BIOTRANSPLANT INC, 424B1, 1996-05-09

BIOTRANSPLANT INC
424B1, 1996-05-09
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1

PROSPECTUS Filed Pursuant to Rule 424(b)(1)
Registration No. 333-2144

2,800,000 SHARES

LOGO
COMMON STOCK
---------------------

All of the 2,800,000 shares of Common Stock offered hereby are being sold
by BioTransplant Incorporated ("BioTransplant" or the "Company"). Prior to this
Offering, there has been no public market for the Common Stock of the Company.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company has been approved for listing on the
Nasdaq National Market under the symbol "BTRN."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING 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.
<TABLE>
===============================================================================================
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share.......................... $9.50 $0.665 $8.835
- -----------------------------------------------------------------------------------------------
Total(3)........................... $26,600,000 $1,862,000 $24,738,000
===============================================================================================
</TABLE>

(1) For information regarding indemnification of the Underwriters, see
"Underwriting."

(2) Before deducting expenses of the Offering payable by the Company, estimated
at $450,000.

(3) The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 420,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public will be $30,590,000, the Underwriting Discounts and
Commissions will be $2,141,300 and the Proceeds to Company will be
$28,448,700. See "Underwriting."

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

The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about May 13, 1996.

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

UBS SECURITIES LLC PACIFIC GROWTH EQUITIES, INC.

May 8, 1996
<PAGE> 2
BIOTRANSPLANT'S PROPRIETARY ANTI-REJECTION PRODUCTS AND TRANSPLANTATION SYSTEMS
CURRENTLY UNDER DEVELOPMENT

BTI-322
A monoclonal antibody being developed as a
selective anti-rejection product and as an important
component of the AlloMune and XenoMune Systems

ALLOMUNE SYSTEM XENOMUNE SYSTEM
Designed to allow the transplantation of Building upon the AlloMune tech-
mismatched organs from human donors, nology, this system is designed
and to reduce or eliminate the need for to allow the transplantation of
lifelong immunosuppressive therapy. organs from miniswine into
humans, and thus, increase the
supply of donor organs

[Silhouette of a man's head and torso with
an anatomical depiction of major organs]

BIOTRANSPLANT'S PRODUCT CANDIDATES ARE DESIGNED TO:
* Reduce or eliminate the need for lifelong immunosuppressive therapy
* Minimize infections and complications assocated with organ transplantation
* Increase the supply of transplantable organs
* Reduce the cost of treating end-stage organ disease

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

The Company's products are currently in research and preclinical and
clinical development. None of the Company's products has been submitted for
regulatory approval. There can be no assurance that any products will be
successfully developed, receive necessary regulatory approvals or, if such
approvals are received, that any product candidate will be marketed
successfully.

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

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,
IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME.

<PAGE> 3
BIOTRANSPLANT'S SOLUTION: SPECIFIC TRANSPLANT TOLERANCE

THYMUS EDUCATES IMMUNE SYSTEM BY SELECTING PROTECTIVE T CELLS AND CREATING
TOLERANCE TO "SELF"

[Graphic depiction of bone marrow, thymus and active and dead T cells]

* Bone marrow generates precursor cells capable of responding to foreign and
self antigens
* Thymus destroys harmful T cells that would attack the recipient's own tissues
and allows maturation of pathogen responsive T cells

T CELLS RECOGNIZE FOREIGN ANTIGENS AND CHRONIC SYSTEMIC IMMUNOSUPPRESSIVE
AID IN THEIR ELIMINATION DRUGS INHIBIT THE IMMUNE RESPONSE

[Graphic depiction of donor kidney, [Graphic depiction of donor kidney,
T cells and pathogens] T cells, pathogens and chronic
systemic immuosuppressive drug]

*T cell activation leads to elimination * Blocking T cell activation with
of pathogens and rejection of foreign chronic systemic immunosuppressive
organ grafts drugs inhibits rejection of foreign
organ grafts AND also inhibits
normal response to pathogens

