell must replicate in order to cause infection. A
similar reaction with leukocyte nucleic acid inhibits the leukocyte activity
that is responsible for certain adverse immune and other transfusion-related
reactions. Most of the S-59 is converted to breakdown products during and after
the inactivation reaction. Studies conducted by the Company with preclinical
models have indicated that, following transfusion, the S-59 and its breakdown
products are rapidly metabolized and excreted. The system under development
employs a removal process designed, as a further safety measure, to reduce the
amount of residual S-59 and breakdown products prior to transfusion (the S-59
reduction device or "SRD").

The Company's platelet pathogen inactivation system, developed with Baxter,
has been designed for use in the blood center setting. The system consists of a
disposable processing set, containing the S-59 compound and the SRD, and an
illumination device to deliver light to trigger the inactivation reaction. The
current configuration of the platelet photochemical treatment system under
development involves the collection of the platelets, as normally performed,
followed by transfer of the platelets to a disposable treatment container with
the S-59 compound. The mixture of S-59 and platelets is then illuminated for
approximately three minutes. The final step employs the SRD, a passive
adsorption device, to reduce the amount of residual S-59 and S-59 breakdown
products. Following the SRD treatment, which takes approximately eight hours,
the platelets are transferred to the final storage container.

Development Status. Based on discussions with the FDA, the Company
believes that it will be required to provide data from human clinical studies to
demonstrate the safety of treated platelets and their therapeutic comparability
to untreated platelets, but that only data from in vitro studies, not data from
human clinical studies, will be required to demonstrate the system's efficacy in
inactivating pathogens. In light of these criteria, the Company's clinical trial
program for platelets will consist of studies that differ from the usual Phase
1, Phase 2 and Phase 3 studies. Specifically, its Phase 1 studies were designed
to demonstrate in healthy subjects that use of the system does not alter the in
vivo function (therapeutic efficacy) of the platelets treated with the system
and to evaluate in healthy subjects the safety and tolerability of platelets
treated with the system. Phase 2 studies consist of a reevaluation in the
healthy subjects used in the Phase 1 study of the in vivo function of platelets
treated with the system. Phase 3 studies are expected to consist of a study of
the therapeutic efficacy of platelets treated with the system in a larger group
of patients who require transfusions.

There can be no assurance, however, that these means of demonstrating
safety and efficacy will ultimately be acceptable to the FDA or that the FDA
will continue to believe that this clinical protocol is appropriate. Moreover,
even if the FDA considers these means of demonstrating safety and efficacy to be
acceptable in principle, there can be no assurance that the FDA will find the
data submitted sufficient to demonstrate safety and efficacy. In particular,
although the Company anticipates that the FDA will consider in vitro data an
appropriate means of demonstrating efficacy in pathogen inactivation, there can
be no assurance that the FDA will so conclude, and any requirement to provide
other than in vitro data would adversely affect the timing and could affect the
success of the Company's efforts to obtain regulatory approval. See
"-- Government Regulation."

In vitro studies conducted by the Company have indicated the efficacy of
the Company's platelet pathogen inactivation system for the inactivation of a
broad array of viral pathogens (cell-free HIV, cell-

30
<PAGE> 33

associated HIV, proviral HIV, human CMV and model viruses for human HBV and HCV)
and bacterial pathogens (six gram-positive strains and seven gram-negative
strains) up to concentrations that the Company believes are present in
contaminated platelets when the blood is donated. There can be no assurance that
contamination will never exceed such concentrations. Similar in vitro studies
have indicated inhibition of leukocyte activity. Because of the mechanism of
action of its platelet pathogen inactivation system, the Company believes that
its platelet system may also inactivate protozoans in platelets. Psoralens other
than S-59 have been shown to inactivate protozoans in cell culture media.
However, to date the Company has conducted no studies on protozoans with S-59 in
platelets, and there can be no assurance that the Company's platelet pathogen
inactivation system would effectively inactivate protozoans.

Human clinical trials of the platelet pathogen inactivation system are
currently being pursued by the Company. Baxter is the sponsor of such trials.
Based upon the assumptions discussed above, the Company currently plans to
conduct clinical trials for the platelet pathogen inactivation system in the
phases described below.

The Company's platelet pathogen inactivation system consists of four new
components not previously tested in humans: the photochemical compound S-59, a
synthetic platelet additive solution (PAS III), the PL 2410 plastic container
for treatment and storage and the SRD. In the initial Phase 1a trial, the
Company compared platelets treated with the pathogen inactivation system
(without the SRD) with non-photochemically treated platelets suspended in the
new PAS III solution and stored in the new PL 2410 plastic container developed
by Baxter, rather than with standard platelets prepared in plasma and stored in
a currently approved container.

The Phase 1a trial, completed in March 1996, consisted of a single blind,
randomized, crossover study in 20 healthy volunteer subjects divided between two
sites. The study compared the post-transfusion recovery (the proportion of
transfused platelets circulating in the first hours after transfusion) and
lifespan (the length of time the transfused platelets circulate in the
recipient's bloodstream) of a small volume (10 ml) of five-day-old treated and
untreated platelets. Under current FDA regulations, platelets may not be stored
for more than five days after collection from the donor.

Post-transfusion recovery and lifespan of five-day-old standard platelets
varies widely, even in healthy individuals. As a result, there is no established
regulatory or clinical standard for post-transfusion recovery and lifespan of
platelets. In the Company's clinical study, the average post-transfusion
recovery of five-day-old platelets treated with the Company's platelet pathogen
inactivation system was lower than that of the untreated five-day-old platelets.
Although this difference was statistically significant, the average post-
transfusion recovery was within the range of average recoveries reported in
published studies funded by the National Institutes of Health (the "NIH") and
Baxter, as well as in a number of other studies reported in the scientific
literature. These published studies used currently approved processing and
storage systems. In addition, in the Company's clinical study, the average
lifespan of treated platelets was shorter than that of untreated platelets.
Although this difference was statistically significant and the average lifespan
was lower than the range of average untreated platelet lifespans reported in the
published studies referred to above, the average lifespan was within the
distribution of ranges of untreated platelet lifespans reported in such studies.
The clinical investigators reported no adverse events attributable to
transfusion with the treated platelets.

In September 1996, a Phase 1b single blind, randomized, crossover study was
completed in 10 healthy subjects. This study compared the tolerability and
safety of photochemically treated platelets processed with the SRD with
untreated platelets. This second study involved the transfusion of full
therapeutic doses of platelets (300 ml) given at the maximum tolerable
transfusion rate. No adverse events attributable to transfusion with the treated
platelets were reported, and the Company is currently analyzing data from this
study.

In September 1996, the Company commenced a Phase 2 clinical study designed
to measure the post-transfusion platelet recovery and lifespan of
photochemically treated platelets processed with the SRD and stored for five
days. This study is being conducted in 17 healthy subjects from the Phase 1a
study so that comparisons may be made with prior results. If the Phase 2 trial
is successfully completed, the Company intends to submit a protocol for a Phase
3 pivotal, randomized study in 200 to 260 patients requiring platelet

31
<PAGE> 34

transfusion. The Company currently anticipates that the primary endpoint in this
study will be the increase in platelet count post-transfusion adjusted for
platelet dose and patient size (the "corrected count increment").

The Company believes that, in deciding whether a pathogen inactivation
system is safe and effective, the FDA is likely to take into account whether it
adversely affects the therapeutic efficacy of blood components as compared to
the therapeutic efficacy of blood components not treated with the system, and
that the FDA will weigh the safety and other risks against the benefits of using
the system in a blood supply that has become safer in recent years. The Company
currently does not expect to file a product approval application with the FDA or
comparable regulatory filings in Europe for its platelet pathogen inactivation
system or for any of its other planned products prior to 1998. The results from
preclinical studies and early clinical trials conducted by the Company may not
be predictive of results obtained in later clinical trials, and there can be no
assurance that clinical trials conducted by the Company will demonstrate
sufficient safety and efficacy to obtain the requisite approvals or that
marketable products will result. The rate of completion of the Company's
clinical trials may be delayed by many factors, including slower than
anticipated patient enrollment or any other adverse event occurring during the
clinical trials. No assurance can be given that any of the Company's development
programs will be successfully completed, that any further IND will become
effective or that additional clinical trials will be allowed by the FDA or other
regulatory authorities, that clinical trials will commence as planned, that
required United States or foreign regulatory approvals will be obtained on a
timely basis, if at all, or that any products for which approval is obtained
will be commercially successful. The Company does not intend to make any
labeling claims that the Company's pathogen inactivation systems may inactivate
any pathogens for which it does not have in vitro data supporting such claims.
The Company does not expect that its platelet pathogen inactivation system will
be able to inactivate all known and unknown infectious pathogens.

FFP PROGRAM

FFP Usage and Market. Plasma is a noncellular component of blood that
contains coagulation factors and is essential for maintenance of intravascular
volume. Plasma is either separated from collected units of whole blood or
collected directly by apheresis. The collected plasma is then packaged and
frozen to preserve the coagulation factors. Some of the frozen plasma is made
available for fractionation, while some is designated for use as FFP. FFP is a
source of all blood clotting factors except platelets and is used to control
bleeding in patients who require clotting factors, such as patients undergoing
extensive surgical procedures or transplants and patients with chronic liver
disease or certain genetic clotting factor deficiencies.

The Company estimates the production of FFP in 1995 to be 3.4 million
transfusion units in North America, 4.8 million transfusion units in Western
Europe and 2.0 million transfusion units in Japan. In the Cost Study, the
estimated base price of a transfusion unit of FFP in the United States ranges
from approximately $35 to $73. A typical therapeutic transfusion consists of
four to six transfusion units of FFP.

FFP Pathogen Inactivation System. The Company's pathogen inactivation
system for FFP will use the same S-59 psoralen compound and is expected to use
an SRD and illumination device similar to those being used by the Company in its
clinical trials for its platelet pathogen inactivation system. The parameters of
the system are expected to be very similar to the platelet treatment system,
with minor changes in the illumination time and treatment volume. The FFP
pathogen inactivation system under development involves the collection of plasma
by either manual or automated procedures. Plasma is then transferred to a
disposable container with S-59. The mixture of S-59 and plasma is then
illuminated for approximately three minutes. The final step employs the SRD to
reduce residual S-59 and breakdown products. Following the SRD treatment, the
plasma is transferred to the final storage container and is frozen in accordance
with standard protocols.

Development Status. The Company believes that the requirements to obtain
regulatory approval of the FFP pathogen inactivation system will be
substantially similar to those applicable to the platelet pathogen inactivation
system.

In vitro studies conducted by the Company to date have indicated the
efficacy of the FFP pathogen inactivation system for the inactivation in FFP of
a broad array of viral pathogens. Because of the mechanism of action of its FFP
pathogen inactivation system, the Company believes that its system may also
inactivate

32
<PAGE> 35

protozoans and inhibit leukocyte function. To date, the Company has conducted no
studies on protozoans or to detect inhibition of leukocyte activity in FFP, and
there can be no assurance that the Company's FFP pathogen inactivation system
would effectively inactivate protozoans or leukocytes. The Company has assessed
the impact of S-59 photochemical treatment on the function of plasma proteins.
Plasma derived from whole blood or apheresis must be frozen within eight hours
of collection to meet the standard as "fresh frozen plasma." After freezing,
plasma may be stored for up to one year, thawed once, and must be transfused
within 24 hours of thawing. The Company has measured the in vitro coagulation
function activity of various clotting factors in FFP after photochemical
treatment, SRD treatment, freezing and thawing. These factors are Fibrinogen
(Factor I), Prothrombin (Factor II), Factor V, Factor VII, Hemophilia A Factor
(Factor VIII), Hemophilia B Factor (Factor IX), Factor X and Factor XI. The
Company believes that in vitro data from these studies indicate that treated FFP
maintained adequate levels of coagulation function for FFP. These in vitro
results are not necessarily indicative of coagulation function that may be
obtained in vivo, and there can be no assurance that the FDA or foreign
regulatory authorities would view such levels of coagulation function as
adequate.

The Company believes that the Phase 1 clinical trials for the FFP pathogen
inactivation system will be similar to the clinical protocol for the platelet
pathogen inactivation system. The Company intends to submit an IND to the FDA to
begin Phase 1 clinical trials on the FFP pathogen inactivation system in early
1997. There can be no assurance that the Company will submit such application as
planned or complete clinical trials as planned or that any such trials, if
commenced, will be successful.

RED CELL PROGRAM

Red Cell Usage and Market. Red blood cells are essential components of
blood that carry oxygen to tissues and carbon dioxide to the lungs. Red cells
may be transfused as a single treatment in surgical and trauma patients with
active bleeding or on a repeated basis in patients with acquired anemia or
genetic disorders such as sickle cell anemia, or in connection with
chemotherapy.

The Company estimates the production of red blood cells in 1995 to be 13.7
million transfusion units in North America, 14.3 million transfusion units in
Western Europe and 3.0 million transfusion units in Japan. The Cost Study
indicated that the estimated cost of a transfusion unit of red blood cells in
the United States ranges from approximately $66 to $110. A typical red blood
cell transfusion consists of two or more red blood cell transfusion units. As
shown in the Cost Study, a red blood cell transfusion may also require one or
more additional procedures with additional costs ranging from $10 to $210 for
each procedure. The procedures are used to address problems presented by
leukocytes and to conduct pathogen diagnostic testing beyond the standard
testing.

Red Cell ALE Treatment System. The Company is developing a system for
pathogen inactivation in red blood cells using a compound that binds to nucleic
acid in a manner similar to that of S-59-based systems, but does not require
light. The Company's method for inactivating pathogens in red blood cells is
based on a proprietary ALE compound, S-303, a small molecule synthesized by the
Company. The selection of S-303 was based on preclinical studies of over 100 ALE
compounds synthesized by the Company to assess safety, stability and ability to
inactivate pathogens and leukocytes, while preserving red cell survival and
function.

The red cell ALE treatment system, which is being co-developed with Baxter,
is being designed for implementation in blood center settings with minimal
disruption of current processing practices. The system is being designed for use
with both manual and automated red blood cell collection systems.

Development Status. In vitro studies by the Company have indicated the
efficacy of the ALE process for the inactivation of a broad array of viral and
bacterial pathogens. Because of the mechanism of action of its red cell ALE
treatment system, the Company believes that its system may also inactivate
protozoans and inhibit leukocyte function. However, the Company has conducted no
studies on protozoans or to detect inhibition of leukocyte activity in red
cells, and there can be no assurance that the Company's red cell system would be
effective to inactivate protozoans or leukocytes. The Company is currently
conducting additional tests on S-303 and expects to commence good laboratory
practice (GLP) toxicology and pathogen inactivation validation studies on its
red cell pathogen inactivation system in early 1997. The estimated date

33
<PAGE> 36

for the commencement of these additional studies is a forward-looking statement
that involves risk and uncertainties. There can be no assurance that these
studies will not be delayed as a result of certain factors set forth under "Risk
Factors" and elsewhere in this Prospectus.

FUTURE PRODUCT DEVELOPMENT

The Company believes that the technology it has developed for treatment of
platelets, FFP and red cells may have application in treating other blood
products, including plasma fractions, such as Factor VIII and Factor IX clotting
factors, and recombinant equivalents of plasma derivatives. The Company also
believes that the compounds and processes it has developed for inactivation of
pathogens and leukocytes may have other medical applications in which reactions
with nucleic acid may serve to prevent or control the activities of cells or
microorganisms.

ALLIANCE WITH BAXTER

In December 1993, the Company entered into an agreement with Baxter to
develop, manufacture and market worldwide a system for pathogen inactivation of
platelets for transfusion (the "Platelet Agreement"). Under the Platelet
Agreement, Baxter purchased 125,000 shares of Series C Preferred Stock for an
aggregate purchase price of $1.0 million and paid the Company up-front license
fees and milestone and development payments totaling $5.2 million. The agreement
provides for Baxter and the Company to share equally development expenses and
for Baxter to make additional payments to the Company subject to the achievement
of certain milestones. To date, Baxter has paid the Company $1.75 million based
on the achievement of preclinical and clinical milestones, in addition to
payments made by Baxter to cover its share of development expenses.

In July 1995, the Company entered into interim research funding agreements
with Baxter providing for Baxter and the Company to share research and
development expenses in 1995 for the Company's pathogen inactivation systems for
FFP and red blood cells.

In April 1996, the Company entered into an agreement with Baxter to
develop, manufacture and market systems for pathogen inactivation of FFP and red
blood cells (the "Red Cell/Plasma Agreement"). Under the Red Cell/Plasma
Agreement and a related Series E Preferred Stock Purchase Agreement dated April
1, 1996, Baxter purchased 190,477 shares of Series E Preferred Stock on April 1,
1996 at an aggregate purchase price of $3.0 million and 190,476 shares of Series
E Preferred Stock on July 1, 1996 at an aggregate purchase price of $3.0
million. The agreement provides for Baxter and the Company to share equally
expenses for development of FFP and red cell pathogen inactivation systems,
subject to certain potential adjustments, commencing on January 1, 1997. The
sharing by Baxter of development expenses is conditioned upon receipt of
regulatory approval to begin Phase 3 clinical trials of the platelet pathogen
inactivation system.

The Red Cell/Plasma Agreement calls for specific equity investments by
Baxter to be made at 120% of the market price at the time of each investment
subject to the achievement of certain milestones as follows: (i) $5 million,
upon the later of January 10, 1997 and the approval to commence a Phase 3 study
in the United States or Europe in the program under the Platelet Agreement, (ii)
either $5 million, upon the later of January 10, 1998 and the achievement of
both (a) the mutual determination by the Company and Baxter that there is
sufficient data to conclude that the Phase 3 platelet trials are likely to
satisfy specified criteria (the "Interim Platelet Determination") and (b) the
filing of an IND with the FDA to begin a Phase 1 study under the red cell
program or comparable filing in Europe under such program, or separate equity
investments of $2 million, upon the later of January 10, 1998 and the Interim
Platelet Determination and $3 million, upon the later of January 10, 1998 and
the approval of an IND by the FDA under the red cell program or comparable
approval in Europe under such program, and (iii) $5 million, upon the later of
January 10, 1999 and the achievement of both (a) the approval by the FDA to
commence a Phase 2 study in the United States or comparable approval in Europe
under the red cell project and the (b) approval of a New Drug Application
("NDA") by the FDA under the platelet program or comparable approval in Europe
under such program.

Pursuant to the Red Cell/Plasma Agreement, Baxter has agreed that it will
not at any time, nor will it permit any of its affiliates, to own capital stock
of the Company having 20.1% or more of the outstanding

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voting power of the Company. Such restrictions on stock purchases will not apply
in the event a third party makes a tender offer for a majority of the
outstanding voting securities of the Company or if the Board of Directors of the
Company determines to liquidate or sell to a third party substantially all of
the assets or a majority of the voting securities of the Company or to approve a
merger or consolidation in which the Company's stockholders will not own a
majority of the voting securities of the surviving entity.

Baxter has the right to purchase a number of shares up to 19.9% of any
equity securities to be sold in this offering and the Baxter Private Placement.
Baxter has committed to purchase the maximum number of shares of Common Stock
permitted by its agreements with the Company at the initial public offering
price, less underwriting discounts and commissions, of $6.9 million (assuming a
total price to public of $30 million), subject to certain conditions, including
the closing of this offering and the satisfaction of any waiting period
requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations promulgated thereunder. The sale of such shares
will not be registered in this offering. Pursuant to an Amended and Restated
Investors' Rights Agreement dated as of April 1, 1996, the Company has granted
to Baxter certain registration rights.

Subject to regulatory approval of a pathogen inactivation system developed
under either agreement, Baxter has the exclusive right and responsibility to
market the system (including both the inactivation system disposables and any
related instruments) worldwide. The Company is obligated to supply the
inactivation compound for the system, with Baxter supplying the remaining
components. Under the Platelet Agreement, the Company is to receive between
24.6% and 28.5% of revenues from sales of inactivation system disposables after
deducting from such revenues the amount by which Baxter's and the Company's cost
of goods for the inactivation system disposables exceeds certain dollar amounts
specified in the agreement. The percentage of revenue to be received by the
Company will be determined on the basis of the market price of the system; in no
event, however, will the amount to be received be less than $8.50 nor more than
$20.00 per system. Under the Red Cell/Plasma Agreement, the Company and Baxter
are to share equally in gross profits from sales of inactivation system
disposables, after deducting from such gross profits a specified percentage
allocation to be retained by the marketing party for marketing and
administrative expenses. However, the revenue sharing under this agreement is
subject to adjustment upon the occurrence of certain events, including any
adjustments in the relative sharing by the parties of development expenses.
Under the Red Cell/Plasma Agreement, the Company and Baxter are also to receive
their respective costs of goods for compounds and components supplied for
inactivation system disposables. Under each agreement, Baxter will retain
revenues from the sales of any related instruments, such as the illumination
devices used to activate S-59. If Baxter does not market a system in a country
following its regulatory approval, ceases to market a system or fails to satisfy
certain market penetration criteria in the case of the platelet system, the
Company will have the non-exclusive right under the Platelet Agreement and the
exclusive right under the Red Cell/Plasma Agreement to market such system in
that country.

Pursuant to the Baxter agreements, Baxter has certain discretion in
decisions concerning the development and marketing of pathogen inactivation
systems. There can be no assurance that Baxter will not elect to pursue
alternative technologies or product strategies or that its corporate interests
and plans will remain consistent with those of the Company. The Company is aware
that Baxter is developing an alternative pathogen inactivation system for FFP,
based on a compound known as methylene blue. Other companies are currently
marketing methylene blue-based pathogen inactivation systems for FFP in Europe.
If the Company's agreements with Baxter were terminated or if Baxter's product
development efforts were unsuccessful, the Company may need to obtain additional
funding from other sources and would be required to devote additional resources
to the development of its products, delaying the development of its products.
Any such delay would have a material adverse effect on the Company's business,
financial condition and results of operations. There can also be no assurance
that disputes will not arise in the future with respect to the Baxter
agreements. Possible disagreements between Baxter and the Company could lead to
delays in the research, development or commercialization of certain planned
products or could require or result in time-consuming and expensive litigation
or arbitration and would have a material adverse effect on the Company's
business, financial condition and results of operations.

In the development agreements, Baxter agreed to certain limited
restrictions on its ability to independently develop and market products that
compete with the products under the agreements. There can be no

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assurance that these provisions will prevent Baxter from developing or marketing
competing products. The development agreements contain restrictions on the
Company's ability to develop and market pathogen inactivation systems for blood
components outside the Baxter agreements. The Company is entitled, however, to
enter into development and licensing agreements with third parties for pathogen
inactivation technology for plasma derivatives and recombinant equivalents of
plasma derivatives. Such development and licensing agreements are free of any
rights of Baxter, except that the Company must offer Baxter the right to license
such technology on terms no less favorable than the terms offered to other
plasma derivative manufacturers.

The development programs under either of the Baxter agreements may be
terminated by Baxter or the Company on 90 days' notice. Neither party may give
such notice under the FFP program or the red cell program before January 1, 1998
if program test results are successful. If either party so terminates as to a
program, the other party gains exclusive development and marketing rights to the
program, and the terminating party's sharing in program revenues is
significantly reduced.

The agreements with Baxter expressly provide that they do not and shall not
be deemed to create any relationship or a joint venture or partnership. See
"-- Manufacturing and Supply," "-- Marketing, Sales and Distribution" and
"-- Competition."

RESEARCH GRANTS

The Company has three ongoing federal (R01) grants which are administered
by the NIH relating to the Company's research and development of its pathogen
inactivation systems. Two of the grants were awarded directly to the Company and
are five-year awards totaling approximately $1.7 million and $1.3 million,
respectively. The third grant was transferred from the University of California
at San Francisco to Cerus at the time Dr. Corash, the grant's principal
investigator, began his employment relationship with the Company. The balance of
the grant transferred to the Company was approximately $579,000. These three
federal grants must be renewed annually by submitting an Application for
Continuing Support to the NIH. The Company retains all rights to technology
funded by these grants, subject to certain rights of the federal government if
the Company fails to commercialize the technology in a timely manner or if
action is necessary to alleviate health or safety needs not addressed by the
Company, to meet requirements for public use specified by federal regulations or
in the event the Company were to breach certain agreements. The United States
Government also has a non-exclusive, non-transferable, irrevocable, paid-up
license to practice or have practiced for or on behalf of the Government any
subject invention throughout the world.

MANUFACTURING AND SUPPLY

The Company has in the past utilized, and intends to continue to utilize,
third parties to manufacture and supply the inactivation compounds for its
systems and Baxter for other system components for use in clinical trials and
for the potential commercialization of its products in development. The Company
has no experience in manufacturing products for commercial purposes and does not
have any manufacturing facilities. Consequently, the Company is dependent on
contract manufacturers for the production of compounds and on Baxter for other
system components for development and commercial purposes.

The Company is responsible for developing and delivering its proprietary
compounds for effecting pathogen inactivation to Baxter for incorporation into
the final system configuration. This arrangement applies both to the current
supply for clinical trials and, if applicable regulatory approvals are obtained,
the future commercial supply. In order to provide the inactivation compounds for
its platelet and FFP pathogen inactivation systems, the Company has contracted
with two manufacturing facilities for large-scale synthesis of S-59 and
currently has a stock of compound sufficient to support the anticipated
remaining clinical trials planned for the platelet pathogen inactivation system.
Only one of the manufacturers, however, has increased its production
capabilities to produce S-59 in commercial quantities. If such manufacturer is
unable to continue to produce S-59 in commercial quantities, the Company could
experience material delays and shortfalls in compound supply while the
alternative manufacturer increased its production capabilities or while the
Company identified another manufacturer and such manufacturer prepared for
production. There can be no assurance that the existing manufacturers or any new
manufacturers will be able to provide commercial quantities of S-59 needed for
the Company's pathogen inactivation systems in the future.

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The red cell pathogen inactivation system will require the manufacture of
S-303, which the Company has produced in only limited quantities for its
research and preclinical development requirements. The Company is in the process
of identifying a pharmaceutical manufacturer to begin production of S-303 for
additional preclinical use. No assurance can be given that an appropriate
clinical or commercial-scale manufacturer of S-303 will be identified or that
the Company will be able to enter into arrangements for the manufacture of S-303
on reasonable terms, if at all.

Under the terms of the Company's development agreements with Baxter for all
described pathogen inactivation systems, Baxter is responsible for manufacturing
the disposable units, such as blood storage containers and related tubing, as
well as any device associated with the inactivation processes. If the Company's
agreements with Baxter were terminated or if Baxter otherwise failed to deliver
an adequate supply of components, the Company would be required to identify
other third-party component manufacturers. There can be no assurance that the
Company would be able to identify such manufacturers on a timely basis or enter
into contracts with such manufacturers on reasonable terms, if at all. Any delay
in the availability of devices or disposables from Baxter could adversely affect
the timely submission of products for regulatory approval or the market
introduction and subsequent sales of such products and would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the inclusion of components manufactured by others could
require the Company to seek new approvals from government regulatory
authorities, which could result in delays in product delivery. There can be no
assurance that the Company would receive any such required regulatory approvals.
Any such delay would have a material adverse effect on the Company's business,
financial condition and results of operations.

There can be no assurance that the Company will be able to contract for the
manufacturing of products and compounds for its pathogen inactivation systems on
reasonable terms, if at all. In the event that the Company is unable to obtain
or retain third-party manufacturing, it will not be able to commercialize its
products as planned. The Company's dependence upon third parties, including
Baxter, for the manufacture of critical portions of its pathogen inactivation
systems may adversely affect the Company's operating margins and its ability to
develop, deliver and sell products on a timely and competitive basis. Failure of
any third-party manufacturer to deliver the required quantities of products on a
timely basis and at commercially reasonable prices could materially adversely
affect the Company's business, financial condition and results of operations. In
the event the Company undertakes to establish its own commercial manufacturing
capabilities, it will require substantial additional funds, manufacturing
facilities, equipment and personnel.

The Company purchases certain key components of its compounds from a
limited number of suppliers. While the Company believes that there are
alternative sources of supply for such components, establishing additional or
replacement suppliers for any of the components in the Company's compounds, if
required, may not be accomplished quickly and could involve significant
additional costs. Any failure by the Company to obtain any of the components
used to manufacture the Company's compounds from alternative suppliers, if
required, could limit the Company's ability to manufacture its compounds and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Alliance with Baxter."

MARKETING, SALES AND DISTRIBUTION

The market for blood component treatment systems consists of the blood
centers and hospitals that collect, store and distribute blood and blood
components. In the United States, the American Red Cross collects and
distributes approximately 45% of the nation's supply of blood and blood
components. Other major blood centers include the New York Blood Center and
United Blood Services, each of which distributes approximately 6% of the
nation's supply of blood and blood components. In Western Europe and Japan,
various national blood transfusion services or Red Cross organizations collect,
store and distribute virtually all of their respective nations' blood and blood
components supply. Hospital-affiliated blood banks also store and dispense blood
and blood components but generally do not collect significant quantities of
blood. The Company believes that, if the Company's products receive appropriate
regulatory approvals, the relatively concentrated nature of the market may
facilitate the Company's ability to penetrate the market more quickly.

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The Company believes that market acceptance of the Company's pathogen
inactivation systems will depend, in part, on the Company's ability to provide
acceptable evidence of the safety, efficacy and cost-effectiveness of its
products, as well as the ability of blood centers to obtain FDA approval and
adequate reimbursement for such products. The Company believes that market
acceptance of its pathogen inactivation systems also will depend upon the extent
to which physicians, patients and health care payors perceive that the benefits
of using blood components treated with the Company's systems justify the
additional costs and processing requirements in a blood supply that has become
safer in recent years. While the Company believes that its pathogen inactivation
systems are able to inactivate pathogens up to concentrations that the Company
believes are present in contaminated blood components when the blood is donated,
there can be no assurance that contamination will never exceed such levels. The
Company does not expect that its planned products will be able to inactivate all
known and unknown infectious pathogens, and there can be no assurance that the
inability to inactivate certain pathogens will not affect the market acceptance
of its products. There can be no assurance that the Company's pathogen
inactivation systems will gain any significant degree of market acceptance among
blood centers, physicians, patients and health care payors, even if clinical
trials demonstrate safety and efficacy and necessary regulatory approvals and
health care reimbursement approvals are obtained.

If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of the Company's pathogen
inactivation systems for blood components worldwide. The Company does not
currently maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to continue to rely on Baxter to market and
sell its pathogen inactivation systems. There can be no assurance that the
Company will be able to maintain its relationship with Baxter or that such
marketing arrangements will result in payments to the Company. Revenues to be
received by the Company through any marketing and sales arrangement with Baxter
will be dependent on Baxter's efforts, and there can be no assurance that the
Company will benefit from Baxter's present or future market presence or that
such efforts will otherwise be successful. If the Company's agreements with
Baxter were terminated or if Baxter's marketing efforts were unsuccessful, the
Company's business, financial condition and results of operations would be
materially adversely affected. See "-- Alliance with Baxter."

COMPETITION

The Company expects to encounter competition in the sale of products it may
develop. If regulatory approvals are received, the Company's products may
compete with other approaches to blood safety currently in use, as well as with
future products developed by biotechnology and pharmaceutical companies,
hospital supply companies, national and regional blood centers, certain
governmental organizations and agencies. Companies that may be competitors or
potential competitors have substantially greater financial and other resources
than the Company and may have greater experience in preclinical testing, human
clinical trials and other regulatory approval procedures. The Company's ability
to compete successfully will depend, in part, on its ability to develop
proprietary products, develop and maintain products that reach the market first,
are technologically superior to and/or are of lower cost than other products on
the market, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals, and manufacture, market and sell any product that it
develops. In addition, other technologies or products may be developed that have
an entirely different approach or means of accomplishing the intended purposes
of the Company's products, or that might render the Company's technology and
products uncompetitive or obsolete. Furthermore, there can be no assurance that
the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's ability to use the
Company's technology or commercialize products that may be developed.

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process uses hundreds of units of plasma that have been combined into large
pools, there is increased risk of transmission of pathogens not inactivated by
the process, such as parvovirus B-19. Other groups are developing synthetic
blood product substitutes or products to stimulate the growth of platelets. If
any of these technologies is successfully developed, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company believes that the primary competitive factors in the market for
pathogen inactivation systems will include the breadth and effectiveness of
pathogen inactivation processes, ease of use, the scope and enforceability of
patent or other proprietary rights, product price, product supply and marketing
and sales capability. In addition, the length of time required for products to
be developed and to receive regulatory and, in some cases, reimbursement
approval is an important competitive factor. The Company believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so. The biopharmaceutical field is
characterized by rapid and significant technological changes. Accordingly, the
Company's success will depend in part on its ability to respond quickly to
medical and technological changes through the development and introduction of
new products. Product development involves a high degree of risk, and there can
be no assurance that the Company's product development efforts will result in
any commercially successful products.

The Company relies on Baxter to support preclinical evaluation and clinical
development of its pathogen inactivation systems, as well as to manufacture and
market the systems. Under the terms of the Red Cell/Plasma Agreement, Baxter has
reserved the right to market competing products not within the field of psoralen
or ALE inactivation. Baxter is conducting several independent product
development efforts in blood collection and processing that may improve blood
quality and safety. The Company is aware that Baxter is developing an
alternative pathogen inactivation system for FFP, based on a compound known as
methylene blue. The development and commercialization of the Company's pathogen
inactivation systems could be materially adversely affected by competition with
Baxter or by Baxter's election to pursue alternative strategies or technologies
in lieu of those of the Company. See "-- Alliance with Baxter."

PATENTS, LICENSES AND PROPRIETARY RIGHTS

The Company's success depends in part on its ability to obtain patents, to
protect trade secrets, to operate without infringing upon the proprietary rights
of others and to prevent others from infringing on the proprietary rights of the
Company. The Company's policy is to seek to protect its proprietary position by,
among other methods, filing United States and foreign patent applications
related to its proprietary technology, inventions and improvements that are
important to the development of its business. As of July 31, 1996, the Company
owned 25 issued or allowed United States patents and 13 issued or allowed
foreign patents. The Company's patents expire at various dates between 2003 and
2015. In addition, the Company has 33 pending United States patent applications
and has filed 12 corresponding patent applications under the Patent Cooperation
Treaty, three of which are currently pending in Europe, Japan, Australia and
Canada. Proprietary rights relating to the Company's planned and potential
products will be protected from unauthorized use by third parties only to the
extent that they are covered by valid and enforceable patents or are effectively
maintained as trade secrets. There can be no assurance that any patents owned
by, or licensed to, the Company will afford protection against competitors or
that any pending patent applications now or hereafter filed by, or licensed, to
the Company will result in patents being issued. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States.

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patent, which could adversely affect the Company's ability to protect future
product development and, consequently, its operating results and financial
position.

Because patent applications in the United States are maintained in secrecy
until patents issue and since publication of discoveries in the scientific or
patent literature often lag behind actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
issued or pending patent applications or that it was the first to file for
protection of inventions set forth in such patent applications. There can be no
assurance the Company's planned or potential products will not be covered by
third-party patents or other intellectual property rights, in which case
continued development and marketing of such products would require a license
under such patents or other intellectual property rights. There can be no
assurance that such required licenses will be available to the Company on
acceptable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. Litigation may be necessary to
defend against or assert such claims of infringement, to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office may be necessary to determine the priority of inventions with
respect to patent applications of the Company. Litigation or interference
proceedings could result in substantial costs to and diversion of effort by the
Company, and could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
these efforts by the Company would be successful.

GOVERNMENT REGULATION

The Company and its products are comprehensively regulated in the United
States by the FDA and, in some instances, by state and local governments, and by
comparable governmental authorities in other countries. The FDA regulates drugs,
medical devices and biologics under the Federal Food, Drug and Cosmetic Act and
other laws, including, in the case of biologics, the Public Health Service Act.
These laws and implementing regulations govern, among other things, the
development, testing, manufacturing, record keeping, storage, labeling,
advertising, promotion and premarket clearance or approval of products subject
to regulation.

The Company believes its pathogen inactivation systems will be regulated by
the FDA as drugs. It is also possible, however, that the FDA will decide to
regulate the pathogen inactivation systems as "biologics," as "combination
products," including drugs or biologics and one or more medical devices, or as
drugs or biologics with one or more medical devices (i.e., the blood bags and
light source) requiring separate approval or clearance. Whether the FDA
regulates the pathogen inactivation systems as drugs or as one or more of the
other alternatives, it is likely that the FDA's Center for Biologics Evaluation
and Review will be principally responsible for regulating the pathogen
inactivation systems.

Before a new drug may be marketed in the United States, the FDA must
approve an NDA for the product. Before a biologic may be marketed in the United
States, the FDA must approve a Biologics License Application ("BLA") or a
Product License Application ("PLA") for the product and an Establishment License
Application ("ELA") for the facility at which the product is manufactured.
Before a medical device may be marketed in the United States, the FDA must clear
a pre-market notification (a "510(k)") or approve a pre-market approval
application ("PMA") for the product. Before a combination product may be
marketed

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in the United States, it must have an approved NDA, BLA (or PLA/ELA) or PMA,
depending on which statutory authority the FDA elects to use.

Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a drug, a biologic, a medical device, a combination
product or some combination thereof. The steps required before a drug, biologic
or medical device may be approved for marketing in the United States pursuant to
an NDA, BLA (or PLA/ELA) or PMA, respectively, generally include (i) preclinical
laboratory and animal tests, (ii) submission to the FDA of an IND (for drugs or
biologics) or an investigational device exemption ("IDE") (for medical devices)
for human clinical testing, which must become effective before human clinical
trials may begin, (iii) appropriate tests to show the product's safety, (iv)
adequate and well-controlled human clinical trials to establish the product's
efficacy for its intended indications, (v) submission to the FDA of an NDA, BLA
(or PLA/ELA) or PMA, as appropriate and (vi) FDA review of the NDA, BLA (or
PLA/ELA) or PMA in order to determine, among other things, whether the product
is safe and effective for its intended uses. In addition, the FDA inspects the
facilities at which the product is manufactured and will not approve the product
unless compliance with cGMP requirements is satisfactory. The steps required
before a medical device may be cleared for marketing in the United States
pursuant to a 510(k) are generally the same, except that instead of conducting
tests to demonstrate safety and efficacy, data, including clinical data if
necessary, must be obtained to show that the product is substantially equivalent
to a legally marketed device, and the FDA must make a determination of
substantial equivalence rather than a determination that the product is safe and
effective.

Based on discussions with the FDA, the Company believes that it will be
required to provide data from human clinical studies to demonstrate the safety
of treated platelets and their therapeutic comparability to untreated platelets,
but that only data from in vitro studies, not data from human clinical studies,
will be required to demonstrate the system's efficacy in inactivating pathogens.
In light of these criteria, the Company's clinical trial program for platelets
will consist of studies that differ from the usual Phase 1, Phase 2 and Phase 3
studies. Specifically, its Phase 1 studies were designed to demonstrate in
healthy subjects that use of the system does not alter the in vivo function
(therapeutic efficacy) of the platelets treated with the system and to evaluate
in healthy subjects the safety and tolerability of platelets treated with the
system. Phase 2 studies will consist of a reevaluation in the healthy subjects
used in the Phase 1 study of the in vivo function of platelets treated with the
system. Phase 3 studies are expected to consist of a study of the therapeutic
efficacy of platelets treated with the system in a larger group of patients who
require transfusions. The Company believes that the Phase 1 clinical trials for
the FFP pathogen inactivation system will be similar to the clinical protocols
for the platelet pathogen inactivation system. To date, The Company has not had
specific discussions with the FDA regarding the FFP or red cell clinical
development programs.

There can be no assurance, however, that these means of demonstrating
safety and efficacy will ultimately be acceptable to the FDA or that the FDA
will continue to believe that this clinical protocol is appropriate. Moreover,
even if the FDA considers these means of demonstrating safety and efficacy to be
acceptable in principle, there can be no assurance that the FDA will find the
data submitted sufficient to demonstrate safety and efficacy. In particular,
although the Company anticipates that the FDA will consider in vitro data an
appropriate means of demonstrating efficacy in pathogen inactivation, there can
be no assurance that the FDA will so conclude, and any requirement to provide
other than in vitro data may adversely affect the timing and could affect the
success of the Company's efforts to obtain regulatory approval.

Even if regulatory approval or clearance is granted, it could include
significant limitations on the indicated uses for which a product could be
marketed. For example, the Company does not believe that it will be able to make
any labeling claims that the Company's pathogen inactivation systems may
inactivate any pathogens for which it does not have in vitro data supporting
such claims. The testing and approval/clearance

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process requires substantial time, effort and financial resources, and is
generally lengthy, expensive and uncertain. The approval process is affected by
a number of factors, including the availability of alternative treatments and
the risks and benefits demonstrated in clinical trials. Additional animal
studies or clinical trials may be requested during the FDA review period and 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 may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Later discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. In addition, the policies of the FDA and foreign regulatory bodies may
change, and additional regulations may be promulgated which could prevent or
delay regulatory approval of the Company's planned products. There can be no
assurance that any approval or clearance will be granted on a timely basis, if
at all. Any failure to obtain or delay in obtaining such approvals or
clearances, and any significant limitation on their indicated uses, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

A drug, biologic or medical device, its manufacturer, and the holder of the
NDA, BLA (or PLA/ELA), PMA or 510(k) for the product are subject to
comprehensive regulatory oversight, both before and after approval or clearance
is obtained. Violations of regulatory requirements at any stage, including
during the preclinical and clinical testing process, during the
approval/clearance process or after the product is approved/cleared for
marketing, could result in various adverse consequences, including the FDA's
requiring that a clinical trial be suspended or halted, the FDA's delay in
approving/clearing or refusing to approve/clear a product, withdrawal of an
approved/cleared product from the market and the imposition of criminal
penalties. For example, the holder of an NDA, BLA (or PLA/ELA), PMA or 510(k) is
required to report certain adverse reactions to the FDA, and must comply with
certain requirements concerning advertising and promotional labeling for the
product. Also, quality control and manufacturing procedures must continue to
conform to cGMP regulations after approval or clearance, and the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP.
Accordingly, manufacturers must continue to expend time, monies and efforts on
regulatory compliance, including cGMP compliance. In addition, new government
requirements may be established that could delay or prevent regulatory approval
or clearance of the Company's products under development or otherwise alter the
applicable law. There can be no assurance that the FDA will determine that the
facilities and manufacturing procedures of Baxter or any other third-party
manufacturer of the Company's planned products will conform to cGMP
requirements.

In addition to the regulatory requirements applicable to the Company and
its products, there are also regulatory requirements applicable to the Company's
prospective customers, which are primarily entities that ship blood and blood
products in interstate commerce. Such entities are regulated by the FDA pursuant
to the Food, Drug, and Cosmetic Act and the Public Health Service Act and
implementing regulations. Blood centers and others that ship blood and blood
products interstate will likely be required to obtain approved license
supplements from the FDA before shipping products processed with the Company's
pathogen inactivation systems. This requirement and/or FDA delays in approving
such supplements may deter some blood centers from using the Company's products,
and blood centers that do submit supplements may face disapproval or delays in
approval that could provide further disincentives to use of the systems. The
regulatory impact on potential customers could have a material adverse effect on
the Company's business, financial condition and results of operations.

In addition, transfusion units of random donor platelets, which currently
represent approximately one-half of the platelets transfused in the United
States, certain platelets pooled from six different donors. Because of the risk
of bacterial growth, current FDA rules require that pooled platelets be
transfused within four hours of pooling and, as a result, most pooling occurs at
hospitals. However, the Company's platelet pathogen inactivation system is being
designed to be used at blood centers, not at hospitals, and requires a
processing time of approximately eight hours. Therefore, in order for the
Company's platelet pathogen inactivation system to be effectively implemented
and accepted at blood centers as planned, the FDA-imposed limit on the time
between pooling and transfusion would need to be lengthened or eliminated for
blood products treated with the Company's systems, which are being designed to
inactivate bacteria that would otherwise contaminate pooled platelets. The
Company intends to work with the FDA during the approval/clearance process to

42
<PAGE> 45

obtain the necessary changes in these limitations. There can be no assurance,
however, that the FDA will change this requirement and, if such a change is not
made, the Company's business, financial condition and results of operations
would be materially adversely affected. In addition, under current FDA
regulations, platelets may not be stored for more than five days after
collection from the donor.

The Company is developing a European investigational plan based on the
platelet treatment systems being categorized as a class 2b device under European
Union regulatory authorities. However, there can be no assurance that this
approach will be accepted by European authorities. The European Union has
promulgated rules that require that medical devices receive by mid-1998 the
right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. Failure to receive CE mark certification will prohibit the Company
from selling its products in the European Union.

The Company is subject to federal, state and local laws, rules, regulations
and policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials, biological
specimens and wastes. There can be no assurance that the Company will not be
required to incur significant costs to comply with environmental and health and
safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, including certain hazardous
chemicals and radioactive materials. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.

HEALTH CARE REIMBURSEMENT AND REFORM

The future revenues and profitability of biopharmaceutical and related
companies as well as the availability of capital to such companies may be
affected by the continuing efforts of the United States and foreign governments
and third-party payors to contain or reduce costs of health care through various
means. In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care, it is likely
that the U.S. Congress and state legislatures will continue to focus on health
care reform and the cost of pharmaceuticals and on the reform of the Medicare
and Medicaid systems. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of the products and related treatment are obtained from governmental
authorities, private health insurers and other organizations, such as HMOs.
Third-party payors are increasingly challenging the prices charged for medical
products and services. The trend toward managed health care in the United States
and other countries and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care or
reduce government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could
materially adversely affect the Company's ability to operate profitably.

FACILITIES

The Company leases approximately 17,400 square feet for its main facility
and approximately 9,900 square feet for an additional facility, both of which
contain laboratory and office space, in Concord, California. The lease of the
main facility extends through 1999 with two five-year renewal options and
provides for an option to expand into an approximately 9,200 square foot
adjacent space. The lease of the additional facility extends through 1998, with
renewal options for up to eight years. The Company believes that these
facilities will be adequate to meet its needs for the foreseeable future.

43
<PAGE> 46

EMPLOYEES

As of June 30, 1996, the Company had 65 employees, 52 of whom were engaged
in research and development and 13 in finance and other administration. The
Company also had consulting arrangements with seven individuals. No employee of
the Company is covered by collective bargaining agreements, and the Company
believes that its relationship with its employees is good.

SCIENTIFIC ADVISORY BOARD

The Company's Scientific Advisory Board is composed of experts in the
fields of transfusion medicine, blood collection, blood component preparation,
virology, chemistry, biochemistry, organic synthesis, hematology and related
fields. The Scientific Advisory Board members work with the Company both as a
group and, less formally and more frequently, on an individual basis. The
Scientific Advisory Board members review the Company's programs for research,
assist in planning its future research directions and provide advice concerning
ongoing product development programs.

The following are members of the Company's Scientific Advisory Board:

Harvey Alter, M.D., is the Chief of the Infectious Diseases Section and
Assistant Director of Research in the Department of Transfusion Medicine
Clinical Center at the National Institutes of Health. His area of expertise is
in the epidemiology of transfusion-associated viral hepatitis.

Harry Greenberg, M.D., is a Professor of Medicine and Chief of
Gastroenterology at Stanford University. His expertise is in infectious viral
diseases.

Jeffrey McCullough, M.D., is a Professor of Laboratory Medicine and
Director of the Blood Bank at the University of Minnesota Hospitals and the
editor-in-chief of the medical journal Transfusion.

Scott Murphy, M.D., is the Chief Medical Officer of the American Red Cross
Blood Services, Penn -- Jersey Region. He is also a Professor of Medicine and
director of the Blood Bank at Thomas Jefferson College of Medicine.

Sherrill Slichter, M.D., is the Director for the Division of Research and
Education at Puget Sound Blood Center, as well as a Professor of Medicine,
Hematology/Medicine, University of Washington.

Robert Stern, M.D., is an Associate Professor of Dermatology at the Harvard
Medical School and Beth Israel Hospital.

All members of the Scientific Advisory Board are employed elsewhere and may
have commitments to and/or consulting contracts with other organizations,
including potential competitors, that may limit their availability to the
Company. Each member has entered into a Nondisclosure Agreement with the
Company, which requires the maintenance of all proprietary information in
complete confidence.