SPECIFIC TRANSPLANT TOLERANCE CAN BE INDUCED BY MIXED BONE MARROW CHIMERISM

[Graphic depiction of donor and recipient bone marrow,
donor kidney, active and dead T cells and pathogens]

* Specific transplant tolerance by mixed bone marrow chimerism combines donor
and recipient bone marrow
* Thymus causes the immune system to recognize donor and recipient tissue as
"self"
* Immune system retains ability to protect against pathogens

<PAGE> 4
CREATION OF SPECIFIC TRANSPLANT TOLERANCE REDUCES OR ELIMINATES THE NEED FOR
LIFELONG IMMUNOSUPPRESSIVE THERAPY

ALLOMUNE SYSTEM
The induction of specific trans-
plant tolerance to allow donation
of mismatched human organs

[Graphic depiction of donor and recipient
bone marrow, silhouette of man with anatomical
depiction of donor kidney, thymus and T cells]

XENOMUNE SYSTEM
The induction of specific
transplant tolerance to
miniswine donor organs

BIOTRANSPLANT'S APPROACH TO TRANPLANTATION
* Mature T cells are removed or inactivated: BTI-322
* Space is created in recipient bone marrow and thymus
* Donor bone marrow cells are added to recipient bone marrow creating mixed
bone marrow chimerism
* New thymic educations occurs. Immune system now recognizes donor and
recipient as "self"
* Transplant to donor organ
* Recipient is still able to respond to pathogens. Specific transplant
tolerance is induced to organ antigens
* Need for chronic immunosuppressive drugs is reduced or eliminated

EXISTING APPROACH TO TRANSPLANTATION
* Transplant suitably matched human organ
* Inhibit the immune response with chronic systemic immunosuppressive drugs
- Treat or prevent organ rejection with:
Anti-metabolites
Chronic systemic immunosuppressive drugs
Anti-lymphocyte therapy
* Patient remains on chronic systemic immunosuppressive drugs for life

<PAGE> 5

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, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus, including the information under "Risk
Factors." This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed under
"Risk Factors." Certain technical and medical terms are defined or explained
under "Business -- The Company," "-- Overview of Organ Transplantation" and
elsewhere in this Prospectus.

THE COMPANY

BioTransplant Incorporated ("BioTransplant" or the "Company") is developing
proprietary anti-rejection pharmaceuticals and organ transplantation systems
which represent a comprehensive approach to inducing long-term specific
transplantation tolerance in humans. Specific transplantation tolerance would
allow a transplant recipient to accept a donor organ as "self," while
maintaining the remainder of the recipient's immune defenses. The Company's
product candidates are intended to reduce or eliminate the need for lifelong
immunosuppressive therapy, minimize infections and complications associated with
organ transplantation, reduce the cost of treating end-stage organ disease, and
increase the supply of transplantable organs.

Organ transplantation is an established therapy for end-stage organ
disease. Approximately 35,000 kidney, liver, heart and lung transplants were
performed in the United States and Western Europe in 1995. There is a critical
shortage of organs worldwide, and large, growing waiting lists have been
established for potential organ transplant recipients. The Company estimates
that over $5.0 billion is spent annually on organ transplantation in the United
States alone. However, the success of these procedures is frequently limited by
the rejection of the transplanted organ by the recipient's immune system. Over
half of the costs of organ transplantation are attributable to care subsequent
to the transplant, including lifelong immunosuppressive therapy and
hospitalization due to complications resulting from the chronic use of
immunosuppressive drugs, infections and transplant rejections.