44
<PAGE> 47

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

The directors, executive officers and other key employees of the Company
and their ages as of July 31, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- ---- -------------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Stephen T. Isaacs..................... 47 President, Chief Executive Officer and Director
David S. Clayton...................... 52 Vice President, Finance and Chief Financial Officer
Laurence M. Corash.................... 52 Vice President, Medical Affairs
John E. Hearst........................ 61 Vice President, New Science Opportunities and Director
B. J. Cassin(1),(2)................... 62 Chairman of the Board
Peter H. McNerney(1).................. 45 Director
Dale A. Smith......................... 64 Director
Henry E. Stickney(2).................. 63 Director
KEY EMPLOYEES
George D. Cimino...................... 44 Director of Product Development
David N. Cook......................... 38 Director of Red Cell Development
William M. Greenman................... 29 Director of Business Development
Lily Lin.............................. 50 Director of Platelet Development
Tim E. McCullough..................... 47 Director of Preclinical Testing
Lori L. Roll.......................... 36 Controller and Secretary
Ira Wallis............................ 46 Director of Regulatory Affairs
Gary P. Wiesehahn..................... 47 Director of Plasma Development
Kathryn P. Wilke...................... 29 Intellectual Property Counsel
Susan Wollowitz....................... 43 Director of Organic Chemistry
</TABLE>

- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee

STEPHEN T. ISAACS founded the Company in September 1991 and has served as
President, Chief Executive Officer and a member of the Board of Directors since
that time. Mr. Isaacs was previously President and Chief Executive Officer of
HRI, a research and development company that is no longer engaged in operations,
since September 1984. From 1975 to 1986, Mr. Isaacs held a faculty research
position at the University of California at Berkeley.

DAVID S. CLAYTON has been Chief Financial Officer of the Company since May
1996 and Vice President, Finance of the Company since July 1996. From 1992 to
May 1996, Mr. Clayton was a financial consultant to various companies, including
the Company. From 1989 through May 1992, Mr. Clayton was an Executive Vice
President of Trans Ocean Ltd., a company engaged in leasing of international
maritime shipping containers.

LAURENCE M. CORASH, M.D., has been Vice President, Medical Affairs of the
Company since July 1996. From July 1994 until he assumed his current position,
Dr. Corash was Director of Medical Affairs. Dr. Corash was a consultant to the
Company from 1991 to July 1994. Dr. Corash has been a Professor of Laboratory
Medicine at the University of California, San Francisco since July 1985 and
Chief of the Hematology Laboratory for the Medical Center at the University of
California, San Francisco since January 1982. Dr. Corash has served as a
consultant to the FDA Advisory Panel for Hematology Devices since 1990.

JOHN E. HEARST, PH.D., D.SC., was elected Vice President, New Science
Opportunities in July 1996. From January 1996 until July 1996, Dr. Hearst served
as Director, New Science Opportunities. He has served as a member of the Board
of Directors of the Company since January 1992. Dr. Hearst has been a Professor
of Chemistry at the University of California at Berkeley since 1972. In 1984,
Dr. Hearst co-founded HRI.

45
<PAGE> 48

B. J. CASSIN has served as Chairman of the Board of the Company since
December 1992. Mr. Cassin has been a private venture capitalist since 1979.
Previously, Mr. Cassin co-founded Xidex Corporation, a manufacturer of data
storage media, in 1969. Mr. Cassin is currently a director of six private
companies.

PETER H. MCNERNEY has served as a member of the Board of Directors of the
Company since December 1992. Mr. McNerney has been a General Partner of Coral
Ventures, a venture capital investment firm, since 1992. Prior to that, Mr.
McNerney was a Managing Partner of Kensington Group, a management consulting
firm, from 1989 to 1992. Mr. McNerney serves as a director for Aksys, Ltd. and
Optical Sensors, Inc.

DALE A. SMITH has served as a member of the Board of Directors of the
Company since March 1994. From 1978 to July 1995, Mr. Smith was Group Vice
President of Baxter Healthcare Corporation. Mr. Smith serves as a director of
Vical, Inc.

HENRY E. STICKNEY has served as a member of the Board of Directors of the
Company since January 1992. In 1988, Mr. Stickney founded Health IQ Corporation
(formerly, Reimbursement Dynamics, Inc.), a medical consulting company
specializing in health care economics and reimbursement issues, and has served
as its chief executive officer since that time.

GEORGE D. CIMINO, PH.D., has been Director of Product Development for the
Company since January 1992. Prior to that time, Dr. Cimino was Director of
Research for HRI from 1985 to January 1992.

DAVID COOK, PH.D., has been Director of Red Cell Development for the
Company since January 1994. Prior to that time, Dr. Cook was a senior scientist
in the Platelet Program for the Company from February 1993 to January 1994. From
January 1990 to February 1993, Dr. Cook was a Postdoctoral Associate in the
Department of Chemistry at the University of California, Berkeley.

WILLIAM M. GREENMAN has been Director of Business Development for the
Company since September 1995. From May 1993 to August 1995, Mr. Greenman was a
manager in the Corporate Development Group of the Biotech Group at Baxter
International. From March 1991 to May 1993, Mr. Greenman held various marketing
and corporate development positions in the Biotech Group at Baxter
International.

LILY LIN, PH.D., has been Director of Platelet Development for the Company
since April 1996. Prior to that time, Dr. Lin was Director of Biological
Research for the Company from January 1992 to April 1996. From 1989 to February
1994, Dr. Lin was a senior scientist for HRI.

TIM E. MCCULLOUGH, PH.D., has been Director of Preclinical Safety for the
Company since January 1996. From 1988 to January 1996, Dr. McCullough was
Department Head/Director of Toxicology of Roche Bioscience (formerly, Syntex
Discovery Research).

LORI L. ROLL has been the Controller of the Company since October 1992 and
Secretary of the Company since February 1994. From December 1991 to October
1992, Ms. Roll was a financial services consultant for a variety of small
private companies.

IRA WALLIS, PH.D., has been Director of Regulatory Affairs for the Company
since June 1996. Dr. Wallis was Associate Director, Regulatory Affairs for
Genentech, Inc. from February 1993 to June 1996 and Manager, Regulatory Affairs
for Genentech, Inc. from February 1990 to February 1993.

GARY WIESEHAHN, PH.D., has been Director of Plasma Development for the
Company since January 1996. From February 1994 to January 1996, Dr. Wiesehahn
was a senior scientist for the Company. From December 1989 to January 1994, Dr.
Wiesehahn was Vice President of Research of Acrogen, Inc.

KATHRYN P. WILKE, ESQ., has been Intellectual Property Counsel for the
Company since February 1992. From September 1990 to August 1991, Ms. Wilke was a
law clerk for Limbach & Limbach, a law firm.

SUSAN WOLLOWITZ, PH.D., has been Director of Organic Chemistry for the
Company since June 1992. From 1984 to June 1992, Dr. Wollowitz was Senior
Research Chemist/Project Leader for DowElanco (formerly Dow Chemical
Agricultural Products), a joint venture of Dow Chemical Company.

46
<PAGE> 49

BOARD COMMITTEES

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, currently comprised of Messrs. Cassin and Stickney, reviews
the internal accounting procedures of the Company and consults with and reviews
the services provided by the Company's independent auditors. The Compensation
Committee, currently comprised of Messrs. Cassin and McNerney, reviews and
recommends to the Board the compensation and benefits of all officers of the
Company and reviews general policy relating to compensation and benefits of the
Company. The Compensation Committee also administers the issuance of stock
options and other awards under the Company's 1996 Equity Incentive Plan and
Employee Stock Purchase Plan.

DIRECTOR COMPENSATION

Directors currently do not receive any cash compensation for their services
as members of the Board of Directors, although they are reimbursed for certain
expenses in connection with attendance at Board and Committee meetings. In
September 1995, the Company granted to Mr. Smith an option to purchase 10,000
shares of Common Stock at an exercise price of $1.05 per share. In May 1996, the
Company granted to Messrs. Cassin, Isaacs, Hearst and Stickney options to
purchase 10,000, 25,000, 5,000 and 10,000 shares of Common Stock, respectively,
at an exercise price of $4.00 per share. All of these options were granted under
the Company's 1992 Stock Option Plan and are fully exercisable. The unvested
shares issued or issuable upon exercise are subject to repurchase by the
Company, with such repurchase right lapsing with respect to 1/48 of the shares
per month from the date of the grant.

EXECUTIVE COMPENSATION

The following table sets forth the compensation awarded to or earned by the
Company's Chief Executive Officer and the other executive officer whose combined
salary and bonus for 1995 was in excess of $100,000 (collectively, the "Named
Executive Officers"):

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
-------------------------------------------------------- -------- --------
<S> <C> <C>
Stephen T. Isaacs....................................... $210,000 $52,489
President and Chief Executive Officer
Laurence M. Corash...................................... $169,689 $25,954
Vice President, Medical Affairs
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers which are available generally to all salaried employees
of the Company and certain perquisites and other personal benefits received
by the Named Executive Officers, which do not exceed the lesser of $50,000
or 10% of any such officer's salary and bonus disclosed in this table.

OPTION GRANTS IN LAST FISCAL YEAR

No options were granted during fiscal 1995 to the Named Executive Officers.
Subsequent to December 31, 1995, Messrs. Isaacs and Corash were granted stock
options exercisable for 25,000 and 20,000 shares of Common Stock, respectively,
at an exercise price of $4.00 per share.

OPTION EXERCISES IN LAST FISCAL YEAR

No options were exercised during fiscal 1995 or held at the end of fiscal
1995 by the Named Executive Officers.

47
<PAGE> 50

EQUITY INCENTIVE PLANS

1996 Equity Incentive Plan. The Company's 1996 Equity Incentive Plan (the
"Incentive Plan") was adopted by the Board of Directors in July 1996 as an
amendment and restatement of the Company's 1992 Stock Option Plan (the "1992
Plan"). There are currently 1,000,000 shares of Common Stock authorized for
issuance under the Incentive Plan.

The Incentive Plan provides for the grant of incentive stock options under
the Internal Revenue Code of 1986, as amended (the "Code"), and stock
appreciation rights appurtenant thereto to employees (including officers and
employee-directors) and nonstatutory stock options, stock appreciation rights,
restricted stock purchase awards and stock bonuses to employees, directors and
consultants. The Incentive Plan is administered by the Board of Directors, or a
committee appointed by the Board, which determines recipients and types of
awards to be granted, including the exercise price, number of shares subject to
the award and the exercisability thereof.

The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. The exercise price of options granted under the Incentive
Plan is determined by the Board of Directors, provided that the exercise price
of an incentive stock option cannot be less than 100% of the fair market value
of the Common Stock on the date of the option grant and the exercise price of a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant. Options granted under the
Incentive Plan vest at the rate specified in the option agreement. No stock
option may be transferred by the optionee other than by will or the laws of
descent and distribution or, in certain limited instances, pursuant to a
qualified domestic relations order, provided that the Board of Directors may
grant a nonstatutory stock option that is transferable, and provided further
that an optionee may designate a beneficiary who may exercise the option
following the optionee's death. An optionee whose relationship with the Company
or any related corporation ceases for any reason (other than by death or
disability) may exercise options in the three-month period following such
cessation (unless such options terminate or expire sooner or later by their
terms). Options may be exercised for up to 12 months after an optionee's
relationship with the Company and its affiliates ceases due to disability or for
up to 18 months following an optionee's death (unless such options expire sooner
or later by their terms). Shares subject to stock awards that have expired or
otherwise terminated without having been exercised in full (or vested in the
case of restricted stock awards) will again become available for the grant of
awards under the Incentive Plan. Shares subject to exercised stock appreciation
rights will not again become available for the grant of new awards.

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (under all such plans of the Company and
its affiliates) may not exceed $100,000. No person may receive options or stock
appreciation rights covering more than 250,000 shares of Common Stock in any
calendar year. The Board of Directors has the authority to reprice outstanding
options and stock appreciation rights and to offer optionees the opportunity to
replace outstanding options and stock appreciation rights with new options and
stock appreciation rights for the same or a different number of shares.

Restricted stock purchase awards granted under the Incentive Plan may be
granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or, in certain limited instances,
pursuant to a qualified domestic relations order while the stock awarded
pursuant to such an agreement remains subject to the agreement.

48
<PAGE> 51

Upon certain changes in control of the Company, all outstanding awards
under the Incentive Plan will either be assumed, continued or substituted by the
surviving entity. If the surviving entity determines not to assume, continue or
substitute such awards, with respect to persons then performing services as
employees, directors or consultants, the time during which such awards may be
exercised will be accelerated and the awards terminated if not exercised prior
to such change in control.

As of July 31, 1996, 333,245 shares of Common Stock had been issued upon
the exercise of options granted under the Incentive Plan, options to purchase
284,891 shares of Common Stock at a weighted average exercise price of $3.18
were outstanding and 381,864 shares remained available for future grant under
the Incentive Plan. The Incentive Plan will terminate in July 2006 unless sooner
terminated by the Board of Directors. As of July 31, 1996, no stock bonuses,
restricted stock or stock appreciation rights had been granted under the
Incentive Plan.

Employee Stock Purchase Plan. In July 1996, the Company's Board of
Directors approved the Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 150,000 shares of Common Stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Code. Under the Purchase Plan, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering may be no more than 27 months.

Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board of Directors and, unless
otherwise determined by the Board of Directors and set forth in the applicable
offering, are employed at least 20 hours per week and five months per year.
Employees who participate in an offering can have up to 15% of their earnings
withheld pursuant to the Purchase Plan and applied, on specified dates
determined by the Board of Directors, to the purchase of shares of Common Stock.
The price of Common Stock purchased under the Purchase Plan will be equal to 85%
of the lower of the fair market value of the Common Stock on the commencement
date of each offering period or the relevant purchase date. Employees may end
their participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.

In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten the offering period and provide for all sums collected
by payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's direction.

401(k) Plan. In July 1992, the Company established a 401(k) Plan covering
certain of the Company's employees. Pursuant to the 401(k) Plan, eligible
employees may elect to reduce their current compensation by up to the
statutorily prescribed annual limit ($9,500 in 1996) and have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not
require, additional contributions by the Company on behalf of the participants.
To date, the Company has made no contributions to the 401(k) Plan other than to
cover administrative and certain other expenses of the 401(k) Plan and
participants. The 401(k) Plan is intended to qualify under Section 401 of the
Code, so that contributions by employees or by the Company to the 401(k) Plan,
and income earned on the 401(k) Plan contributions, are not taxable to employees
until withdrawn from the 401(k) Plan, and so that contributions by the Company,
if any, will be deductible by the Company when made. The trustee under the
401(k) Plan, at the direction of each participant, invests the 401(k) Plan
employee salary deferrals in selected investment options.

49
<PAGE> 52

CERTAIN TRANSACTIONS

Since January 1, 1993, the Company has sold, in a series of private
financings, 1,091,593 shares of its Series C Preferred Stock at a price of $8.00
per share, 529,084 shares of its Series D Preferred Stock at a price of $10.50
per share and 380,953 shares of its Series E Preferred Stock at a price of
$15.75 per share. The Company sold these securities pursuant to preferred stock
purchase agreements and an investors' rights agreement on substantially similar
terms (except for terms relating to date and price), under which the Company
made standard representations, warranties and covenants, and which provided the
purchasers thereunder with registration rights, information rights and rights of
first refusal, among other provisions standard in venture capital financings.
Each share of Preferred Stock will convert into shares of Common Stock
upon the closing of this offering. The purchasers of the Preferred Stock
included, among others, the following holders of 5% or more of the Company's
Common Stock and, directors:

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
PURCHASED
----------------------------------
INVESTOR SERIES C SERIES D SERIES E
---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Coral Partners II, a limited partnership...... 247,926 95,238 --
Coral Partners IV, a limited partnership...... 125,000 190,476 --
Baxter Healthcare Corporation................. 125,000 -- 380,953
B. J. Cassin.................................. 65,797 4,760 --
Peter H. McNerney............................. 1,250 952 --
Henry E. Stickney............................. 10,690 952 --
</TABLE>

In May 1993, pursuant to a Note and Warrant Purchase Agreement, the Company
issued convertible promissory notes in an aggregate principal amount of $800,000
and sold warrants to purchase shares of Series B Preferred Stock for an
aggregate purchase price of $800. The notes accrued interest at the rate of 8%
per annum and were convertible into shares of Series C Preferred Stock. In March
1994, the outstanding notes and accrued interest, representing an aggregate of
$853,304, were converted into an aggregate of 106,663 shares of the Company's
Series C Preferred Stock. In May 1994, warrants were issued to purchase 15,798
shares of Series B Preferred Stock at an exercise price of $5.065 per share. The
purchasers of the notes and warrants included, among others, the following
holders of 5% or more of the Company's Common Stock and directors: (i) Coral
Partners II, which purchased a convertible promissory note in the principal
amount of $208,220 and a warrant to purchase 4,111 shares of Series B Preferred
Stock, (ii) Mr. Cassin, who purchased a convertible promissory note in the
principal amount of $108,274 and a warrant to purchase 2,138 shares of Series B
Preferred Stock, and (iii) Mr. Stickney, who purchased a convertible promissory
note in the principal amount of $21,655 and a warrant to purchase 428 shares of
Series B Preferred Stock.

In August 1993, pursuant to a Note and Warrant Purchase Agreement, the
Company issued convertible promissory notes in an aggregate principal amount of
$1,194,698 and sold warrants to purchase shares of Series C Preferred Stock for
an aggregate purchase price of $1,200. The notes accrued interest at the rate of
8% per annum and were convertible into shares of Series C Preferred Stock. In
March 1994, the outstanding notes and accrued interest, representing an
aggregate of $1,250,440, were converted into an aggregate of 156,305 shares of
the Company's Series C Preferred Stock. In May 1994, warrants to purchase 17,570
shares of Series C Preferred Stock at an exercise price of $6.80 per share were
issued. The purchasers of the notes and warrants included, among others, the
following holders of 5% or more of the Company's Common Stock and directors: (i)
Coral Partners II, which purchased a convertible promissory note in the
principal amount of $249,658 and a warrant to purchase 3,671 shares of Series C
Preferred Stock, (ii) Mr. Cassin, who purchased a convertible promissory note in
the principal amount of $129,822 and a warrant to purchase 1,909 shares of
Series C Preferred Stock, and (iii) Mr. Stickney, who purchased a convertible
promissory note in the principal amount of $25,965 and a warrant to purchase 382
shares of Series C Preferred Stock.

In June 1995, the Company entered into a Transfer Agreement with HRI
Research, Inc. ("HRI"). Mr. Isaacs is President, Chief Financial Officer and a
director of HRI and Mr. Hearst is a director and Secretary of HRI. Pursuant to
the Transfer Agreement, HRI transferred to the Company all of its right, title
and interest to HRI's technology, which generally relates to photochemistry and
photoreactive compounds, trademarks and trade names in consideration of $52,610.
In addition, the Company purchased certain assets

50
<PAGE> 53

related to technology for $44,930 from HRI. From December 1991 to the date of
the purchase, the Company had rented such equipment for an aggregate price of
$52,460.

INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY

In July 1996, the Board authorized the Company to enter into indemnity
agreements with each of the Company's directors and executive officers. The form
of indemnity agreement, which is subject to stockholder approval, provides that
the Company will indemnify against any and all expenses of the director or
executive officer who incurred such expenses because of his or her status as a
director or executive officer, to the fullest extent permitted by the Company's
Bylaws and Delaware law. In addition, the Company's Bylaws provide that the
Company shall indemnify its directors and executive officers to the fullest
extent permitted by Delaware law, subject to certain limitations, and may also
secure insurance, to the fullest extent permitted by Delaware law, on behalf of
any director, officer, employee or agent against any expense, liability or loss
arising out of his or her actions in such capacity.

The Company's Restated Certificate contains certain provisions relating to
the limitation of liability of directors. The Company's Restated Certificate
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payment of dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the director
derived an improper benefit. If the Delaware General Corporation Law is amended
to authorize corporate action further eliminating or limiting the personal
liability of a director, then the liability of a Company director shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. The provision in the Restated Certificate does
not eliminate the duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.

51
<PAGE> 54

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1996, assuming the
conversion of all shares of Preferred Stock into shares of Common Stock and as
adjusted to reflect the sale of Common Stock offered by the Company hereby and
the Baxter Private Placement for (i) each stockholder who is known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each Named
Executive Officer of the Company, (iii) each director of the Company, and (iv)
all executive officers and directors of the Company as a group. Except as
otherwise indicated in the notes to this table, the Company believes, based on
information furnished by such owners, that the persons named in the table have
voting and investment power with respect to all the shares of Common Stock,
subject to community property laws, where applicable.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
-----------------------
SHARES PRIOR TO AFTER
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Coral Partners II, a limited partnership(3).......... 895,361 20.7%
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Baxter Healthcare Corporation........................ 505,953 11.7%
One Baxter Parkway
Deerfield, IL 60015
Stephen T. Isaacs(4)................................. 235,995 5.4%
Cerus Corporation
2525 Stanwell Drive, Suite 300
Concord, CA 94520
Laurence M. Corash(5)................................ 177,500 4.1%
John E. Hearst(6).................................... 167,500 3.9%
B. J. Cassin(7)...................................... 218,652 5.0%
Cerus Corporation
2525 Stanwell Drive, Suite 300
Concord, CA 94520
Peter H. McNerney(8)................................. 897,563 20.7%
Coral Group, Inc.
60 South Sixth Street
Suite 3510
Minneapolis, MN 55402
Dale A. Smith(9)..................................... 10,000 *
Henry E. Stickney(10)................................ 56,262 1.3%
All executive officers and directors as a group
(8 persons)(11).................................... 1,809,172 41.0%
</TABLE>

- ---------------
* Less than 1%

(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Percentage of beneficial ownership is based on 4,329,600
shares of Common Stock outstanding as of July 31, 1996 and shares
of Common Stock outstanding after completion of the closing and the Baxter
Private Placement.

(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of shares of Common Stock from the Company.

(3) Includes 315,476 shares of Common Stock held by Coral Partners IV.

(4) Includes 5,000 shares held by Stephen T. Isaacs and Kathryn Macbride as
trustees for the Alexandra Isaacs Irrevocable Trust and 5,000 shares held
by Stephen T. Isaacs and Kathryn Macbride as trustees for the Megan Isaacs
Irrevocable Trust. Includes 25,000 shares issuable upon the exercise of
stock options exercisable within 60 days of July 31, 1996, subject to
repurchase of unvested shares.

52
<PAGE> 55

(5) Includes 20,000 shares issuable upon the exercise of stock options
exercisable within 60 days of July 31, 1996, subject to repurchase of
unvested shares.

(6) Includes 10,000 shares held by David Paul Hearst Irrevocable Trust and
10,000 shares held by Leslie Jean Hearst Irrevocable Trust. Also includes
5,000 shares of Common Stock issuable upon the exercise of stock options
exercisable within 60 days of July 31, 1996, subject to repurchase of
unvested shares.

(7) Includes 159,100 shares held by Brendan Joseph Cassin and Isabel B. Cassin,
Trustees of the Cassin Family Trust, 25,000 shares held by Cassin Family
Partners, a California Limited Partnership, and 5,505 shares held by Mr.
Cassin as conservator for Robert J. Cassin. Includes 25,000 shares issuable
upon the exercise of stock options exercisable within 60 days of July 31,
1996, subject to repurchase of unvested shares.

(8) Includes 579,885 shares of Common Stock held by Coral Partners II and
315,476 shares of Common Stock held by Coral Partners IV. Mr. McNerney is a
General Partner of Coral Partners II and Coral Partners IV and disclaims
beneficial ownership of the shares held by such entities except to the
extent of his proportionate partnership interest therein.

(9) Includes 10,000 shares issuable upon the exercise of stock options
exercisable within 60 days of July 31, 1996, subject to repurchase of
unvested shares.

(10) Includes 12,452 shares of Common Stock held by Mr. Stickney as Trustee of
the Stickney Family Trust. Includes 20,000 shares issuable upon the
exercise of stock options exercisable within 60 days of July 31, 1996,
subject to repurchase of unvested shares.

(11) Includes information contained in the notes above, as applicable. Includes
45,700 shares of Common Stock held by Mr. Clayton, of which 28,333 are
subject to a right of repurchase in favor of the Company that expires
ratably through May 1999.

53
<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $.001 per
share, and 5,000,000 shares of Preferred Stock, par value $.001 per share.

COMMON STOCK

As of July 31, 1996, there were 4,329,600 shares of Common Stock (including
Preferred Stock that will be converted into Common Stock upon the closing of
this offering) outstanding held of record by 217 stockholders.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon the closing of
this offering will be, fully paid and nonassessable.

PREFERRED STOCK

Pursuant to the Company's Restated Certificate, the Board of Directors has
the authority, without further action by the stockholders, to issue up to
5,000,000 shares of Preferred Stock in one or more series and to fix the
designations, powers, preferences, privileges and relative participating,
optional or special rights and the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock and may
adversely affect the voting and other rights of the holders of Common Stock.
Upon the closing of this offering, there will be no shares of Preferred Stock
outstanding and the Company has no plans to issue any of the Preferred Stock.

ANTITAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW

Charter Documents. The Restated Certificate and Bylaws include a number of
provisions that may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company. First, the
Company's Board of Directors will be classified into three classes of directors.
Under Delaware law, directors of a corporation with a classified board may be
removed only for cause unless the corporation's certificate of incorporation
provides otherwise. The Restated Certificate does not provide otherwise. See
"Management -- Directors, Executive Officers and Other Key Employees." In
addition, the Restated Certificate provides that all stockholder action must be
effected at a duly called meeting of stockholders and not by a consent in
writing. Further, the Bylaws limit who may call special meetings of the
stockholders. The Company's Restated Certificate does not include a provision
for cumulative voting for directors. Under cumulative voting, a minority
stockholder holding a sufficient percentage of a class of shares may be able to
ensure the election of one or more directors. Finally, the Bylaws establish
procedures, including advance notice procedures, with regard to the nomination
of candidates for election as directors and stockholder proposals. These and
other provisions of the Restated Certificate and Bylaws and Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control or management of the Company. See "Risk Factors -- Effects of Certain
Charter and Bylaw Provisions."

54
<PAGE> 57

Delaware Takeover Statutes. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.

REGISTRATION RIGHTS

Pursuant to an agreement between the Company and the holders (or their
permitted transferees) of approximately 3,070,423 shares of Common Stock
("Holders"), the Holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act. If the Company proposes to
register its Common Stock, subject to certain exceptions, under the Securities
Act, the Holders are entitled to notice of the registration and are entitled to
include, at the Company's expense, such shares therein, provided that the
managing underwriters have the right to limit the number of such shares included
in the registration. Registration rights with respect to this offering have been
waived. In addition, certain of the Holders may require the Company, on no more
than two occasions and, on one of such occasions, at the Company's expense, to
file a registration statement under the Securities Act with respect to their
shares of Common Stock. Such rights may not be exercised until six months after
the closing of this offering. Further, certain Holders, at their expense, may
require the Company to register the shares on Form S-3 when such form becomes
available to the Company, subject to certain conditions and limitations. Such
right expires on the tenth anniversary of the closing of this offering.

TRANSFER AGENT AND REGISTRAR

Norwest Bank Minnesota, National Association has been appointed as the
transfer agent and registrar for the Company's Common Stock.

SHARES ELIGIBLE FOR FUTURE SALE

Upon the closing of this offering, the Company will have outstanding
shares of Common Stock, based on the number of shares of Preferred
Stock and Common Stock outstanding as of July 31, 1996 and assuming no exercise
of the Underwriters' over-allotment option. Of these shares, all the shares sold
in this offering will be freely tradeable without restrictions or further
registration under the Securities Act. The remaining 4,329,600 shares of Common
Stock held by existing stockholders are Restricted Shares. Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under the
Securities Act. As a result of contractual restrictions and the provisions of
Rule 144 and 701, additional shares will be available for sale in the public
market as follows: (i) no Restricted Shares will be eligible for immediate sale
on the date of this Prospectus, (ii) 4,183,413 Restricted Shares, 109,292 shares
of Common Stock issuable upon exercise of currently outstanding options and
35,478 shares of Common Stock issuable upon exercise of currently outstanding
warrants will be eligible for sale 180 days after the date of this Prospectus
upon expiration of lock-up agreements and (iii) the remainder of the Restricted
Shares will be eligible for sale from time to time thereafter upon expiration of
their respective two-year holding periods.

Each officer, director and substantially all stockholders of the Company
and holders of options to acquire Common Stock have agreed with the
representatives of the Underwriters for a period of 180 days after the effective
date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions,
not to offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are then owned by such person or are thereafter acquired directly
from the

55
<PAGE> 58

Company), or to enter into any swap or similar arrangement that transfers, in
whole or in part, the economic risks of ownership of the Common Stock, without
the prior written consent of Morgan Stanley & Co. Incorporated.

As of July 31, 1996, there were 284,891 shares of Common Stock subject to
outstanding options. The Company intends to file registration statements under
the Securities Act to register shares of Common Stock reserved for issuance
under the Incentive Plan, thus permitting the sale of such shares by
non-Affiliates in the public market without restriction under the Securities
Act. Such registration statements will become effective immediately upon filing.
Holders of substantially all of these option shares have also entered into
agreements not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option for contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock, or to enter into any swap
or similar agreement that transfers, in whole or in part, the economic risks of
ownership of the Common Stock, during the Lock-Up Period without the prior
written consent of Morgan Stanley & Co. Incorporated.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, any holder, including an Affiliate of the Company,
of Restricted Shares as to which at least two years have elapsed since the later
of the date of the holder's acquisition of such shares from the Company or from
an Affiliate, would be entitled within any three-month period to sell a number
of shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately shares immediately after the closing of
this offering assuming no exercise of the Underwriters' over-allotment option)
or the average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of the
sale is filed with the Commission. Sales under Rule 144 are subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. However, a person (or persons whose shares
are aggregated) who is not deemed to have been an Affiliate of the Company at
any time during the 90 days immediately preceding the sale and who beneficially
owns Restricted Shares is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above, provided that at least three years
have elapsed since the later of the date the shares were acquired from the
Company or from an Affiliate of the Company. The foregoing is a summary of Rule
144 and is not intended to be a complete description of that rule.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this Prospectus (unless subject
to the contractual restrictions described above), may be sold by persons other
than Affiliates, subject only to the manner of sale provisions of Rule 144 and
by Affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or will continue after this offering or that the
market price of the Common Stock will not decline below the initial public
offering price. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to time.
As described herein, only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.

56
<PAGE> 59

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement, the Underwriters named below, for whom Morgan Stanley & Co.
Incorporated and Alex. Brown & Sons Incorporated are serving as Representatives,
have severally agreed to purchase, and the Company has agreed to sell to the
Underwriters, the respective numbers of shares of Common Stock set forth
opposite their respective names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
----------------------------------------------------------------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated................................
Alex. Brown & Sons Incorporated..................................
----------
Total..................................................
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any such shares are taken.

The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of
$ per share to other Underwriters or to certain other dealers.

The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to additional
shares of Common Stock at the initial public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The Underwriters
may exercise such option to purchase solely for the purpose of covering
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered hereby to the Underwriters.

The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales in excess of five percent of the
number of shares of Common Stock offered hereby to accounts over which they
exercise discretionary authority.

The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.

The Company has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not offer, sell, contract to sell, or
otherwise dispose of any shares of Common Stock, for a period of 180 days after
the date of this Prospectus, other than any shares of Common Stock issued upon
the exercise of an option or warrant. In addition, in connection with the
offering, the Company, its executive officers and directors and certain existing
stockholders of the Company, who will own an aggregate of approximately
million shares of Common Stock after the offering, have agreed that,
without the prior written consent of Morgan Stanley & Co. Incorporated on behalf
of the Underwriters, they will not (a) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are then owned by such person or are thereafter
acquired directly from the Company), or (b) enter into any swap or similar
arrangement that transfers, in whole or in part, the economic risk of ownership
of the Common Stock, whether any such transaction described in clause (a) or (b)
of this paragraph is to be settled by delivery of such Common Stock or such
other securities, in cash or otherwise, for

57
<PAGE> 60

a period of 180 days after the date of this Prospectus, other than (i) as a bona
fide gift or gifts, (ii) by will or intestacy to the undersigned's immediate
family or to a trust the beneficiaries of which are exclusively the undersigned
and/or a member or members of his or her immediate family, (iii) as a
distribution to limited partners or shareholders of the undersigned, or (iv)
with the prior written consent of Morgan Stanley & Co. Incorporated; provided
that a gift, transfer or distribution pursuant to clause (i), (ii) or (iii)
above shall be conditioned upon such donee, transferee or distributee executing
and delivering a copy of this Lock-up Agreement to Morgan Stanley & Co.
Incorporated.

The Underwriters have reserved for sale, at the initial public offering
price, up to 6% of the Common Stock offered hereby for employees and directors
of the Company and certain other individuals who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as other
shares offered hereby.

PRICING OF THE OFFERING

Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiation among
the Company and the Representatives of the Underwriters. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market and economic conditions, will be the future prospects of the
Company (including the prospects for, and timing of, future revenues) and its
industry in general, sales, earnings and certain other financial and operating
information of the Company in recent periods, an assessment of the Company's
management, the present stage of the Company's development and clinical and
regulatory status, and the price-earnings ratios, price-sales ratios, market
prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
initial public offering price range set forth on the cover page of this
Preliminary Prospectus is subject to change as a result of market conditions and
other factors.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by its counsel, Cooley Godward LLP ("Cooley Godward"), San
Francisco, California. Certain legal matters will be passed upon for the
Underwriters by Wilson, Sonsini, Goodrich & Rosati, P.C., Palo Alto, California.
As of the date of this Prospectus, GC&H Investments, an investment partnership
composed of certain partners of and persons associated with Cooley Godward,
beneficially owned 15,359 shares of Common Stock of the Company.

EXPERTS

The financial statements of Cerus Corporation as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

The statements in this Prospectus under the captions "Risk
Factors -- Patent and License Uncertainties," "Business -- Patents, Licenses and
Proprietary Rights" and other references herein to intellectual property of the
Company have been reviewed and approved by Medlen & Carroll, patent counsel for
the Company, as experts on such matters, and are included herein in reliance
upon that review and approval. As of the date of this Prospectus, certain
members of Medlen & Carroll beneficially owned 47,409 shares of Common Stock of
the Company.

58
<PAGE> 61

ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto,
relating to the shares of Common Stock offered hereby has been filed by the
Company with the Commission under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to such Registration Statement, exhibits and schedules. A copy
of the Registration Statement may be inspected by anyone without charge at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from those offices upon the payment of certain fees
prescribed by the Commission. The Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov.

59
<PAGE> 62

CERUS CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Stockholders' Equity (Deficit).......................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-8
</TABLE>

F-1
<PAGE> 63

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Cerus Corporation

We have audited the accompanying balance sheets of Cerus Corporation as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1995. 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 Cerus Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.

Walnut Creek, California
April 3, 1996, except for Note 7
as to which the date is July 24, 1996

The foregoing report is in the form that will be signed upon the completion
of the stock split and reincorporation in Delaware as described in Note 7.

/s/ Ernst & Young LLP

Walnut Creek, California
September 3, 1996

F-2
<PAGE> 64

CERUS CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, PRO FORMA
--------------------------- JUNE 30, STOCKHOLDERS'
1994 1995 1996 EQUITY AT
----------- ----------- ------------ JUNE 30,
1996
(UNAUDITED) ------------
(NOTE 7)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 7,802,275 $ 9,659,017 $ 8,760,884
Other current assets....................... 313,603 258,583 213,752
----------- ----------- ------------
Total current assets......................... 8,115,878 9,917,600 8,974,636
Furniture and equipment at cost:
Laboratory and office equipment............ 317,744 508,384 639,146
Leasehold improvements..................... 1,427,520 1,440,863 1,440,863
----------- ----------- ------------
1,745,264 1,949,247 2,080,009
Less accumulated depreciation.............. 356,720 686,427 919,301
----------- ----------- ------------
Net furniture and equipment.................. 1,388,544 1,262,820 1,160,708
Other assets................................. 179,873 168,429 145,472
----------- ----------- ------------
Total assets................................. $ 9,684,295 $11,348,849 $ 10,280,816
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 503,725 $ 257,610 $ 557,963
Accrued compensation and related
expenses................................ 163,600 355,511 152,575
Accrued third-party toxicology and
development expenses.................... 586,383 -- 796,565
Other accrued expenses..................... 10,766 42,348 273,030
Deferred revenue........................... 933,241 1,900,504 599,084
Current portion of capital lease
obligations............................. 53,067 98,230 115,966
----------- ----------- ------------
Total current liabilities.................... 2,250,782 2,654,203 2,495,183
Deferred revenue............................. 1,900,504 -- --
Capital lease obligations, less current
portion.................................... 93,811 32,007 36,499
Stockholders' equity:
Preferred stock, $.001 par value;
3,199,942 shares authorized
(5,000,000 pro forma):
issuable in series: 2,091,593,
2,620,677, and 2,811,154 shares issued
and outstanding at December 31, 1994,
December 31, 1995 and June 30, 1996,
respectively (none pro forma); aggregate
liquidation preference of $18,485,267
and $21,485,264 at December 31, 1995 and
June 30, 1996, respectively............. 2,092 2,621 2,811 $ --
Common stock, $.001 par value; 4,681,833
shares authorized (50,000,000 pro
forma): 961,410, 964,555 and 1,294,655
shares issued and outstanding at
December 31, 1994, December 31, 1995 and
June 30, 1996, respectively (4,105,809
shares issued and outstanding pro
forma).................................. 961 964 1,295 4,106
Additional paid-in capital................. 13,155,359 18,738,589 22,426,014 22,426,014
Deferred compensation...................... -- -- (444,421) (444,421)
Notes receivable from stockholders......... (80,588) (80,588) (80,087) (80,087)
Accumulated deficit........................ (7,638,626) (9,998,947) (14,156,478) (14,156,478)
----------- ----------- ------------ ------------
Total stockholders' equity................... 5,439,198 8,662,639 7,749,134 $ 7,749,134
============
----------- ----------- ------------
Total liabilities and stockholders' equity... $ 9,684,295 $11,348,849 $ 10,280,816
=========== =========== ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 65

CERUS CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Licenses, milestones and
development funding from a
related party............... $ 200,000 $ 3,901,419 $ 6,047,579 $ 2,415,666 $ 2,104,790
Government grants.............. 30,000 894,929 751,356 319,156 500,931
----------- ----------- ----------- ----------- -----------
Total revenue.................... 230,000 4,796,348 6,798,935 2,734,822 2,605,721
Operating expenses:
Research and development....... 2,484,994 5,680,263 8,125,311 4,962,972 5,981,660
General and administrative..... 1,210,357 1,193,838 1,517,152 626,893 1,009,469
----------- ----------- ----------- ----------- -----------
Total operating expenses......... 3,695,351 6,874,101 9,642,463 5,589,865 6,991,129
----------- ----------- ----------- ----------- -----------
Loss from operations............. (3,465,351) (2,077,753) (2,843,528) (2,855,043) (4,385,408)
Other income (expense):
Interest income................ 25,886 320,681 500,028 241,844 236,179
Interest expense............... (76,001) (43,017) (16,821) (7,701) (8,302)
----------- ----------- ----------- ----------- -----------
Total other income (expense)..... (50,115) 277,664 483,207 234,143 227,877
----------- ----------- ----------- ----------- -----------
Net loss......................... $(3,515,466) $(1,800,089) $(2,360,321) $(2,620,900) $(4,157,531)
=========== =========== =========== =========== ===========
Pro forma net loss per share..... $ (0.55) $ (0.93)
Shares used in computing pro
forma net loss per share....... 4,314,045 4,491,454
</TABLE>

See accompanying notes.

F-4
<PAGE> 66

CERUS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
------------------ ------------------ PAID-IN DEFERRED FROM ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT EQUITY (DEFICIT)
--------- ------ --------- ------ ----------- ------------ ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances
at December
31, 1993... 1,125,000 $1,125 1,020,000 $1,020 $ 5,411,557 $ -- $(91,552) $ (5,838,537) $ (516,387)
Issuance of
common
stock... -- -- 4,000 4 3,196 -- -- -- 3,200
Repurchase
of common
stock through
cancellation
of notes
receivable... -- -- (62,590) (63) (6,196) -- 6,259 -- --
Issuance
of Series C
convertible
preferred
stock, net
of issuance
costs of
$59,912... 966,540 967 -- -- 7,671,441 -- -- -- 7,672,408
Issuance
of warrants
to purchase
Series C
preferred
stock... -- -- -- -- 75,000 -- -- -- 75,000
Exercise
of warrants
to purchase
Series C
preferred
stock... 53 -- -- -- 361 -- -- -- 361
Payment on
notes
receivable... -- -- -- -- -- -- 4,705 -- 4,705
Net loss... -- -- -- -- -- -- -- (1,800,089) (1,800,089)
--------- ------ --------- ------ ----------- -------- -------- ----------- ------------
Balances at
December 31,
1994....... 2,091,593 2,092 961,410 961 13,155,359 -- (80,588) (7,638,626) 5,439,198
Exercise
of stock
options... -- -- 3,145 3 1,683 -- -- -- 1,686
Issuance
of Series
D convertible
preferred
stock, net
of issuance
costs of
$60,806... 529,084 529 -- -- 5,494,047 -- -- -- 5,494,576
Issuance
of warrants
to purchase
Series D
preferred stock... -- -- -- -- 87,500 -- -- -- 87,500
Net loss... -- -- -- -- -- -- -- (2,360,321) (2,360,321)
--------- ------ --------- ------ ----------- --------- -------- ------------ ------------
Balances
at December
31, 1995... 2,620,677 2,621 964,555 964 18,738,589 -- (80,588) (9,998,947) 8,662,639
Exercise
of stock
options
(unaudited)... -- -- 330,100 331 250,816 -- -- -- 251,147
Issuance
of Series
E convertible
referred
stock, net
of issuance
costs of
$93,417
(unaudited)... 190,477 190 -- -- 2,906,394 -- -- -- 2,906,584
Payment on
notes
receivable
(unaudited)... -- -- -- -- -- -- 501 -- 501
Deferred
compensation
(unaudited)... -- -- -- -- 530,215 (444,421) -- -- 85,794
Net l
(unaudited)... -- -- -- -- -- -- -- (4,157,531) (4,157,531)
--------- ------ --------- ------ ----------- --------- -------- ------------- -------------
Balance
at June 30,
1996
(unaudited)... 2,811,154 $2,811 1,294,655 $1,295 $22,426,014 $(444,421) $(80,087) $(14,156,478) $ 7,749,134
========= ====== ========= ====== =========== ========= ======== ============ ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 67

CERUS CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................. $(3,515,466) $(1,800,089) $(2,360,321) $(2,620,900) $(4,157,531)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.......... 131,447 269,954 369,267 163,144 236,404
Amortization of deferred
compensation........................ -- -- -- -- 85,794
Common stock issued for consulting
services............................ 4,557 3,200 -- -- --
Issuance of preferred stock for payment
of interest......................... -- 33,210 -- -- --
Changes in operating assets and
liabilities:
Other current assets................ (20,297) (162,134) 72,220 38,617 44,831
Other assets........................ 63,525 (7,157) 42,184 47,553 19,427
Accounts payable.................... (88,506) 367,699 (246,115) (104,393) 300,353
Accrued compensation and related
expenses.......................... 16,317 133,788 191,911 (71,224) (202,936)
Accrued third-party toxicology and
development expenses.............. -- 586,383 (586,383) (345,557) 796,565
Other accrued expenses.............. 44,413 (8,334) 31,582 54,777 230,682
Income taxes payable................ 68,140 (68,140) -- -- --
Deferred revenue.................... 5,000,000 (2,166,255) (933,241) (323,497) (1,301,420)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 1,704,130 (2,817,875) (3,418,896) (3,161,480) (3,947,831)

INVESTING ACTIVITIES
Purchases of furniture and equipment..... (280,649) (989,656) (124,359) (84,949) (20,928)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.... (280,649) (989,656) (124,359) (84,949) (20,928)

FINANCING ACTIVITIES
Net proceeds from sale of preferred
stock.................................. 2,430,600 5,569,026 5,494,576 5,494,576 2,906,584
Proceeds from issuance of common stock... 1,995 -- 1,686 -- 251,147
Payments on notes receivable from
shareholders........................... -- 4,705 -- -- 501
Proceeds from convertible notes
payable................................ 1,994,698 -- -- -- --
Payments on capital lease obligations.... -- (40,157) (96,265) (25,695) (87,606)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................. 4,427,293 5,533,574 5,399,997 5,468,881 3,070,626
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 5,850,774 1,726,043 1,856,742 2,222,452 (898,133)
Cash and cash equivalents, beginning of
period................................. 225,458 6,076,232 7,802,275 7,802,275 9,659,017
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of
period................................. $ 6,076,232 $ 7,802,275 $ 9,659,017 $10,024,727 $ 8,760,884
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 68

CERUS CORPORATION

STATEMENTS OF CASH FLOWS -- (CONTINUED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures:
Interest paid.......................... $ 1,162 $ -- $ 16,821 $ 7,701 $ 8,302
=========== =========== =========== =========== ===========
Income taxes paid...................... $ -- $ 68,140 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Supplemental schedule of noncash
investing and financing activities:
Repurchase of common stock through
cancellation of notes receivable.... $ -- $ 6,259 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Issuance of preferred stock warrants in
connection with an operating lease
line................................ $ 29,600 $ 75,000 $ 87,500 $ 87,500 $ --
=========== =========== =========== =========== ===========
Issuance of Series C preferred stock in
exchange for convertible notes
payable and accrued interest........ $ -- $ 2,070,533 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Capital lease obligations incurred..... $ -- $ 187,035 $ 79,624 $ -- $ 109,834
=========== =========== =========== =========== ===========
Deferred compensation related to stock
option grants....................... $ -- $ -- $ -- $ -- $ 530,215
=========== =========== =========== =========== ===========
</TABLE>

See accompanying notes.

F-7
<PAGE> 69

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Cerus Corporation (the "Company"), incorporated in California on September
19, 1991 as Steritech, Inc., is developing systems designed to improve the
safety of blood transfusions by inactivating infectious pathogens in transfusion
blood components used for transfusion (platelets, fresh frozen plasma ("FFP")
and red blood cells) and inhibiting the leukocyte (white blood cell) activity
that is responsible for certain adverse immune and other transfusion-related
reactions. The Company has entered into two development and commercialization
agreements with Baxter Healthcare Corporation ("Baxter") to develop, manufacture
and market, these pathogen inactivation systems. The Company has not received
any revenues from product sales, and all revenues recognized by the Company to
date have resulted from the Company's agreements with Baxter and federal
research grants. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on its pathogen
inactivation systems that, together with anticipated general and administrative
expenses, are expected to result in substantial additional losses.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

INTERIM FINANCIAL INFORMATION

The financial information at June 30, 1996 and for the six-month periods
ended June 30, 1995 and 1996 is unaudited, but includes all adjustments that the
Company considers necessary for a fair presentation of the financial information
set forth therein, in accordance with generally accepted accounting principles.
The results for the six months ended June 30, 1996 should not be considered
indicative of the results to be expected for any future period or for the entire
year ended December 31, 1996.

REVENUES AND RESEARCH AND DEVELOPMENT EXPENSES

Revenues related to the cost reimbursement provisions under development
contracts are recognized as the costs on the project are incurred. Revenues
related to milestones specified under development contracts are recognized as
the milestones are achieved. Prepaid license fees, included in deferred revenue,
are recognized as revenues on a pro rata basis upon achievement of milestones.
Research and development costs are expensed as incurred.

The Company receives certain United States government grants which support
the Company's research effort in defined research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in the
various grants. Revenues associated with these grants are recognized as costs
under each grant are incurred.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with maturities less
than three months when purchased to be cash and cash equivalents. Substantially
all of the Company's cash and cash equivalents are maintained by two major
financial institutions.

F-8
<PAGE> 70

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

DEPRECIATION AND AMORTIZATION

Depreciation on equipment is calculated on a straight-line basis over the
estimated useful lives of the assets (principally five years for laboratory
equipment and furniture and three years for office equipment). Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful lives of the improvements.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company will adopt SFAS 123 in 1996. It is the
Company's intention to continue to account for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 and to adopt the
"disclosure only" alternative described in SFAS 123.

INCOME TAXES

The Company accounts for income taxes based upon Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalent shares from convertible
preferred stock and from stock options and warrants are not included as the
effect is anti-dilutive. Pursuant to the Securities and Exchange Commission
Staff Accounting Bulletins, however, common and common equivalent shares (stock
options, warrants and preferred stock) issued by the Company at prices below the
initial public offering price during the twelve-month period prior to the
initial public offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method at the
estimated initial public offering price for stock options and warrants and the
as-if-converted method for preferred stock). Per share information calculated on
the above basis is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net loss per share........... $ (1.83) $ (0.95) $ (1.26) $ (1.40) $ (2.22)
========== ========== ========== ========== ==========
Shares used in computing net
loss per share............. 1,920,222 1,888,495 1,869,729 1,868,680 1,870,777
========== ========== ========== ========== ==========
</TABLE>

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share has been computed as described above and also
gives effect, even if antidilutive, to common equivalent shares from convertible
preferred shares that will automatically convert to common shares upon the
closing of the Company's initial public offering (using the as-if-converted
method).

F-9
<PAGE> 71

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

PRO FORMA STOCKHOLDER'S EQUITY

The Company's unaudited pro forma stockholders' equity as of June 30, 1996
gives effect to the conversion of all convertible preferred stock outstanding
into an aggregate of 2,811,154 shares of common stock, effective upon the
closing of the Company's initial public offering. The unaudited pro forma
stockholders' equity as of June 30, 1996 does not reflect the sale on July 1,
1996 of 190,476 shares of Series E preferred stock at a purchase price of $15.75
per share to Baxter. The unaudited pro forma stockholders' equity does not
assume the exercise of any outstanding warrants to purchase shares of capital
stock.

2. LICENSING AGREEMENTS WITH BAXTER HEALTHCARE CORPORATION, A RELATED PARTY OF
THE COMPANY

In December 1993, the Company entered into a development, manufacturing and
marketing agreement with Baxter relating to the development of a system for the
inactivation of pathogens in the platelet component of human blood (the
"Platelet System"). The agreement grants to Baxter the exclusive right to market
and distribute the Platelet System throughout the world, subject to certain
conditions.

In 1993, under the terms of the agreement, the Company received $5.2
million in license fees and milestone and development payments. In 1994 and
1995, the Company received milestone and development payments from Baxter under
this agreement totaling $1.7 million and $2.5 million, respectively. Under this
agreement, the Company is to receive a specified percentage of revenues from
sales of inactivation system disposables after deducting from such revenues the
amount by which Baxter's and the Company's cost of goods for the inactivation
system disposables exceeds certain dollar amounts specified in the agreement.

In July 1995, the Company entered into two interim research funding
agreements with Baxter relating to the development of certain technologies for
the pathogen inactivation of the red cell and FFP components of human blood.
Under the terms of these agreements, the Company received cash proceeds of
$2,580,000 in 1995 to be used for certain incurred and future research and
development expenses.

On April 1, 1996, the Company entered into a development, manufacturing and
marketing agreement with Baxter to develop pathogen inactivation systems for
blood components and products other than platelets. The agreement grants Baxter
the exclusive right to market and distribute the systems throughout the world,
subject to certain conditions. The agreement specifies two initial programs for
pathogen inactivation systems for red cells and FFP. These programs are under
development by the Company. The costs incurred during 1996 on these two programs
will be funded by the Company. Subsequent costs will be shared equally by the
parties upon approval to commence Phase 3 clinical trials for the Platelet
System. Under this agreement, the Company and Baxter are to share gross profits
from sales of inactivation systems after deducting from such gross profits a
specified percentage allocation to be retained by the marketing party for
marketing and administrative expenses. Either party may terminate work on any or
all projects with 90 days written notice. Neither party, however, may terminate
work on the red cell or plasma projects prior to January 1, 1998.

Under the terms of this agreement, Baxter purchased 190,477 shares of
Series E preferred stock at $15.75 per share for $3,000,000 in cash on April 1,
1996, and an additional 190,476 shares of Series E preferred stock on July 1,
1996 at $15.75 per share for $3,000,000 in cash. The agreement calls for
specific equity investments by Baxter to be made at 120% of the market price at
the time of each investment, subject to the achievement of certain milestones as
follows: (i) $5 million, upon the later of January 10, 1997 and the approval to
commence a Phase 3 study in the United States or Europe in the program under the
Platelet Agreement, (ii) either $5 million, upon the later of January 10, 1998
and the achievement of both (a) the mutual determination by the Company and
Baxter that there is sufficient data to conclude that the Phase 3 platelet
trials are likely to satisfy specified criteria (the "Interim Platelet
Determination") and (b) the filing of an IND with the FDA to begin a Phase 1
study under the red cell program or comparable filing in Europe under

F-10
<PAGE> 72

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

such program, or separate equity investments of $2 million, upon the later of
January 10, 1998 and the Interim Platelet Determination and $3 million, upon the
later of January 10, 1998 and the approval of an IND by the FDA under the red
cell program or comparable approval in Europe under such program, and (iii) $5
million, upon the later of January 10, 1999 and the achievement of both (a) the
approval by the FDA to commence a Phase 2 study in the United States or
comparable approval in Europe under the red cell project and the (b) approval of
a New Drug Application by the FDA under the platelet program or comparable
approval in Europe under such program.

Baxter has agreed that it will not at any time, nor will it permit any of
its affiliates, to own capital stock of the Company having 20.1% or more of the
outstanding voting power of the Company. Such restrictions on stock purchases
will not apply in the event a third party makes a tender offer for a majority of
the outstanding voting securities of the Company or if the Board of Directors of
the Company determines to liquidate or sell to a third party substantially all
of the assets or a majority of the voting securities of the Company or to
approve a merger or consolidation in which the Company's stockholders will not
own a majority of the voting securities of the surviving entity.

Revenue relating to licenses, milestones and development funding for all
periods presented are as a result of agreements with Baxter.

3. LEASES

The Company leases its office facilities and certain equipment under
non-cancelable operating leases with initial terms in excess of one year which
require the Company to pay operating costs, property taxes, insurance and
maintenance. These facility leases generally contain renewal options and
provisions adjusting the lease payments.

In 1994, the Company entered into various capital lease agreements for
laboratory and office equipment. Capital lease obligations represent the present
value of future rental payments under these leases. The original cost and
accumulated amortization on the equipment under capital leases is $187,035 and
$37,408, respectively, at December 31, 1994 and $266,659 and $71,465,
respectively, at December 31, 1995.

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

<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- --------------------------------------------------------------------- -------- ----------
<S> <C> <C>
1996............................................................ $106,490 $ 625,112
1997............................................................ 33,215 540,517
1998............................................................ -- 356,995
1999............................................................ -- 140,209
2000............................................................ -- --
-------- ----------
Total minimum lease payments.................................. 139,705 $1,662,833
==========
Amount representing interest.................................... 9,468
--------
Present value of net minimum lease payments..................... 130,237
Current portion................................................. 98,230
--------
Long-term portion............................................... $ 32,007
========
</TABLE>

F-11
<PAGE> 73

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

Rent expense for office facilities and certain equipment was $460,783,
$602,662, and $801,632 for the years ended December 31, 1993, 1994 and 1995,
respectively.

4. STOCKHOLDERS' EQUITY

PREFERRED STOCK

Preferred stock consists of the following:

<TABLE>
<CAPTION>
SHARES DESIGNATED SHARES ISSUED AND OUTSTANDING
--------------------------------- ---------------------------------
DECEMBER 31, DECEMBER 31,
--------------------- JUNE 30, --------------------- JUNE 30,
1994 1995 1996 1994 1995 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Series A...................... 761,079 761,079 761,079 714,286 714,286 714,286
Series B...................... 305,461 305,461 305,461 285,714 285,714 285,714
Series C...................... 1,147,449 1,147,449 1,147,449 1,091,593 1,091,593 1,091,593
Series D...................... -- 605,000 605,000 -- 529,084 529,084
Series E...................... -- -- 380,953 -- -- 190,477
---------- ---------- ---------- ---------- ---------- ----------
2,213,989 2,818,989 3,199,942 2,091,593 2,620,677 2,811,154
========== ========== ========== ========== ========== ==========
</TABLE>

CONVERTIBLE PREFERRED STOCK

Holders of Series A, B, C, D and E convertible preferred stock are entitled
to receive non-cumulative, annual dividends of $0.46, $0.61, $0.96, $1.26 and
$1.89 per share, respectively, prior to any dividends on common stock. Subject
to certain conversion price provisions, each share of preferred stock is
convertible into one share of common stock at the option of the stockholders.
Preferred stockholders are entitled to the number of votes equal to the number
of shares of common stock into which the preferred stock is convertible. Shares
automatically convert upon the closing of an initial public offering of common
stock with a per share price of at least $13.13 per share (as adjusted for stock
splits, stock dividends and the like) and with net cash proceeds to the Company
of at least $10,000,000 or at any time more than two-thirds of the shares of
preferred stock authorized, issued and outstanding have been converted.

In the event of liquidation, dissolution, or winding up of the Company,
holders of Series A, B, C, D and E convertible preferred stock have a
liquidation preference over holders of common stock equal to $3.85, $5.075,
$8.00, $10.50 and $15.75 per share, respectively, plus any declared but unpaid
dividends (none as of June 30, 1996). Any remaining assets would be distributed
pro rata to holders of common and preferred shares on an as-converted basis
until the preferred stockholders of Series A, B, C, D and E receive an aggregate
of $15.40, $20.30, $32.00, $31.50 and $15.75, respectively, inclusive of the
respective liquidation preference amounts referred to above.

1992 STOCK OPTION PLAN

In January 1992, the Company's Board of Directors approved the 1992 Stock
Option Plan (the "Plan"), which provides for the grant of stock options to
purchase up to 400,000 of the Company's common stock. An additional 300,000
shares were reserved under the Plan for future grant by the Company's Board of
Directors in 1996. Under the Plan, two types of options may be granted:
Incentive Stock Options ("ISOs") and Non-Qualified Stock Options ("NQSOs"). The
ISOs may be granted at a price per share not less than the fair market value at
the date of grant. The NQSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. The option term is 10 years.
Vesting, as determined by the Board of Directors, generally occurs ratably over
four years. In the event option holders cease to be employed by the

F-12
<PAGE> 74

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

Company, except in the event of death or disability or as otherwise provided in
the option grant, all unvested options are forfeited and all vested options must
be exercised within a three-month period, otherwise the options are forfeited.
Options granted are immediately exercisable, and unvested (but issued) shares
are subject to repurchase by the Company if the holder is no longer employed by
the Company. As of June 30, 1996, 132,346 shares were subject to this repurchase
provision.

Activity under the Plan is set forth below:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
NUMBER OF
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Balances at December 31, 1993...................................... 161,590 $.385-.5065
Granted.......................................................... 180,360 .800
Cancelled........................................................ (3,000) .800
-------- -----------
Balances at December 31, 1994...................................... 338,950 .385- .800
Granted.......................................................... 51,500 1.05
Cancelled........................................................ (43,055) .385- .800
Exercised........................................................ (3,145) .385- .800
-------- -----------
Balances at December 31, 1995...................................... 344,250 .385- 1.05
Granted.......................................................... 274,741 1.05- 6.00
Cancelled........................................................ (4,000) .385- 1.05
Exercised........................................................ (330,100) 1.05- 4.00
-------- -----------
Balances at June 30, 1996.......................................... 284,891 $.385- 6.00
======== ===========
</TABLE>

At December 31, 1995, options to purchase 204,262 shares of common stock
were exercisable at prices ranging from $.385-$1.05. At June 30, 1996, options
to purchase 258,709 shares of common stock were exercisable at prices ranging
from $.385-$1.05 and options to purchase 81,864 shares of common stock were
available for future grant.

The Company recognized deferred compensation of $530,215 for the difference
between the exercise price and deemed fair value of certain stock options
granted during the six months ended June 30, 1996. This amount is being
amortized by periodic charges to operations over the four year vesting periods
of the individual options. Amortization expense related to deferred compensation
totaled $85,794 for the six-month period ended June 30, 1996.

F-13
<PAGE> 75

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

WARRANTS

The Company had the following warrants outstanding at December 31, 1995 to
purchase shares of preferred stock:

<TABLE>
<CAPTION>
NUMBER PREFERRED EXERCISE DATE
OF SHARES STOCK PRICE PER SHARE ISSUED
- --------- --------- --------------- ------ EXPIRATION OF WARRANTS
-----------------------------------------------
At the earlier of:
<S> <C> <C> <C> <C>
20,779 Series A $ 3.85 5/92 May 2002 or five years after initial public
offering
3,949 Series B $ 5.07 7/93 July 2003 or five years after initial public
offering
15,798 Series B $ 5.07 5/94 May 1998 or initial public offering
17,517 Series C $ 6.80 5/94 August 1998 or initial public offering
6,250 Series C $ 8.00 5/94 May 2004 or five years after initial public
offering
4,500 Series D $ 10.50 4/95 April 2005 or five years after initial public
offering
- --------
68,793
========
</TABLE>

In May 1993 and August 1993, the Company entered into convertible note
payable agreements with investors for $1,994,698 cash with the principal amount
of the notes bearing interest at 8% per annum. The notes were due on demand.
Additionally, the note holders were issued warrants to purchase 15,798 and
17,570 shares of Series B and Series C preferred stock, respectively, which are
included above less any redeemed warrants. The purchase price for the warrants
was $.001 per warrant. In March 1994, these note holders converted their notes
and accrued interest, together with an additional $3,550,321 in cash, for
706,758 shares of Series C preferred stock for $8.00 per share. In September
1994, 53 shares under the Series C warrant were exercised at $6.80 per share.
All of the remaining warrants were issued in connection with an operating lease
line. No value has been ascribed to the above warrant issuances.

All of the outstanding warrants will become exercisable for common stock if
the Company completes an initial public offering of its common stock.

5. INCOME TAXES

Significant components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Net operating loss carryforward................................... $ 1,600,000 $ 2,600,000
Research and development credit carryforward...................... 300,000 400,000
Deferred revenue.................................................. 1,100,000 800,000
Capitalized research and development.............................. 100,000 300,000
Other............................................................. 100,000 100,000
----------- -----------
Gross deferred tax assets......................................... 3,200,000 4,200,000
Valuation allowance............................................... (3,200,000) (4,200,000)
----------- -----------
Net deferred tax assets........................................... $ -- $ --
=========== ===========
</TABLE>

The valuation allowance increased by $692,000 and $1,000,000 for the fiscal
years ended in 1994 and 1995, respectively. The Company believes that, based on
a number of factors, the available objective evidence creates sufficient
uncertainty regarding the realizability of the deferred tax assets such that a
full valuation allowance has been recorded. These factors include the Company's
history of net losses since its inception, the

F-14
<PAGE> 76

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

need for FDA approval of the Company's products prior to commercialization,
expected near-term future losses, the nature of the Company's deferred tax
assets, the lack of firm sales backlog, no significant excess of appreciated
asset value over the tax basis of the Company's net assets and the absence of
taxable income in prior carryback years.

Although management's operating plans assume that beyond the near-term,
taxable and operating income in future periods, management evaluation of all
available information in assessing the realizability of the deferred tax assets
in accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," indicates that such plans were subject to
considerable uncertainty. Therefore, the valuation allowance was increased to
fully reserve the Company's deferred tax assets. The Company will continue to
assess the realizability of the deferred tax assets based on actual and
forecasted operating results.

At December 31, 1995, the Company had net operating loss carryforwards of
approximately $7,200,000 for federal and $1,800,000 for state income tax
purposes. The Company also had research and development tax credit carryforwards
of approximately $300,000 for federal income tax purposes at December 31, 1995.
The federal net operating loss and tax credit carryforwards expire between the
years 2007 and 2010. The state net operating loss expires in 2000.

Utilization of the Company's net operating losses and credits are subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code. The annual limitation may result in the
expiration of net operating losses and credits before utilization.

6. RETIREMENT PLAN

The Company maintains a defined contribution savings plan (the "401(k)
Plan") that qualifies under the provisions of Section 401(k) of the Internal
Revenue Code and covers all employees of the Company. Under the terms of the
401(k) Plan, employees may contribute varying amounts of their annual
compensation. The Company may contribute a discretionary percentage of qualified
individual employee's salaries, as defined, to the 401(k) Plan. Company
contributions of $2,423, $3,300 and $2,700 were charged to operations in 1993,
1994 and 1995, respectively, in order to cover certain costs of the 401(k) Plan.

7. SUBSEQUENT EVENTS

PROPOSED PUBLIC OFFERING OF COMMON STOCK

On July 24, 1996, the Board of Directors authorized the Company to proceed
with an offering of the Company's common stock. If the offering is consummated
under the terms presently anticipated, all of the outstanding shares of
preferred stock at June 30, 1996 will automatically convert into 2,811,154
shares of common stock. Unaudited pro forma stockholders' equity, as adjusted
for the assumed conversion of all outstanding shares of convertible preferred
stock as of June 30, 1996, is set forth on the accompanying balance sheet. The
unaudited pro forma stockholders' equity as of June 30, 1996 does not reflect
the sale on July 1, 1996 of 190,476 shares of Series E preferred stock at a
purchase price of $15.75 per share to Baxter. The unaudited pro forma
stockholders' equity does not assume the exercise of any outstanding warrants to
purchase shares of capital stock.

REINCORPORATION AND STOCK SPLIT

On July 24, 1996, the Board of Directors approved a change in the name of
the Corporation to "Cerus Corporation," subject to stockholder approval. At the
same time, the Board authorized the Company to proceed with the reincorporation
of the Company into Delaware. In connection with the reincorporation, the

F-15
<PAGE> 77

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(INFORMATION AT JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)

Company will effect a stock split of all outstanding shares of common stock. In
connection with the stock split, the conversion and exercise provisions of the
outstanding shares of preferred stock, stock options and warrants will be
adjusted accordingly. Upon the reincorporation, the authorized stock of the
Company will become 5,000,000 shares of preferred stock, par value $.001 per
share, and 50,000,000 shares of common stock, par value $.001 per share. Also
upon reincorporation, the Board of Directors has the authority, without further
action by the stockholders, to issue up to 5,000,000 shares of preferred stock
in one or more series and to fix the designations, powers, preferences,
privileges, and relative participating, optional or special rights and the
qualifications, limitations, or restrictions thereof, including dividend rights,
conversion rights, voting rights, and terms of redemption and liquidation
preferences, any or all of which may be greater than the rights of the common
stock.

EQUITY INCENTIVE PLAN

On July 24, 1996, the Board of Directors adopted, subject to stockholder
approval, the 1996 Equity Incentive Plan (the "Incentive Plan") as an amendment
and restatement of the Company's 1992 Stock Option Plan, and reserved an
additional 300,000 shares of common stock for issuance thereunder. The Incentive
Plan provides for grants of incentive stock options to employees and non
statutory stock options, restricted stock purchase awards, stock appreciation
rights and stock bonuses to employees, directors and consultants of the Company.

EMPLOYEE STOCK PURCHASE PLAN

On July 24, 1996, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") subject to stockholder approval,
covering an aggregate of 150,000 shares of Common Stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423(b) of the Code. Under the Purchase Plan, the Board of Directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no more than 27 months.

F-16
<PAGE> 78

[CERUS LOGO]
<PAGE> 79

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the shares of Common Stock being registered. All the amounts shown are
estimates except for the SEC registration fee, the NASD filing fee and the
Nasdaq National Market application fee.

<TABLE>
<S> <C>
SEC registration fee............................................... $11,897
NASD filing fee.................................................... 3,950
Nasdaq National Market application fee.............................
Blue sky qualification fee and expenses............................
Printing and engraving expenses....................................
Legal fees and expenses............................................
Accounting fees and expenses.......................................
Transfer agent and registrar fees..................................
Directors and Officers Insurance Premium...........................
Miscellaneous......................................................
-------
Total.................................................... $
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. The
Registrant's Bylaws provide for mandatory indemnification of its directors and
executive officers and permissible indemnification of officers, employees and
other agents to the maximum extent permitted by the Delaware General Corporation
Law. The Registrant has entered into indemnification agreements with its
executive officers and directors, a form of which is attached as Exhibit 10.1
hereto and incorporated herein by reference. The indemnification agreements
provide the Registrant's officers and directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. The
Company plans to also obtain directors' and officers' insurance to insure its
directors and officers against certain liabilities, including liabilities under
the Securities Act. Reference is also made to Section 8 of the Underwriting
Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors
of the Registrant against certain liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since July 1993, the Registrant has sold and issued the following
unregistered securities:

(1) In July 1993, the Company issued warrants to purchase an aggregate
of 3,949 shares of Series B Preferred Stock to Comdisco, Inc., in
connection with an equipment lease, at an exercise price of $5.065 per
share.

(2) In May 1994, the Company issued warrants to purchase an aggregate
of 15,798 shares of Series B Preferred Stock to certain non-employee
investors at an exercise price of $5.065 per share, all of which will
expire upon the closing of this offering.

(3) In May 1994, the Company issued warrants to purchase an aggregate
of 6,250 shares of Series C Preferred Stock to Comdisco, Inc., in
connection with an equipment lease, at an exercise price of $8.00 per
share.

II-1
<PAGE> 80

(4) In May 1994, the Company issued warrants to purchase an aggregate
of 17,570 shares of Series C Preferred Stock to certain non-employee
investors at an exercise price of $6.80 per share. Of these warrants,
warrants to purchase 53 shares of Series C Preferred Stock were exercised.
The remaining warrants will expire upon the closing of this offering.

(5) In December 1993, March through June 1994, the Company sold an
aggregate of 1,091,593 shares of the Company's Series C Preferred Stock to
certain non-employee investors for an aggregate purchase price of
$8,732,680.

(6) In April 1995, the Company issued warrants to purchase an
aggregate of 4,500 shares of Series D Preferred Stock to Comdisco, Inc., in
connection with an equipment lease, at an exercise price of $10.50 per
share.

(7) In April, May and June 1995, the Company sold an aggregate of
529,084 shares of the Company's Series D Preferred Stock to certain
non-employee investors for an aggregate purchase price of $5,555,382.

(8) In April 1996 and July 1996, the Company sold an aggregate of
380,953 shares of the Company's Series E Preferred Stock to Baxter for an
aggregate purchase price of $6,000,000.

(9) From January 1992 to July 1996, the Company granted stock options
to employees, directors and consultants covering an aggregate of 668,191
shares of the Company's Common Stock, at an average exercise price varying
from $0.385 to $6.00. Of such shares, 333,245 shares have been issued and
sold pursuant to the exercise of such options. Options to purchase 50,055
shares of Common Stock have been canceled or have lapsed without being
exercised or otherwise been canceled.

The Company claimed exemptions under the Securities Act from registration
under the Securities Act for the sale and issuance of securities in the
transaction described in paragraphs (1) through (8) by virtue of Section 4(2) or
Regulation D promulgated thereunder as transactions not involving public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and with a view to the distribution thereof.
Appropriate legends are affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.

The sales and issuances in the transactions described in paragraph (9)
above were deemed to be exempt from registration under the Securities Act by
virtue of Rule 701 promulgated thereunder, in that they were issued pursuant to
a written compensatory benefit plan, as provided by Rule 701.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ----------------------------------------------------------------------------------
<S> <C>
1.1** Form of Underwriting Agreement.
2.1* Form of Agreement and Plan of Merger to be used in connection with the
Registrant's Reincorporation in Delaware.
3.1 Registrant's Certificate of Incorporation.
3.2 Registrant's Amended and Restated Certificate of Incorporation to be effective
following the closing of this offering.
3.3* Registrant's Bylaws.
4.1* Reference is made to Exhibits 3.1 through 3.3.
4.2** Specimen stock certificate.
5.1** Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1* Form of Indemnity Agreement to be entered into between the Registrant and each of
its directors and executive officers.
10.2* 1996 Equity Incentive Plan.
</TABLE>

II-2
<PAGE> 81

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ----------------------------------------------------------------------------------
<S> <C>
10.3* Form of Incentive Stock Option Agreement under the 1996 Equity Incentive Plan.
10.4* Form of Nonstatutory Stock Option Agreement under the 1996 Equity Incentive Plan.
10.5* 1996 Employee Stock Purchase Plan.
10.6** Form of Employee Stock Purchase Plan Offering.
10.7* Warrant Agreement, dated May 11, 1992, between the Registrant and Comdisco, Inc.
to purchase Series A Preferred Stock
10.8* Warrant Agreement, dated July 12, 1993, between the Registrant and Comdisco, Inc.
to purchase Series B Preferred Stock
10.9* Warrant Agreement, dated May 25, 1994, between the Registrant and Comdisco, Inc.
to purchase Series C Preferred Stock
10.10* Warrant Agreement, dated April 25, 1995, between the Registrant and Comdisco, Inc.
to purchase Series D Preferred Stock
10.11* Form of Warrant to purchase shares of Series B Preferred Stock of the Registrant.
10.12* Form of Warrant to purchase shares of Series C Preferred Stock of the Registrant.
10.13* Series D Preferred Stock Purchase Agreement, dated March 1, 1995, between the
Registrant and certain investors.
10.14* Series E Preferred Stock Purchase Agreement, dated April 1, 1996, between the
Registrant and Baxter Healthcare Corporation.
10.15 Common Stock Purchase Agreement, dated September 3, 1996, between the Registrant
and Baxter Healthcare Corporation.
10.16* Amended and Restated Investors' Rights Agreement, dated April 1, 1996, among the
Registrant and certain investors.
Development, Manufacturing and Marketing Agreement, dated December 13, 1993,
10.17*+ between the Registrant and Baxter Healthcare Corporation.
Development, Manufacturing and Marketing Agreement, dated April 1, 1996, between
10.18*+ the Registrant and Baxter Healthcare Corporation.
Supply Agreement, dated July 18, 1994.
10.19*+
Custom Synthesis Agreement, dated March 14, 1996.
10.20*+
10.21* Industrial Real Estate Lease, dated October 1, 1992, between the Registrant and
Shamrock Development Company, as amended on May 16, 1994 and December 21, 1995.
10.22* Real Property Lease, dated August 8, 1996, between the Registrant and S.P. Cuff.
10.23* Lease, dated February 1, 1996, between the Registrant and Holmgren Partners.
11.1 Statement Regarding Computation of Net Loss Per Share.
23.1* Consent of Ernst & Young LLP, Independent Auditors. Reference is made to page
II-6.
23.2** Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
23.3** Consent of Medlen & Carroll.
24.1* Power of Attorney. Reference is made to the signature page.
27.1* Financial Data Schedule.
</TABLE>

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

* Previously filed.

** To be filed by amendment.

+ Request is being made for confidential treatment of certain portions of this
exhibit.

(b) Financial Statement Schedules.

Schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements or
notes thereto.

II-3
<PAGE> 82

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described in Item 14 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 Act, the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the
registration statement as of the time it was declared effective, and (2) for the
purpose of determining any liability under the Act, 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-4
<PAGE> 83

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Concord, State of California, on the 28th day of October, 1996.

CERUS CORPORATION

By: /s/ DAVID S. CLAYTON

David S. Clayton

Vice President and Chief Financial
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------
<C> <S> <C>
/s/ STEPHEN T. ISSACS* President, Chief Executive October 28, 1996
- ------------------------------------------ Officer and Director (Principal
Stephen T. Isaacs Executive Officer)
/s/ DAVID S. CLAYTON Vice President, Chief Financial October 28, 1996
- ------------------------------------------ Officer (Principal Financial
David S. Clayton and Accounting Officer)
/s/ B. J. CASSIN* Chairman of the Board October 28, 1996
- ------------------------------------------
B. J. Cassin
/s/ JOHN E. HEARST* Director October 28, 1996
- ------------------------------------------
John E. Hearst
/s/ PETER H. MCNERNEY* Director October 28, 1996
- ------------------------------------------
Peter H. McNerney
/s/ DALE A. SMITH* Director October 28, 1996
- ------------------------------------------
Dale A. Smith
/s/ HENRY E. STICKNEY* Director October 28, 1996
- ------------------------------------------
Henry E. Stickney
*By: /s/ DAVID S. CLAYTON
David S. Clayton
Attorney-in-fact
</TABLE>

II-5
<PAGE> 84

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated April 3, 1996
(except Note 7, as to which the date is July 24, 1996), in the Registration
Statement (Form S-1) and related Prospectus of Cerus Corporation for the
registration of shares of its common stock.

ERNST & YOUNG LLP

Walnut Creek, CA

The foregoing consent is in the form that will be signed upon the
completion of the stock split and reincorporation in Delaware described in Note
7 to the financial statements.

/s/ ERNST & YOUNG LLP

Walnut Creek, CA

October 28, 1996

II-6
<PAGE> 85

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----- ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
1.1 ** -- Form of Underwriting Agreement.
2.1 * -- Form of Agreement and Plan of Merger to be used in connection with the
Registrant's Reincorporation in Delaware.
3.1 -- Registrant's Certificate of Incorporation.
3.2 -- Registrant's Amended and Restated Certificate of Incorporation to be
effective following the closing of this offering.
3.3 * -- Registrant's Bylaws.
4.1 * -- Reference is made to Exhibits 3.1 through 3.3.
4.2 ** -- Specimen stock certificate.
5.1 ** -- Opinion of Cooley Godward Castro Huddleson & Tatum.
10.1 * -- Form of Indemnity Agreement to be entered into between the Registrant
and each of its directors and executive officers.
10.2 * -- 1996 Equity Incentive Plan.
10.3 * -- Form of Incentive Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.4 * -- Form of Nonstatutory Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.5 * -- 1996 Employee Stock Purchase Plan.
10.6 ** -- Form of Employee Stock Purchase Plan Offering.
10.7 * -- Warrant Agreement, dated May 11, 1992, between the Registrant and
Comdisco, Inc. to purchase Series A Preferred Stock
10.8 * -- Warrant Agreement, dated July 12, 1993, between the Registrant and
Comdisco, Inc. to purchase Series B Preferred Stock
10.9 * -- Warrant Agreement, dated May 25, 1994, between the Registrant and
Comdisco, Inc. to purchase Series C Preferred Stock
10.10* -- Warrant Agreement, dated April 25, 1995, between the Registrant and
Comdisco, Inc. to purchase Series D Preferred Stock
10.11* -- Form of Warrant to purchase shares of Series B Preferred Stock of the
Registrant.
10.12* -- Form of Warrant to purchase shares of Series C Preferred Stock of the
Registrant.
10.13* -- Series D Preferred Stock Purchase Agreement, dated March 1, 1995,
between the Registrant and certain investors.
10.14* -- Series E Preferred Stock Purchase Agreement, dated April 1, 1996,
between the Registrant and Baxter Healthcare Corporation.
10.15 -- Common Stock Purchase Agreement, dated September 3, 1996, between the
Registrant and Baxter Healthcare Corporation.
10.16* -- Amended and Restated Investors' Rights Agreement, dated April 1, 1996,
among the Registrant and certain investors.
10.17*+ -- Development, Manufacturing and Marketing Agreement, dated December 13,
1993, between the Registrant and Baxter Healthcare Corporation.
10.18*+ -- Development, Manufacturing and Marketing Agreement, dated April 1,
1996, between the Registrant and Baxter Healthcare Corporation.
10.19*+ -- Supply Agreement, dated July 18, 1994.
</TABLE>

<PAGE> 86

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----- ---------------------------------------------------------------------- ------------
<C> <C> <S> <C>
10.20*+ -- Custom Synthesis Agreement, dated March 14, 1996.
10.21* -- Industrial Real Estate Lease, dated October 1, 1992, between the
Registrant and Shamrock Development Company, as amended on May 16,
1994 and December 21, 1995.
10.22* -- Real Property Lease, dated August 8, 1996, between the Registrant and
S.P. Cuff.
10.23* -- Lease, dated February 1, 1996, between the Registrant and Holmgren
Partners.
11.1 -- Statement Regarding Computation of Net Loss Per Share.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors. Reference is made
to page II-6.
23.2 ** -- Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
23.3 ** -- Consent of Medlen & Carroll.
24.1 * -- Power of Attorney. Reference is made to the signature page.
27.1 * -- Financial Data Schedule.
</TABLE>

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

* Previously filed.

** To be filed by amendment.

+ Request is being made for confidential treatment of certain portions of this
exhibit.

<PAGE> 1
EXHIBIT 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CERUS CORPORATION

MITCHELL R. TRUELOCK hereby certifies that:

1. He is Sole Incorporator of Cerus Corporation, a Delaware corporation
(the "Corporation"), which filed its original Certificate of Incorporation on
July 31, 1996.

2. No officers or directors have been elected.

3. The Amended and Restated Certificate of Incorporation, in the form
attached as Exhibit A, has been duly adopted in accordance with the provisions
of Sections 241 and 245 of the General Corporation Law of the State of Delaware
(the "Delaware Code") by the Sole Incorporator of the Corporation.

4. The Amended and Restated Certificate of Incorporation so adopted
reads in its entirety as set forth on Exhibit A attached hereto and is hereby
incorporated by reference.

5. Pursuant to Section 241 of the Delaware Code, the Corporation has
not received payment for any of its stock.

IN WITNESS WHEREOF, the undersigned has signed this certificate this
16th day of September, 1996, and hereby affirms and acknowledges under penalty
of perjury that the filing of this Amended and Restated Certificate of
Incorporation is the act and deed of Cerus Delaware Corporation.

CERUS CORPORATION

\s\ Mitchell Truelock
---------------------------
Mitchell R. Truelock
Sole Incorporator

<PAGE> 2

EXHIBIT A

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CERUS DELAWARE CORPORATION

The name of this Corporation is Cerus Delaware Corporation.

II.

The address of the registered office of the Corporation in the State of
Delaware is 15 East North Street, City of Dover, County of Kent, and the name of
the registered agent of the Corporation in the State of Delaware at such address
is Incorporating Services, Ltd.

III.

The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.

IV.

A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the Corporation is authorized to issue is fifty-five million
(55,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock,
each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).

The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be decreased in accordance with the foregoing sentence, the shares constituting
such decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.

<PAGE> 3

B. Seven Hundred Sixty-One Thousand Seventy-Nine (761,079) of the
authorized shares of Preferred Stock are hereby designated "Series A Preferred
Stock" (the "Series A Preferred"), Three Hundred Five Thousand Four Hundred
Sixty-One (305,461) shares of the authorized shares of Preferred Stock are
hereby designated "Series B Preferred Stock" (the "Series B Preferred"), One
Million One Hundred Forty-Seven Thousand Four Hundred Forty-Nine (1,147,449)
shares of the authorized shares of Preferred Stock are hereby designated "Series
C Preferred Stock" (the "Series C Preferred"), Six Hundred Five Thousand
(605,000) shares of the authorized shares of Preferred Stock are hereby
designated Series D Preferred Stock (the "Series D Preferred") and Three Hundred
Eighty Thousand Nine Hundred Fifty-Three (380,953) shares of the authorized
shares of Preferred Stock are hereby designated "Series E Preferred Stock" (the
"Series E Preferred").

C. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred, the Series B Preferred, the Series C
Preferred, the Series D Preferred and the Series E Preferred (hereinafter the
Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D
Preferred and the Series E Preferred shall be referred to collectively as the
"Preferred Stock") are as follows:

1. DIVIDEND RIGHTS.

a. Holders of Preferred Stock, in preference to the
holders of any Common Stock, shall be entitled to receive, when and if declared
by the Board of Directors, but only out of funds that are legally available
therefor, cash dividends at the rate of $0.46 per annum on each outstanding
share of Series A Preferred, $0.61 per annum on each outstanding share of Series
B Preferred, $0.96 per annum on each outstanding share of Series C Preferred,
$1.26 per annum on each outstanding share of Series D Preferred and $1.89 per
annum on each outstanding share of Series E Preferred. Such dividends shall be
non-cumulative, and no right shall accrue to the holders of Preferred Stock by
reason of the fact that dividends on such shares are not declared or paid in any
prior year.

b. So long as any shares of Preferred Stock shall be
outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any Common Stock, nor
shall any shares of any class of stock of the Company be purchased, redeemed, or
otherwise acquired for value by the Company or any subsidiary of the Company,
unless a corresponding dividend, distribution or redemption has been or is
simultaneously declared or made on the Preferred Stock and all declared but
unpaid dividends on the shares of outstanding Preferred Stock shall have been
paid or a sum sufficient for the payment thereof shall have been reserved
therefor. The provisions of this Section 1(b) shall not, however, apply to (i) a
dividend payable solely in stock, (ii) the acquisition of shares of any Common
Stock in exchange for shares of any Common Stock, (iii) the repurchase of shares
of Common Stock held by employees, officers, directors, consultants or other
persons performing services for the Company or any wholly-owned subsidiary that
are subject to restrictive stock purchase agreements under which the Corporation
has the option to repurchase such shares at cost upon the occurrence of certain
events, such as the termination of employment; or (iv) any repurchase of any
outstanding securities of the Company that is approved by not less than four
members of the Company's

<PAGE> 4

Board of Directors. The holders of the Preferred Stock expressly waive their
rights, if any, as described in California Corporations Code Sections 503 and
506 as they relate to repurchase of shares upon termination of employment.

c. Subject to the foregoing and to any further
limitations set forth herein, the Board of Directors may declare, out of any
funds legally available therefor, dividends upon the then outstanding shares of
any Common Stock; provided, however, that if any cash dividend or other
distribution is declared by the Board of Directors to be paid on the Common
Stock, then an additional dividend shall be paid at the same time to the holders
of the outstanding Preferred Stock at a rate per share (based upon the number of
shares of Common Stock into which the outstanding Preferred Stock is
convertible) equal to the rate at which cash dividends or other distributions
are paid or granted with respect to the Common Stock.

2. VOTING RIGHTS.

a. Except as otherwise provided herein or as required
by law, the shares of the Preferred Stock shall be voted equally with the shares
of the Common Stock of the Company and not as a separate class, at any annual or
special meeting of shareholders of the Company, and may act by written consent
in the same manner as the Common Stock, in either case upon the following basis:
each holder of shares of the Preferred Stock shall be entitled to such number of
votes as shall be equal to the whole number of shares of Common Stock into which
such holder's aggregate number of shares of Preferred Stock are convertible
(pursuant to Section 5 hereof) immediately after the close of business on the
record date fixed for such meeting or the effective date of such written
consent.

b. In addition to any other vote or consent required
herein or by law, the consent of the holders of at least two-thirds (2/3) of the
outstanding Preferred Stock voting together as a separate class, voting in
person or by proxy, either in writing without a meeting, or by a vote at any
meeting called for the purpose, shall be necessary for effecting or validating
the following actions:

(1) Any amendment, alteration, or repeal of
any provision of the Amended and Restated Articles of Incorporation or the
Bylaws of the Company (including any filing of a Certificate of Determination),
that affects adversely the voting powers, preferences, or other special rights
or qualifications, limitations, or restrictions of the Preferred Stock;

(2) Any creation of or any increase, whether
by reclassification or otherwise, in the authorized amount of any class or
series of equity securities of the Company ranking on a parity with or prior to,
or convertible or exercisable into a class or series ranking on a parity with or
prior to, the Preferred Stock in right of liquidation preference, voting or
dividends;

(3) Any agreement to encumber (except in
connection with a financing in the ordinary course of business for other than
equity financing purposes), sell,

<PAGE> 5

lease or otherwise dispose of all or substantially all of the assets, property
or business of the Company, or to merge or consolidate the Company with any
person, or permit any other person to merge into it, or any other
reorganization, transaction or series of transactions pursuant to which the
holders of the Company's outstanding voting securities immediately preceding
such merger, consolidation or other transaction or series of transactions fail
to hold equity securities representing a majority of the voting power of the
surviving entity immediately following such consolidation, merger or other
transaction or series of transactions;

(4) Any voluntary liquidation or dissolution of the
Company (as defined in Section 3(c) hereof); and

(5) Any redemption of, or payment of dividends with
respect to, Common Stock, other than a repurchase of Common Stock pursuant to
the exercise of any contractual or other legal rights of first refusal upon
termination of employment or a consulting arrangement or repurchase in
settlement of shareholder disputes; provided that this subparagraph (v) shall
not apply to any redemption of Preferred Stock pursuant to Section 4 hereof, or
any repurchase of any outstanding securities of the Company that is approved by
not less than four members of the Company's Board of Directors.

3. LIQUIDATION RIGHTS.

a. Upon any liquidation, dissolution, or winding up
of the Company, whether voluntary or involuntary, before any distribution or
payment of the assets of the Company shall be made to the holders of any Common
Stock, the holders of Preferred Stock shall be entitled to be paid out of the
assets of the Company an amount equal to the sum of (i) $3.85 plus all declared
but unpaid dividends on such shares to the date of such payment for each share
of Series A Preferred outstanding, (ii) $5.075 plus all declared but unpaid
dividends on such shares to the date of such payment for each share of Series B
Preferred outstanding, (iii) $8.00 plus all declared but unpaid dividends on
such shares to the date of such payment for each share of Series C Preferred
outstanding, (iv) $10.50 plus all declared but unpaid dividends on such shares
to the date of such payment for each share of Series D Preferred outstanding,
and (v) $15.75 plus all declared but unpaid dividends on such shares to the date
of such payment for each share of Series E Preferred outstanding, respectively.
If, upon any liquidation, distribution, or winding up, the assets of the Company
shall be insufficient to make payment in full under this Section 3(a) to all
holders of Preferred Stock, then such assets shall be distributed among the
holders of Preferred Stock at the time outstanding, ratably in proportion to the
full stated amounts to which they would otherwise be respectively entitled under
this Section 3(a).

b. After the payment of the full liquidation
preference of the Preferred Stock as set forth in Section 3(a) above, the
holders of the Common Stock and the holders of the Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred shall receive the remaining
assets on a pro rata basis (as if the shares of Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred had been converted to
shares of Common Stock as of the liquidation, dissolution or winding up of the
Company);

<PAGE> 6

provided, however, that the aggregate distributions made to the holders of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred pursuant to Section 3(a) and this Section 3(b) shall not exceed $15.40
per share of Series A Preferred, $20.30 per share for each share of Series B
Preferred, $32.00 per share for each share of Series C Preferred, and $31.50 per
share for each share of Series D Preferred, respectively. Holders of series of
Preferred Stock created after the creation of the Series D Preferred will be
entitled to the full liquidation preference set forth in Section 3(a) above or
to convert their shares as provided in Section 5 below. Upon conversion of
shares as provided in Section 5, the holders of the Common Stock arising from
such converted shares will be entitled to receive such remaining assets on a pro
rata basis without being subject to the limitations set forth above in this
Section 3(b).

c. The following events shall be considered a liquidation,
dissolution or winding up under this Section 3:

(1) any consolidation or merger of the Company
with or into any other corporation or other entity or person, or any other
corporate reorganization or other transaction or series of transactions pursuant
to which the holders of the outstanding voting securities of the Company
immediately prior to such consolidation, merger, reorganization or other
transaction or series of transactions fail to hold equity securities
representing a majority of the voting power of the surviving entity immediately
following such consolidation, merger or reorganization or any transaction or
series of related transactions; or

(2) a sale, lease or other disposition of all
or substantially all of the assets of the Company.

d. Any securities to be delivered to the holders of
the Preferred Stock or Common Stock pursuant to a transaction treated as a
liquidation shall be valued as follows:

(1) Securities not subject to investment
letter or other similar restrictions on free marketability:

(i) If traded on a national
securities exchange or the National Market System of the National Association of
Securities Dealers, Inc. (the "NMS"), the value shall be deemed to be the
average of the security's closing prices on such exchange or the NMS over the
thirty (30) day period ending three (3) days prior to the closing;

(ii) If traded over-the-counter
(but not on the NMS), the value shall be deemed to be the average of the mean of
the closing bid and ask prices over the thirty (30) day period ending three (3)
days prior to the closing; or

(iii) If there is no active
public market, the value shall be the fair market value thereof, as mutually
determined by the Corporation and the holders

<PAGE> 7

of not less than fifty percent (50%) of the outstanding Preferred Stock, voting
together as a single class.

(2) The method of valuation of securities
subject to investment letter or other restrictions on free marketability shall
be to make an appropriate discount from the market value determined as above in
Sections 3(e)(i)(1), (2) or (3) to reflect the approximate fair market value
thereof, as mutually determined by the Corporation and the holders of not less
than fifty percent (50%) of the outstanding Preferred Stock, voting together as
a single class.

4. REDEMPTION.

The Company shall not have any right to require
redemption of the Preferred Stock, nor shall any holder of Preferred Stock be
entitled to require redemption of Preferred Stock.

5. CONVERSION RIGHTS.

The holders of the Preferred Stock shall have the
following rights with respect to the conversion of the Preferred Stock into
shares of Common Stock:

a. OPTIONAL CONVERSION. Subject to and in compliance
with the provisions of this Section 5, any shares of the Preferred Stock may, at
the option of the holder, be converted at any time into fully-paid and
nonassessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, or Series E Preferred shall be entitled upon conversion
shall be the product obtained by multiplying, as the case may be, the "Series A
Conversion Rate," the "Series B Conversion Rate," the "Series C Conversion
Rate," the "Series D Conversion Rate," or the "Series E Conversion Rate" then in
effect (determined as provided in Section 5(b)) by the number of shares of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
or Series E Preferred being converted.

b. SERIES A, SERIES B, SERIES C, SERIES D AND SERIES
E CONVERSION RATES. The conversion rate in effect at any time for conversion of
the Series A Preferred (the "Series A Conversion Rate") shall be the quotient
obtained by dividing $3.85 by the "Series A Conversion Price," calculated as
provided in Section 5(c), the conversion rate in effect at any time for
conversion of the Series B Preferred (the "Series B Conversion Rate") shall be
the quotient obtained by dividing $5.075 by the "Series B Conversion Price,"
calculated as provided in Section 5(c), the conversion rate in effect at any
time for conversion of the Series C Preferred (the "Series C Conversion Rate")
shall be the quotient obtained by dividing $8.00 by the "Series C Conversion
Price," calculated as provided in Section 5(c), the conversion rate in effect at
any time for conversion of the Series D Preferred (the "Series D Conversion
Rate") shall be the quotient obtained by dividing $10.50 by the "Series D
Conversion Price," calculated as provided in Section 5(c), and the conversion
rate in effect at any time for conversion of the Series E Preferred (the "Series
E

<PAGE> 8

Conversion Rate") shall be the quotient obtained by dividing $15.75 by the
"Series E Conversion Price," calculated as provided in Section 5(c).

c. CONVERSION PRICE. The conversion price for the
Series A Preferred shall initially be $3.85 (the "Series A Conversion Price"),
the conversion price of the Series B Preferred shall initially be $5.075 (the
"Series B Conversion Price"), the conversion price of the Series C Preferred
shall initially be $8.00 (the "Series C Conversion Price"), the conversion price
of the Series D Preferred shall initially be $10.50 (the "Series D Conversion
Price") and the conversion price of the Series E Preferred shall initially be
$15.75 (the "Series E Conversion Price"). Such initial Conversion Price for each
series of Preferred Stock shall be adjusted from time to time in accordance with
this Section 5. All references to the Conversion Price herein shall mean the
Conversion Price as so adjusted. As used hereinafter, the term "Conversion
Price" shall refer to the Conversion Price for the Series A Preferred, the
Series B Preferred, the Series C Preferred, the Series D Preferred, or the
Series E Preferred, as applicable.

d. MECHANICS OF CONVERSION. Each holder of Preferred
Stock who desires to convert the same into shares of Common Stock pursuant to
this Section 5 shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or any transfer agent for the Preferred
Stock, and shall give written notice to the Company at such office that such
holder elects to convert the same. Such notice shall state the number of shares
and the series of Preferred Stock being converted and the name or names in which
the certificate or certificates for shares of Common Stock are to be issued.
Thereupon, the Company shall promptly issue and deliver at such office to such
holder a certificate or certificates for the number of shares of Common Stock to
which such holder is entitled and shall promptly pay in cash or, to the extent
sufficient funds are not then legally available therefor, in Common Stock (at
the Common Stock's fair market value determined by the Board of Directors as of
the date of such conversion), any declared and unpaid dividends on the shares of
Preferred Stock being converted. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the certificates representing the shares of Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder of
such shares of Common Stock on such date. If the conversion is in connection
with the underwritten offering of securities registered pursuant to the
Securities Act of 1933, the conversion may, at the option of any holder
tendering Preferred Stock for conversion, be conditioned upon the closing with
the underwriter of the sale of securities pursuant to such offering, in which
event the persons to receive the Common Stock issuable upon such conversion of
the Preferred Stock shall not be deemed to have converted such Preferred Stock
until immediately prior to the closing of such sale of securities.

e. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If
the Company shall at any time or from time to time after the date that the first
share of Preferred Stock is issued (the "Original Issue Date") fix a record date
for the effectuation of a split or subdivision of the outstanding Common Stock,
the Conversion Price for the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred

<PAGE> 9

in effect immediately before that subdivision shall be proportionately
decreased. Conversely, if the Company shall at any time or from time to time
after the Original Issue Date combine the outstanding shares of Common Stock
into a smaller number of shares, the Conversion Price for the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section 5(e) shall become
effective at the close of business on the date the split, subdivision or
combination becomes effective.

f. ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND
DISTRIBUTIONS. If the Company at any time or from time to time after the
Original Issue Date makes, or fixes a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other distribution
payable in additional shares of Common Stock, in each such event the Conversion
Price for the Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred and Series E Preferred that is then in effect shall be decreased as
of the time of such issuance or, in the event such record date is fixed, as of
the close of business on such record date, by multiplying the Conversion Price
then in effect with respect to each such series of Preferred Stock by a fraction
(i) the numerator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date, and (ii) the denominator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Conversion Price shall
be adjusted pursuant to this Section 5(f) to reflect the actual payment of such
dividend or distribution or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock.

g. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS.
If the Company at any time or from time to time after the Original Issue Date
makes or fixes a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in securities of
the Company other than shares of Common Stock, in each such event for purposes
of this subsection 5(g), provision shall be made so that the holders of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred shall receive upon conversion thereof, in addition to the
number of shares of Common Stock receivable thereupon, the amount of other
securities of the Company which they would have received had their Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred been converted into Common Stock as of the record date fixed for the
determination of the holders of Common Stock of the Company entitled to receive
such distribution and had they thereafter, during the period from the date of
such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred, or Series E Preferred or with respect to such
other securities by their terms.

<PAGE> 10

h. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND
SUBSTITUTION. If at any time or from time to time after the Original Issue Date,
the Common Stock issuable upon the conversion of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred, or Series E Preferred is
changed into the same or a different number of shares of any class or classes of
stock, whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere in this Section 5
or in Section 3), in any such event each holder of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series E Preferred shall
have the right thereafter to convert such stock into the kind and amount of
stock and other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of shares of
Common Stock into which such shares of Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred and Series E Preferred could have been
converted immediately prior to or as of such recapitalization, reclassification
or change, all subject to further adjustment as provided herein or with respect
to such other securities or property by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, or Series E
Preferred after such recapitalization, reclassification or change to the end
that the provisions of this Section 5 (including adjustment of the Conversion
Price then in effect and the number of shares issuable upon conversion of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred) shall be applicable after that event and be as nearly
equivalent as practicable.

i. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES
OF ASSETS. If at any time or from time to time after the Original Issue Date,
there is a capital reorganization of the Common Stock (other than a
recapitalization, subdivision, combination, reclassification, exchange or
substitution of shares provided for elsewhere in this Section 5 or in Section
3), as a part of such capital reorganization, provision shall be made so that
the holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred shall thereafter be entitled to
receive upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred the number of shares of
stock or other securities or property of the Company or otherwise to which a
holder of the number of shares of Common Stock deliverable upon conversion would
have been entitled on such capital reorganization, subject to adjustment in
respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 5 with respect to the rights of the holders of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred after the capital reorganization to the end that the provisions of
this Section 5 (including adjustment of the Conversion Price then in effect and
the number of shares issuable upon conversion of the Series A Preferred, Series
B Preferred, Series C Preferred, Series D Preferred and Series E Preferred)
shall be applicable after that event and be as nearly equivalent as practicable.

<PAGE> 11

j. SALE OF SHARES BELOW CONVERSION PRICE.

(i) If at any time or from time to time after
the Original Issue Date, the Company issues or sells, or is deemed by the
express provisions of this subsection (j) to have issued or sold, Additional
Shares of Common Stock (as hereinafter defined), other than as a dividend or
other distribution on any class of stock as provided in Section 5(f) above, and
other than a subdivision or combination of shares of Common Stock as provided in
Section 5(e) above, for an Effective Price (as hereinafter defined) less than
the then effective Conversion Price for the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, or Series E Preferred, then
and in each such case the then existing Conversion Price for each such series of
Preferred Stock for which the Effective Price is less than the Conversion Price
shall be reduced, as of the opening of business on the date of such issue or
sale, to a price determined by multiplying the Conversion Price for such series
by a fraction (1) the numerator of which shall be (A) the number of shares of
Common Stock deemed outstanding (as defined in the following sentence) at the
close of business on the day preceding the date of such issue or sale, plus (B)
the number of shares of Common Stock which the aggregate consideration received
(as defined in subsection (j)(ii)) by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (2) the denominator of which shall be the number of shares of Common
Stock deemed outstanding (as defined below) at the close of business on the date
of such issue. For the purposes of the preceding sentence, all outstanding
shares of Common Stock and all shares of Common Stock issuable upon conversion
of Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred or upon exercise of warrants (excluding any
warrants as to which the exercise price then exceeds the Effective Price for
such Additional Shares of Common Stock) and conversion of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Series
E Preferred subject to such warrants that are outstanding as of the close of
business on the day preceding the date of issue or sale of Additional Shares of
Common Stock shall be deemed outstanding.

(ii) For the purpose of making any adjustment
required under this Section 5(j), the consideration received by the Company for
any issue or sale of securities shall (1) to the extent it consists of cash, be
computed at the net amount of cash received by the Company after deduction of
any underwriting or similar commissions, compensation or concessions paid or
allowed by the Company in connection with such issue or sale but without
deduction of any expenses payable by the Company, (2) to the extent it consists
of property other than cash, be computed at the fair value of that property as
determined in good faith by the Board of Directors, and (3) if Additional Shares
of Common Stock, Convertible Securities (as hereinafter defined) or rights or
options to purchase either Additional Shares of Common Stock or Convertible
Securities are issued or sold together with other stock or securities or other
assets of the Company for a consideration which covers both, be computed as the
portion of the consideration so received that may be reasonably determined in
good faith by the Board of Directors to be allocable to such Additional Shares
of Common Stock, Convertible Securities or rights or options.

10.

<PAGE> 12

(iii) For the purpose of the adjustment
required under this Section 5(j), if the Company issues or sells any rights or
options for the purchase of, or stock or other securities then convertible into,
Additional Shares of Common Stock (such convertible stock or securities being
herein referred to as "Convertible Securities") and if the Effective Price of
such Additional Shares of Common Stock is less than the Conversion Price then in
effect with respect to any series of Preferred Stock, in each case the Company
shall be deemed to have issued at the time of the issuance of such rights or
options or Convertible Securities the number of Additional Shares of Common
Stock issuable upon exercise or conversion thereof and to have received as
consideration for the issuance of such shares an amount equal to the total
amount of the consideration, if any, received by the Company for the issuance of
such rights or options or Convertible Securities, plus, in the case of such
rights or options, the amounts of consideration, if any, payable to the Company
upon the exercise of such rights or options, plus, in the case of Convertible
Securities, the amounts of consideration, if any, payable to the Company (other
than by cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; provided further that if the amount of
consideration payable to the Company upon the exercise or conversion of rights,
options or Convertible Securities is reduced over time or on the occurrence or
non-occurrence of specified events other than by reason of antidilution
adjustments, the Effective Price shall be recalculated using the figure to which
such amount of consideration is reduced; provided further that if the amount of
consideration payable to the Company upon the exercise or conversion of such
rights, options or Convertible Securities is subsequently increased, the
Effective Price shall be again recalculated using the increased amount of
consideration payable to the Company upon the exercise or conversion of such
rights, options or Convertible Securities. No further adjustment of the
Conversion Price, as adjusted upon the issuance of such rights, options or
Convertible Securities, shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or options
or the conversion of any such Convertible Securities. If any such rights or
options or the conversion privilege represented by any such Convertible
Securities shall expire without having been exercised, the Conversion Price as
adjusted upon the issuance of such rights, options or Convertible Securities
shall be readjusted to the Conversion Price which would have been in effect had
an adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or rights of conversion
of such Convertible Securities, and such Additional Shares of Common Stock, if
any, were issued or sold for the consideration actually received by the Company
upon such exercise, plus the consideration, if any, actually received by the
Company for the granting of all such rights or options, whether or not
exercised, plus the consideration received for issuing or selling the
Convertible Securities actually converted, plus the consideration, if any,
actually received by the Company (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) on the conversion of such
Convertible Securities, provided that such readjustment shall not apply to prior
conversions of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred.

(iv) "Additional Shares of Common Stock" shall
mean all shares of Common Stock issued by the Company, whether or not
subsequently reacquired or

11.

<PAGE> 13

retired by the Company, other than (1) shares of Common Stock issued upon
conversion of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred; (2) shares of Common Stock (and/or
options, warrants or other Common Stock purchase rights, and the Common Stock
issued pursuant to such options, warrants and other rights) issued or to be
issued to employees, officers or directors of, or consultants or advisors to the
Company or any subsidiary pursuant to stock purchase or stock option plans or
other arrangements not to exceed an aggregate of 600,000 shares of Common Stock
as such number may be increased from time to time by the Company's Board of
Directors with the approval of at least four members of the Company's Board of
Directors; (3) shares of Common Stock issued pursuant to the exercise of
options, warrants or convertible securities outstanding as of the Original Issue
Date; (4) shares of Common Stock (and/or options, warrants, preferred stock or
other common stock issued pursuant to such options, warrants, preferred stock or
other rights) issued in connection with leasing arrangements not to exceed an
aggregate of 200,000 shares of Common Stock (and/or options, warrants or other
Common Stock purchase rights, and the Common Stock issued pursuant to such
options, warrants or other rights) as such number may be increased from time to
time by the Company's Board of Directors with the approval of at least four
members of the Company's Board of Directors; and (5) shares of Common Stock
issued as a function of antidilution or similar protective clauses. The
"Effective Price" of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Company under this
Section 5(j), into the aggregate consideration received, or deemed to have been
received by the Company for such issue under this Section 5(j), for such
Additional Shares of Common Stock.

k. ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each
case of an adjustment or readjustment of the Conversion Price for the number of
shares of Common Stock or other securities issuable upon conversion of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
or Series E Preferred, if the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, or Series E Preferred is then convertible
pursuant to this Section 5, the Company, at its expense, shall compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
or Series E Preferred at the holder's address as shown in the Company's books.
The certificate shall set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based, including
a statement of (i) the consideration received or deemed to be received by the
Company for any Additional Shares of Common Stock issued or sold or deemed to
have been issued or sold, (ii) the Conversion Price with respect to such series
of Preferred Stock at the time in effect, (iii) the number of Additional Shares
of Common Stock and (iv) the type and amount, if any, of other property which at
the time would be received upon conversion of the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, or Series E Preferred.

12.

<PAGE> 14

l. AUTOMATIC CONVERSION.

(i) Each share of Preferred Stock shall
automatically be converted into shares of Common Stock, based on the
then-effective Conversion Price with respect to such share; at any time (1) more
than two-third of the shares of Preferred Stock authorized and issued and
outstanding have converted into Common Stock pursuant to this Section 5, or (2)
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Company in which the per share price is at least $13.13, appropriately adjusted
for any stock splits, stock combinations, stock dividends, recapitalizations and
the like, and the gross cash proceeds to the Company, less underwriting
discounts, commissions and fees, are at least $10,000,000.

(ii) Upon the occurrence of the event
specified in paragraph (i) above, the outstanding shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred shall be converted automatically without any further action by the
holders of such shares and whether or not the certificates representing such
shares are surrendered to the Company or its transfer agent; provided, however,
that the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred are either delivered to the
Company or its transfer agent as provided below, or the holder notifies the
Company or its transfer agent that such certificates have been lost, stolen or
destroyed and executes an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with such certificates. Upon
the occurrence of such automatic conversion of the Preferred Stock, the holders
of Preferred Stock shall surrender the certificates representing such shares at
the office of the Company or any transfer agent for the Preferred Stock.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Preferred Stock surrendered were convertible on the date on
which such automatic conversion occurred, and the Company shall promptly pay in
cash or, at the option of the Company, Common Stock (at the Common Stock's fair
market value determined by the Board as of the date of such conversion), or, at
the option of the Company, both, all declared and unpaid dividends on the shares
of Preferred Stock being converted, to and including the date of such
conversion.

m. FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of Preferred Stock and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
Whether or not fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred, or Series E
Preferred the holder is at the time converting into Common Stock and the number
of shares of Common Stock issuable upon such aggregate conversion.

13.

<PAGE> 15

n. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Company shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Preferred Stock. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.

o. OTHER ADJUSTMENTS. No adjustment of the Conversion
Price for the Series A Preferred, Series B Preferred, Series C Preferred, Series
D Preferred, or Series E Preferred shall be made in an amount less than one cent
per share, provided that any adjustments which are not required to be made by
reason of this sentence shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to 3 years from the date of the
event giving rise to the adjustment being carried forward, or shall be made at
the end of 3 years from the date of the event giving rise to the adjustment
being carried forward. Except to the limited extent provided for in subsections
5(j)(iii), no adjustment of such Conversion Price pursuant to subsection 5(j)
shall have the effect of increasing the Conversion Price above the Conversion
Price in effect immediately prior to such adjustment.

p. NOTICES. Any notice required by the provisions of
this Section 5 to be given to the holders of shares of the Preferred Stock shall
be deemed given upon the earlier of actual receipt or seventy-two (72) hours
after the same has been deposited in the United States mail, by certified or
registered mail, return receipt requested, or first class mail postage prepaid,
and addressed to each holder of record at the address of such holder appearing
on the books of the Company.

q. PAYMENT OF TAXES. The Company will pay all taxes
(other than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Preferred Stock, excluding any tax or other charge
imposed in connection with any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that in which the shares of
Preferred Stock so converted were registered.

r. NO DILUTION OR IMPAIRMENT. The Company shall not
amend its Articles of Incorporation or participate in any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, for the purpose of avoiding or seeking
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but shall at all times in good faith assist
in carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Preferred Stock
against dilution or other impairment.

14.

<PAGE> 16

6. NOTICES OF RECORD.

a. Upon any taking by the Company of a record of the
holders of any class of securities for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or upon
any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company with or into any other corporation, or any transfer
of all or substantially all the assets of the Company to any other person, or
any voluntary or involuntary dissolution, liquidation or winding up of the
Company, or any shareholders' meeting to approve the terms thereof, the Company
shall mail to each holder of Preferred Stock at least twenty (20) days prior to
the record date specified therein a notice specifying (i) the date on which any
such record is to be taken for the purpose of such dividend or distribution and
a description of such dividend or distribution, (ii) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and the date of the
shareholders meeting to approve the terms thereof, if applicable, (iii) the
date, if any, that is to be fixed as to when the holders of record of Common
Stock (or other securities) shall be entitled to exchange their shares of Common
Stock (or other securities) for securities or other property deliverable upon
such reorganization, reclassification, transfer, consolidation, merger,
dissolution, liquidation or winding up, and (iv) the material terms thereof.

7. NO REISSUANCE OF PREFERRED STOCK. No share or shares of
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred,
or Series E Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued. The Articles of
Incorporation shall be appropriately amended to reflect the consequent valuation
in the Company's authorized capital stock.

A. The following is applicable to the Common Stock:

1. DIVIDEND RIGHTS. Subject to the prior rights of holders of
all classes of stock at the time outstanding having prior rights as to
dividends, the holders of the Common Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of any assets of the Company
legally available therefor, such dividends as may be declared from time to time
by the Board of Directors.

2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or
winding up of the Company, the assets of the Company shall be distributed as
provided in Section 3, Division C of Article III hereof.

3. REDEMPTION. The Common Stock is not redeemable.

4. VOTING RIGHTS. The holder of each share of Common Stock
shall have the right to one vote, and shall be entitled to notice of any
shareholders' meeting in

15.

<PAGE> 17

accordance with the Bylaws of the Company, and shall be entitled to vote upon
such matters and in such manner as may be provided by law.

VI.

For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:

1. The management of the business and the conduct of the
affairs of the Corporation shall be vested in its Board of Directors. The number
of directors which shall constitute the whole Board of Directors shall be fixed
exclusively by one or more resolutions adopted by the Board of Directors.

2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the Closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be entered for a full-term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.

Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

3. Subject to the rights of the holders of any series of
Preferred Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, except as
otherwise provided by law, be filled only by the affirmative vote of a majority
of the

16.

<PAGE> 18

directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.

1. Subject to paragraph (h) of Section 43 of the Bylaws, the
Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote
of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then-outstanding shares of voting stock of the Corporation entitled
to vote at an election of directors (the "Voting Stock"). The Board of Directors
shall also have the power to adopt, amend, or repeal Bylaws.

2. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.

3. No action shall be taken by the stockholders of the
Corporation except at an annual or special meeting of stockholders called in
accordance with the Bylaws and following the closing of the Initial Public
Offering no action shall be taken by the stockholders by written consent.

4. Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.

VII.

A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.

B. Any repeal or modification of this Article VII shall be prospective
and shall not affect the rights under this Article VII in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.

17.

<PAGE> 19

VIII.

A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B of this
Article VIII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.

B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles VI, VII
and VIII.

18.

<PAGE> 1
EXHIBIT 3.2

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

CERUS CORPORATION, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, hereby certifies
as follows:

1. The name of the corporation is Cerus Corporation.

2. The corporation's original Certificate of Incorporation was filed
with the Secretary of State on July 31, 1996.

3. The Amended and Restated Certificate of Incorporation of this
corporation, in the form attached hereto as Exhibit A, has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the Board of Directors and by the
stockholders of the corporation, and prompt written notice was duly given
pursuant to Section 228 of the General Corporation Law of the State of Delaware
to those stockholders who did not approve the Amended and Restated Certificate
of Incorporation by written consent.

4. The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and hereby incorporated
by reference.

IN WITNESS WHEREOF, Cerus Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed by its President and Chief
Executive Officer and attested to by its Secretary this _____ day of
____________, 1996.

_____________________________________
STEPHEN T. ISAACS
President and Chief Executive Officer

ATTEST:

_____________________________
LORI ROLL
Secretary

<PAGE> 2

EXHIBIT A

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION

CERUS CORPORATION

The name of this corporation is Cerus Corporation.

II.

The address of the registered office of the corporation in the State of
Delaware is 9 East Loockerman Street, City of Dover, County of Kent, and the
name of the registered agent of the corporation in the State of Delaware at such
address is the National Registered Agents, Inc.

III.

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.

IV.

A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is fifty-five million
(55,000,000) shares. Fifty million (50,000,000) shares shall be Common Stock,
each having a par value of one-tenth of one cent ($.001). Five million
(5,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).

<PAGE> 3

sentence, the shares constituting such decrease shall resume the status that
they had prior to the adoption of the resolution originally fixing the number of
shares of such series.

2. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
following the closing of the initial public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the "1933
Act"), covering the offer and sale of Common Stock to the public (the "Initial
Public Offering"), the directors shall be divided into three classes designated
as Class I, Class II and Class III, respectively. Directors shall be assigned to
each class in accordance with a resolution or resolutions adopted by the Board
of Directors. At the first annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class I directors
shall expire and Class I directors shall be elected for a full term of three
years. At the second annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class II directors shall
expire and Class II directors shall be elected for a full term of three years.
At the third annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class III directors shall expire and
Class III directors shall be entered for a full-term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.

<PAGE> 4

provided by law, be filled only by the affirmative vote of a majority of the
directors then in office, even though less than a quorum of the Board of
Directors, and not by the stockholders. Any director elected in accordance with
the preceding sentence shall hold office for the remainder of the full term of
the director for which the vacancy was created or occurred and until such
director's successor shall have been elected and qualified.

2. The directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.

VI.

B. Any repeal or modification of this Article VI shall be prospective
and shall not affect the rights under this Article VI in effect at the time of
the alleged occurrence of any act or omission to act giving rise to liability or
indemnification.

<PAGE> 5

VII.

A. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in paragraph B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.

<PAGE> 1
EXHIBIT 10.15

STERITECH, INC.

COMMON STOCK PURCHASE AGREEMENT

SEPTEMBER 3, 1996
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE

<S> <C>
1. AGREEMENT TO SELL AND PURCHASE......................................................................... 1
1.1 Authorization Of Shares....................................................................... 1
1.2 Sale And Purchase Of Common Stock............................................................. 1
1.3 Hart-Scott-Rodino Compliance.................................................................. 2

2. CLOSING, DELIVERY AND PAYMENT.......................................................................... 2

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.......................................................... 2
3.1 Organization, Good Standing And Qualification................................................. 2
3.2 Authorization; Binding Obligations............................................................ 2
3.3 Compliance With Other Instruments............................................................. 3
3.4 Registration Rights........................................................................... 3
3.5 Securities Exemption.......................................................................... 3
3.6 Full Disclosure............................................................................... 3
3.7 Subsidiaries.................................................................................. 4
3.8 Valid Issuance of Shares...................................................................... 4
3.9 Litigation, Etc............................................................................... 4
3.10 Governmental Consents......................................................................... 4

4. REPRESENTATIONS AND WARRANTIES OF PURCHASER............................................................ 5
4.1 Requisite Power And Authority................................................................. 5
4.2 Consents...................................................................................... 5
4.3 Investment Representations.................................................................... 5
(a) Purchaser Is An Accredited Investor. ............................................... 5
(b) Purchaser Bears Economic Risk........................................................ 5
(c) Acquisition For Own Account.......................................................... 5
(d) Purchaser Can Protect Its Interest................................................... 6
(e) Company Information.................................................................. 6

5. Termination of Obligation of Purchaser. ............................................................... 6

6. CONDITIONS TO CLOSING.................................................................................. 7
6.1 Conditions To Purchaser's Obligations At The Closing.......................................... 7
(a) Concurrent Closing of IPO............................................................ 7
(b) Representations And Warranties True; Performance Of
Obligations.......................................................................... 7
(c) Legal Investment..................................................................... 7
(d) Consents, Permits, And Waivers....................................................... 8
(e) Certificate Of Status................................................................ 8
(f) Opinion Letter....................................................................... 8
(g) Copies............................................................................... 8
(h) Proceedings and Documents............................................................ 8
</TABLE>

i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
(i) Compliance Certificate............................................................... 8
6.2 Conditions To Obligations Of The Company. ................................................... 8
(a) Concurrent Closing of IPO............................................................ 8
(b) Representations And Warranties True.................................................. 8
(c) Performance Of Obligations........................................................... 8

7. MISCELLANEOUS.......................................................................................... 9
7.1 Governing Law................................................................................. 9
7.2 Survival...................................................................................... 9
7.3 Successors And Assigns........................................................................ 9
7.4 Entire Agreement.............................................................................. 9
7.5 Separability.................................................................................. 9
7.6 Amendment And Waiver.......................................................................... 9
7.7 Delays Or Omissions........................................................................... 10
7.8 Notices....................................................................................... 10
7.9 Expenses...................................................................................... 10
7.10 Attorneys' Fees............................................................................... 10
7.11 Titles And Subtitles.......................................................................... 10
7.12 Counterparts.................................................................................. 11
7.13 Broker's Fees................................................................................. 11
7.14 Termination................................................................................... 11
7.15 Subsequent Consents, Permits and Waivers...................................................... 11
</TABLE>

Exhibit A Preliminary Prospectus
Exhibit B Form of Opinion

ii.
<PAGE> 4

STERITECH, INC.

COMMON STOCK PURCHASE AGREEMENT

THIS COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is entered into
as of September 3, 1996, by and between STERITECH, INC., a California
corporation (the "Company") and BAXTER HEALTHCARE CORPORATION, a Delaware
corporation ("Purchaser").

RECITALS

WHEREAS, the Company intends to reincorporate in Delaware by merger
into Cerus Corporation, a Delaware corporation that was formed for the purpose
of the reincorporation and that will be the surviving entity; the "Company" as
used in this Agreement refers to, prior to such merger, the California
corporation and, after such merger, the Delaware corporation; and

WHEREAS, Purchaser desires to purchase shares of the Company's Common
Stock pursuant to Section 4.2(b) of that certain Development, Manufacturing and
Marketing Agreement dated April 1, 1996 between the Company and Purchaser (the
"Baxter Agreement"); such purchase to be made in a private placement to close
concurrently with the closing of the initial public offering (the "IPO") of the
Company pursuant to a registration statement to be filed on Form S-1 with the
Securities and Exchange Commission (the "Commission") (such registration
statement, as amended, shall be referred to herein as the "Registration
Statement"); and

WHEREAS, the Company desires to issue and sell the Shares to Purchaser
on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:

1. AGREEMENT TO SELL AND PURCHASE.

1.1 AUTHORIZATION OF SHARES. On or prior to the Closing (as defined in
Section 2 below), the Company shall have authorized the sale and issuance to
Purchaser of the Shares. Prior to the Closing the Company will have adopted and
filed a Certificate of Incorporation (the "Certificate of Incorporation") with
the Secretary of State of the State of Delaware authorizing sufficient shares of
Common Stock to cover the sale and issuance of the shares to be purchased
hereunder.

1.2 SALE AND PURCHASE OF COMMON STOCK. Subject to the terms and
conditions hereof, the Company hereby agrees to issue and sell to Purchaser and
Purchaser agrees to purchase from the Company, at the Closing, a number of
shares of Common Stock of the Company equal to the Purchase Price (as hereafter
defined) divided by the purchase price per share for which the Company's Common
Stock is sold in the IPO, less underwriter discount, at an aggregate purchase
price of Nine Million Five Hundred Thousand Dollars ($9,500,000) (the "Purchase
Price"). The shares of Common Stock to be purchased hereunder are referred

1.
<PAGE> 5
to as the "Shares." Notwithstanding the foregoing, the aggregate number of
Shares to be sold pursuant to this agreement shall not exceed nineteen and
nine-tenths percent (19.9%) of the sum of (a) the number of shares issued upon
the closing of the IPO plus (b) the number of shares purchased pursuant to this
Agreement. The parties acknowledge and agree that, when issued, the Shares will
be "Registrable Securities" under (and as such term is defined in) the
Investors' Rights Agreement (as hereinafter defined).

1.3 HART-SCOTT-RODINO COMPLIANCE. Notwithstanding anything else in this
Agreement, if the sale and issuance of the Shares is subject to the premerger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), it shall be a condition to the Closing that
any waiting period under the HSR Act applicable to the purchase of the Shares
shall have expired or been terminated and any approvals required thereunder
shall have been obtained, and the parties shall cooperate in promptly filing
premerger reports and in taking all steps reasonably necessary to obtain early
termination of any applicable HSR Act waiting periods. If any such waiting
period shall not have expired or been subject to early termination on or before
the date ninety (90) days from the date of this Agreement, either party may
terminate this Agreement by giving written notice to the other.

2. CLOSING, DELIVERY AND PAYMENT.

Subject to the terms of Section 6, the closing of the sale and purchase
of the Shares under this Agreement (the "Closing") shall take place concurrently
with the closing of the IPO at the offices of Cooley Godward Castro Huddleson &
Tatum, One Maritime Plaza, 20th floor, San Francisco, California 94111. The date
of the Closing is referred to as the "Closing Date". At the Closing, subject to
the terms and conditions hereof, the Company will deliver to Purchaser a
certificate representing the number of Shares to be purchased at the Closing
against payment by or on behalf of Purchaser of the purchase price therefor by
cash, wire transfer, or by such other means as shall be mutually agreeable to
Purchaser and the Company.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company hereby represents and warrants to Purchaser as follows:

3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California, and will, as of the Closing Date, be a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware. The Company has full power and authority to own and operate
its properties and assets, and to carry on its business as presently conducted
and as proposed to be conducted. The Company is duly qualified, is authorized to
do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its properties (both
owned and leased) makes such qualification necessary, except for those
jurisdictions, in the aggregate, in which failure to do so would not have a
material adverse effect on the Company or its business.

3.2 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the
part of the Company, its officers, directors and shareholders necessary for the
authorization, execution and

2.
<PAGE> 6
delivery of this Agreement and the Certificate of Incorporation, for the sale
and issuance of the Shares pursuant hereto and for the performance of the
Company's obligations hereunder and under the Investors' Rights Agreement dated
December 27, 1991, as amended on December 10, 1993, and March 14, 1994, as
amended and restated on March 1, 1995 and April 1, 1996 (the "Investors' Rights
Agreement") has been taken or will be taken prior to the Closing. This
Agreement, when executed and delivered, will be a valid and binding obligation
of the Company enforceable in accordance with its terms. The sale of the Shares
is not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. When issued in
compliance with the provisions of this Agreement and the Certificate of
Incorporation, the Shares will be validly issued, fully paid and nonassessable,
and will be free of any liens or encumbrances; provided, however, that the
Shares may be subject to restrictions on transfer under state and/or federal
securities laws as set forth herein or as otherwise required by such laws at the
time a transfer is proposed.

3.3 COMPLIANCE WITH OTHER INSTRUMENTS. The execution, delivery and
performance of and compliance with this Agreement, the performance of and
compliance with the Investors' Rights Agreement and the issuance and sale of the
Shares pursuant hereto will not result in (i) any violation, or be in conflict
with or constitute a default under any term, of its Restated Articles,
Certificate of Incorporation or Bylaws, (ii) any material violation or default
of any mortgage, indenture, contract, agreement, instrument, judgment, decree,
order or any statute, rule or regulation applicable to the Company or (iii) the
creation of any mortgage, pledge, lien, encumbrance or charge upon any of the
properties or assets of the Company.

3.4 REGISTRATION RIGHTS. Except as required pursuant to the Investors'
Rights Agreement, the Company is presently not under any obligation, and has not
granted any rights, to register (as defined in Section 1.2 of the Investors'
Rights Agreement) any of the Company's presently outstanding securities or any
of its securities that may hereafter be issued.

3.5 SECURITIES EXEMPTION. Assuming the accuracy of the representations
and warranties of the Purchaser contained in Section 4.3 hereof, the offer, sale
and issuance of the Shares will be exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), and will have
been registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.

3.6 FULL DISCLOSURE.

(a) The Company has delivered to Purchaser a draft of the
Registration Statement substantially in the form to be filed with the
Commission.

(b) The Company shall deliver the finalized text of the
preliminary prospectus included in a pre-effective amendment to the Registration
Statement that is to be printed by the Company for distribution to prospective
purchasers (the "Preliminary Prospectus") pursuant to Section 5.2. When so
delivered, the Preliminary Prospectus shall be appended to this Agreement as
Exhibit A and incorporated herein as if delivered at the time this Agreement was
executed. The Preliminary Prospectus will contain all statements that are
required to be stated

3.
<PAGE> 7
therein in accordance with, and will comply as to form in all material respects
with, the Securities Act and will not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.

(c) When the Registration Statement becomes effective, and at
all times subsequent thereto, up to the Closing Date, (1) the Registration
Statement and the Prospectus (as hereinafter defined) and any amendments or
supplements thereto will contain all statements that are required to be stated
therein in accordance with the Securities Act and will comply as to form in all
material respects with to the requirements of the Securities Act, and (2)
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.

For purposes of this Agreement, "Prospectus" means the prospectus, as
amended, on file with the Commission at the time the Registration Statement
becomes effective, including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A(h), if
applicable, except that if the prospectus filed by the Company pursuant to Rule
424(b) differs from the prospectus on file at the time the Registration
Statement becomes effective, the term "Prospectus" shall refer to the Rule
424(b) Prospectus from and after the time it was filed with the Commission or
transmitted to the Commission for filing.

3.7 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, and has no stock or other interest as owner or principal
in, any other corporation or partnership, joint venture, association or other
business venture or entity.

3.8 VALID ISSUANCE OF SHARES. The Shares which will be purchased by
Purchaser hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
authorized and issued, fully paid and nonassessable.

3.9 LITIGATION, ETC. There is no action, suit, proceeding nor, to the
best of the Company's knowledge, any investigation pending or currently
threatened against the Company, that questions the validity of this Agreement or
the right of the Company to enter into such agreements, or which might result,
either individually or in the aggregate, in any material adverse change in the
assets, condition, affairs or prospects of the Company, financial or otherwise.

3.10 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or provincial governmental authority on
the part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for (a) any filing required
to be filed pursuant to the HSR Act as contemplated in Section 1.3 and (b)
notices required or permitted to be filed with certain state and federal
securities commissions, which notices will be filed by the Company on a timely
basis.

4.
<PAGE> 8
4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.

Purchaser hereby represents and warrants to the Company as follows
(such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):

4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power
and authority under all applicable provisions of law to execute and deliver this
Agreement to carry out the provisions of this Agreement and the Investors'
Rights Agreement. All action on Purchaser's part required for the lawful
execution and delivery of this Agreement has been or will be effectively taken
prior to the Closing. This Agreement, when executed and delivered, will be a
valid and binding obligation of Purchaser, enforceable in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights; (ii) general principles of equity that
restrict the availability of equitable remedies; and (iii) to the extent that
the enforceability of the indemnification provisions of Section 2.9 of the
Investors' Rights Agreement may be limited by applicable laws.

4.2 CONSENTS. All consents, approvals, orders, authorizations,
registrations, qualifications, designations, declarations or filings with any
governmental or banking authority on the part of Purchaser required in
connection with the consummation of the transactions contemplated in this
Agreement have been or shall have been obtained prior to and be effective as of
the Closing.

4.3 INVESTMENT REPRESENTATIONS. Purchaser understands that the Shares
have not been registered under the Securities Act. Purchaser also understands
that the Shares are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon Purchaser's
representations contained in the Agreement. Purchaser hereby represents and
warrants as follows:

(a) PURCHASER IS AN ACCREDITED INVESTOR. Purchaser represents
that Purchaser is an Accredited Investor within the meaning of Rule 501(a) of
Regulation D under the Securities Act.

(b) PURCHASER BEARS ECONOMIC RISK. Purchaser must bear the
economic risk of this investment indefinitely unless the Shares are registered
pursuant to the Securities Act, or an exemption from registration is available.
Purchaser understands that it has no registration rights with respect to the
Shares except as provided in Section 1.2 of this Agreement. Purchaser also
understands that there is no assurance that any exemption from registration
under the Securities Act will be available and that, even if available, such
exemption may not allow Purchaser to transfer all or any portion of the Shares
under the circumstances, in the amounts or at the times Purchaser might propose.

(c) ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the
Shares for Purchaser's own account for investment only, and not with a view
towards their distribution within the meaning of the Securities Act.

5.
<PAGE> 9
(d) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated in this Agreement. Purchaser is not a corporation,
trust or partnership specifically formed for the purpose of consummating these
transactions.

(e) COMPANY INFORMATION. Purchaser has had an opportunity to
discuss the Company's business, management and financial affairs with directors,
officers and management of the Company and has had the opportunity to review the
Company's operations and facilities. Purchaser has also had the opportunity to
ask questions of and receive answers from, the Company and its management
regarding the terms and conditions of this investment.

5. TERMINATION OF OBLIGATION OF PURCHASER.

The Purchaser shall have the right to terminate its obligation to
purchase the Shares in the event that the Preliminary Prospectus discloses any
material adverse event fundamental to the business of the Company that was not
disclosed in the form of prospectus incorporated in the Registration Statement
as originally filed with the Commission on September 4, 1996 (the "Initial
Registration Statement"); Purchaser's right to terminate shall be implemented in
accordance with the following procedures:

5.1 The Company shall promptly provide to Purchaser, by facsimile,
copies of the Registration Statement and each amendment thereto
contemporaneously with the filing of such Registration Statement or amendment
with the Commission. Unless otherwise agreed to in writing by the parties, all
deliveries to Purchaser pursuant to this Section 5 shall be made by facsimile to
the individuals (the "Designees") at the numbers previously furnished by
Purchaser to the Company, or at such other number as Purchaser furnishes to the
Company. Contemporaneously with any delivery made to Purchaser pursuant to
Sections 5.2 and 5.3, the Company shall notify, by telephone or voicemail, the
Designees at the numbers previously furnished by Purchaser to the Company, or at
such other number(s) as Purchaser furnishes to the Company, that such delivery
has been sent.

5.2 When the Company elects to print the Preliminary Prospectus, the
Company shall deliver to Purchaser a notice of the Company's intention to so
print as soon as possible, but in no event later than two (2) days prior to the
transmission of the amendment to the Registration Statement that includes the
form of prospectus anticipated to be printed. Contemporaneously with the
delivery of the Company's notice to print, the Company shall deliver to
Purchaser a copy of the most recent draft of the Registration Statement, marked
to show changes from the Initial Registration Statement (the "Cumulative
Registration Statement"). Subsequent to the delivery of the Cumulative
Registration Statement and prior to the printing of the Preliminary Prospectus,
the Company shall deliver to Purchaser any and all pages of the Registration
Statement containing substantive changes, marked to show such changes from the
Cumulative Registration Statement (the "Marked Pages").

6.
<PAGE> 10
5.3 When the Company decides upon the final form of the Preliminary
Prospectus, it shall deliver to Purchaser a notice that the Preliminary
Prospectus is in its final form and that no additional substantive changes will
be made prior to printing (the "Company's Notice").

5.4 In the event that the Cumulative Registration Statement, as
modified by any Marked Pages, reflects a material adverse event fundamental to
the business of the Company that was not disclosed in the form of prospectus
incorporated in the Initial Registration Statement, Purchaser shall have a right
to terminate its obligation to purchase the Shares. As soon as possible after
receiving the Company's Notice, but in no event later than twenty-four (24)
hours after receipt of the Company's Notice (the "Termination Period"),
Purchaser shall deliver a notice, by facsimile, to the individuals at the
numbers previously furnished by the Company to Purchaser, or at such other
number(s) as furnished by the Company to Purchaser, indicating whether or not
Purchaser will exercise its right to terminate pursuant to this Section 5 (the
"Purchaser's Notice"). If Purchaser decides to exercise its right to terminate,
upon request of the Company and within ten (10) days of such request, Purchaser
shall deliver to the Company a written description of the material adverse event
upon which Purchaser is relying to exercise its right to terminate, describing
the event in reasonable detail. Purchaser shall deliver the original Purchaser's
Notice to the Company as soon as practicable in accordance with Section 7.8 of
this Agreement.

5.5 Purchaser's right to terminate this Agreement pursuant to this
Section 5 shall expire upon the expiration of the Termination Period.

5.6 The time periods set forth in this Section 5 may be changed by
agreement between the Company and Purchaser.

6. CONDITIONS TO CLOSING.

6.1 CONDITIONS TO PURCHASER'S OBLIGATIONS AT THE CLOSING. Purchaser's
obligation to purchase the Shares identified in Section 1.2 of the Agreement at
the Closing are subject to the satisfaction, at or prior to the Closing, of the
following conditions:

(a) CONCURRENT CLOSING OF IPO. The closing of the IPO shall
occur concurrently with the Closing.

(b) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
(excepting Sections 3.6(b) and 3.9) hereof shall be true and correct in all
material respects as of the Closing with the same force and effect as if they
had been made as of the Closing, and the Company shall have performed and
complied with all obligations and conditions herein required to be performed or
complied with by it on or prior to the Closing.

(c) LEGAL INVESTMENT. At the time of the Closing, the sale and
issuance of the Shares shall be legally permitted by all laws and regulations to
which Purchaser and the Company are subject.

7.
<PAGE> 11
(d) CONSENTS, PERMITS, AND WAIVERS. The Company shall have
obtained any and all authorizations, approvals, consents, permits and waivers
necessary or appropriate for consummation of the transactions contemplated by
this Agreement (except for such as may be properly obtained subsequent to the
Closing, and such items shall be effective on and as of the Closing).

(e) CERTIFICATE OF STATUS. The Company shall have obtained a
Certificate of Status from the Delaware Secretary of State dated as of a recent
date prior to the Closing.

(f) OPINION LETTER. Purchaser shall have received from Cooley
Godward Castro Huddleson & Tatum, counsel to the Company, an opinion letter
addressed to it, dated the date of the Closing, in substantially the form
attached hereto as Exhibit B.

(g) COPIES. The Company shall have delivered to Purchaser a
true and complete copy of the Registration Statement and any amendments thereto,
of each exhibit filed therewith and of the Preliminary Prospectus and final form
of Prospectus.

(h) PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents and instruments incident to such transactions shall be reasonably
satisfactory in form and substance to counsel to Purchaser, and counsel to
Purchaser shall have received all such counterpart originals or certified or
other copies of such documents as they may reasonably request.

(i) COMPLIANCE CERTIFICATE. The Company shall have delivered
to Purchaser a Compliance Certificate, executed by the President and the Chief
Financial Officer of the Company, dated the Closing Date, to the effect that the
conditions specified in subparagraphs (a) through (h) of this Section 6.1 have
been satisfied.

6.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's obligation
to issue and sell the Shares at the Closing is subject to the satisfaction, on
or prior to the Closing, of the following conditions:

(a) CONCURRENT CLOSING OF IPO. The closing of the IPO shall
occur concurrently with the Closing.

(b) REPRESENTATIONS AND WARRANTIES TRUE. The representations
and warranties made by Purchaser in Section 4 hereof shall be true and correct
in all material respects at the date of the Closing, with the same force and
effect as if they had been made on and as of said date.

(c) PERFORMANCE OF OBLIGATIONS. Purchaser shall have performed
and complied with all agreements and conditions herein required to be performed
or complied with by Purchaser on or before the Closing.

8.
<PAGE> 12
7. MISCELLANEOUS.

7.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California.

7.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by Purchaser and the closing of
the transactions contemplated hereby. All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument, except as
expressly provided otherwise in such certificate or instrument.

7.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of the Shares from time to time; provided, however,
that prior to the receipt by the Company of adequate written notice of the
transfer of any Shares specifying the full name and address of the transferee,
the Company may deem and treat the person listed as the holder of such Shares in
its records as the absolute owner and holder of such Shares for all purposes,
the payment of any dividends or any redemption price.

7.4 ENTIRE AGREEMENT. This Agreement and Exhibit A hereto, the
Investors' Rights Agreement, the Baxter Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and no party
shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein.
Nothing in this Agreement or the Investors' Rights Agreement, express or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and assigns, any rights, remedies, obligations
or liabilities under or by reason of this Agreement, except as expressly
provided herein or therein.

7.5 SEPARABILITY. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, such provision shall, to the extent
practicable, be modified so as to make it valid, legal and enforceable and to
maintain as nearly as practicable the intent of the parties, and the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.

7.6 AMENDMENT AND WAIVER.

(a) This Agreement may be amended or modified only upon the
written consent of the parties hereto.

(b) The obligations of the Company and the rights of the
holder of the Shares under this Agreement may be waived only with the written
consent of the parties hereto.

9.
<PAGE> 13
(c) Except to the extent provided in this Section 7.6, neither
this Agreement nor any provision hereof may be changed, waived, discharged or
terminated, except by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought.

(d Any amendment or waiver effected in accordance with this
Section 7.6 shall be binding upon any future holder of some or all of the
Shares.

7.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to Purchaser, upon any breach,
default or noncompliance of the Company under this Agreement or the Investors'
Rights Agreement, Sections 4.1 and 4.2 of the Baxter Agreement or under the
Certificate of Incorporation, shall impair any such right, power or remedy, nor
shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach,
default or noncompliance thereafter occurring. It is further agreed that any
waiver, permit, consent or approval of any kind or character on Purchaser's part
of any breach, default or noncompliance under this Agreement, the Investors'
Rights Agreement, Sections 4.1 and 4.2 of the Baxter Agreement or under the
Certificate of Incorporation or any waiver on Purchaser's part of any provisions
or conditions of the Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement, the Investors' Rights Agreement, the Baxter Agreement, the
Restated Articles, bylaws, or otherwise afforded to Purchaser, shall be
cumulative and not alternative.

7.8 NOTICES. Except as otherwise provided in Section 5, all notices and
other communications required or permitted hereunder shall be in writing and
shall be deemed effectively given and received (a) upon personal delivery, (b)
on the fifth day following mailing sent by registered or certified mail, return
receipt requested, postage prepaid, (c) upon confirmed delivery by means of a
nationally recognized overnight courier service or (d) upon transmission of
facsimile (with telephonic notice) addressed: (i) if to Purchaser, at
Purchaser's address as set forth on the Company's records, or at such other
address as Purchaser shall have furnished to the Company in writing or (ii) if
to the Company, at its address as set forth at the end of this Agreement, or at
such other address as the Company shall have furnished to Purchaser in writing.

7.9 EXPENSES. The Company shall pay all costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
the Agreement, and Purchaser shall pay all costs and expenses that it incurs
with respect to the negotiation, execution, delivery and performance of this
Agreement.

7.10 ATTORNEYS' FEES. If legal action is brought to enforce or
interpret this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and legal costs in connection therewith.

7.11 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.

10.
<PAGE> 14
7.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.

7.13 BROKER'S FEES. Each party hereto represents and warrants that no
agent, broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's or
finder's fee or any other commission directly or indirectly in connection with
the transactions contemplated herein. Each party hereto further agrees to
indemnify each other party for any claims, losses or expenses incurred by such
other party as a result of the representation in this Section 7.13 being untrue.

7.14 TERMINATION. If the Registration Statement for the IPO has not
become effective within ninety (90) days after the date of this Agreement,
Purchaser in its sole discretion may elect to terminate this Agreement by
providing written notice to the Company within ninety-seven (97) days after the
date of this Agreement. The foregoing sentence supersedes the last sentence of
Section 4.2(b) of the Baxter Agreement. If the Registration Statement never
becomes effective (either because the offering is withdrawn or otherwise),
however, and the Company files a new registration statement for an initial
public offering, the rights provided Purchaser under Section 4.2(b) of the
Baxter Agreement shall be reinstated and shall apply to such offering pursuant
to Section 4.2(b) of the Baxter Agreement.

7.15 SUBSEQUENT CONSENTS, PERMITS AND WAIVERS. The Company shall obtain
promptly after the Closing all authorizations, approvals, consents, permits and
waivers that are necessary or applicable for consummation of the transactions
contemplated by this Agreement and that were not obtained prior to the Closing
because they may be properly obtained subsequent to the Closing.

11.
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in the first paragraph hereof.

COMPANY:

STERITECH, INC.
2525 Stanwell Drive
Concord, CA 94520

By: \s\ Stephen T. Isaacs
----------------------------
Stephen T. Isaacs
President

PURCHASER:

BAXTER HEALTHCARE CORPORATION
One Baxter Parkway
Deerfield, Illinois 60015

By: \s\ Timothy B. Anderson
------------------------------
(Signature)

Its: Group Vice President
-----------------------------

12.

<PAGE> 1
EXHIBIT 11.1

CERUS CORPORATION
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share data)

<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss........................................ $(3,515,486) $(1,800,089) $(2,360,321) $(2,620,900) $(4,157,531)
=========== =========== =========== =========== ===========
Shares used in net loss per share computation:
Weighted average shares of common stock
outstanding................................. 1,014,000 982,273 963,507 962,458 964,555
Shares related to Staff Accounting Bulletin
Topic 4D:
Common stock(1)............................. 330,100 330,100 330,100 330,100 330,100
Common stock options(2)..................... 195,169 195,169 195,169 195,169 195,169
Preferred stock(3).......................... 380,953 380,953 380,953 380,953 380,953
----------- ----------- ----------- ----------- -----------
906,222 906,222 906,222 906,222 906,222
Shares used in net loss per share computation... 1,920,222 1,888,495 1,869,729 1,868,680 1,870,777
=========== =========== =========== =========== ===========
Net loss per share.............................. $ (1.83) $ (0.95) $ (1.26) $ (1.40) $ (2.22)
=========== =========== =========== =========== ===========
Calculation of shares outstanding for computing
pro forma net loss per share:
Shares used in computing historical net loss
per share (from above): .................... 1,869,729 1,870,777
Adjustment to reflect the effect of the
assumed conversion of convertible preferred
stock from the date of issuance(4): ........ 2,444,316 2,620,677
----------- -----------
Shares used in computing pro forma net loss
per share..................................... 4,314,045 4,491,454
=========== ===========
Pro forma net loss per share.................... $ (0.55) $ (0.93)
=========== ===========
</TABLE>

(1) Net additional outstanding shares assuming common shares issued after July
31, 1995 were issued and outstanding in all prior periods and the proceeds
were applied to repurchase shares at the estimated initial public offering
price per share.

(2) Net additional outstanding shares from stock options granted after July 31,
1995 assuming exercise of options and repurchase of shares at the estimated
initial public offering price per share.

(3) Series E preferred stock issued in April 1996 and July 1996 (convertible
into common stock) and assumes shares are outstanding in all prior periods.

(4) Preferred stock issued before July 31, 1995 (convertible into common stock).