The following table describes the principal product candidates being
developed by the Company and its corporate collaborators, as well as MEDI-500, a
proprietary product of MedImmune, Inc. ("MedImmune") for which the Company is
entitled to receive royalties:

<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS CORPORATE PARTNER
----------------- ------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
BTI-322(TM) - Treatment of acute Phase I/II (Eur, US) MedImmune
transplant rejection
- Prevention of acute Phase I/II (Eur)
transplant rejection
- Treatment of Graft vs. Phase I/II (Eur)
Host disease
- Prevention of Graft Preclinical
vs. Host disease
- Treatment of Preclinical
autoimmune diseases
MEDI-500(TM) - Treatment of acute Phase I/II (US) Proprietary to MedImmune
transplant rejection
- Ex vivo treatment of Phase III (US)
bone marrow prior to
transplantation
AlloMune(TM) - Transplantation of Preclinical Rights retained by
System mismatched human BioTransplant
organs with reduced
need for chronic
immunosuppression
XenoMune(TM) - Transplantation of Research/Preclinical Sandoz Pharma, Ltd.;
System miniswine organs into Charles River
humans Laboratories, Inc.
</TABLE>

3
<PAGE> 7

BioTransplant and MedImmune entered into an agreement in October 1995
relating to products to treat and prevent organ rejection derived from
BioTransplant's BTI-322 and MedImmune's MEDI-500. BTI-322 is a novel and
proprietary monoclonal antibody being developed as an anti-rejection product and
as an important component in the Company's AlloMune and XenoMune Systems for
organ transplantation. The Company has retained exclusive rights to the use of
BTI-322 in its AlloMune and XenoMune Systems. By selectively inhibiting T cells
in an antigen specific manner, preliminary studies indicate that BTI-322 leaves
the remainder of the immune system competent to respond to pathogens subsequent
to BTI-322 administration. The Company believes that BTI-322 offers unique
advantages both as a treatment for acute organ rejection and as an agent,
administered at the time of transplantation, for the prevention of acute organ
rejection. MEDI-500 is a monoclonal antibody that suppresses most T cells.
Studies to date suggest that it has a similar efficacy profile to, and an
improved side effect profile over, a widely used therapy for the treatment of
acute rejection, OrthoClone OKT(R)3, a T cell binding monoclonal antibody
produced by Johnson & Johnson ("OKT3").

The AlloMune System is designed to reduce or eliminate the need for
lifelong immunosuppressive therapy in human to human organ transplantation by
inducing long-term, specific transplantation tolerance through the creation of
mixed bone marrow chimerism between the donor and the recipient. Mixed bone
marrow chimerism (bone marrow which contains cells from both the donor and the
recipient) re-educates the recipient's immune system to recognize the donor
organ as self, while maintaining the remainder of the recipient's immune
defenses. The Company is currently conducting preclinical studies in which
kidneys of intentionally mismatched donor monkeys are being transplanted into
monkey recipients which have undergone the Company's proprietary bone marrow
chimerization procedure. To date, six out of six recipient monkeys have achieved
mixed bone marrow chimerism with normal kidney function for periods ranging from
6 to 27 months without the need for chronic immunosuppressive therapy. The
Company is seeking to optimize the AlloMune System through additional
preclinical testing in primates prior to filing an investigational new drug
application ("IND") with the United States Food and Drug Administration ("FDA")
for human clinical trials.

With the XenoMune System, BioTransplant hopes to build upon the Company's
proprietary knowledge and technology developed with the AlloMune System. The
XenoMune System is designed to expand the pool of donor organs by using organs
derived from proprietary genetically-defined major histocompatibility complex
("MHC") inbred miniature swine ("miniswine") for transplantation into humans.
The MHC is a group of genes that encode proteins that regulate the interactions
of the cells of the immune system and are involved in transplant acceptance or
rejection. The Company is working to achieve mixed bone marrow chimerism between
cross-species donors and recipients. The Company has established
miniswine-to-primate mixed bone marrow chimerism for more than 300 days and has
had preliminary success with miniswine-to-primate kidney transplant survival for
up to 15 days, without evidence of hyperacute rejection. In addition, the
Company is actively pursuing the genetic manipulation of the recipient's bone
marrow with an MHC gene from the miniswine donor ("gene transduction") as an
alternate means for inducing long-term specific tolerance. The Company has
entered into a strategic alliance with Sandoz Pharma, Ltd. ("Sandoz") to develop
xenotransplantation products utilizing gene transduction. Pursuant to the
Company's agreement with Sandoz, BioTransplant will receive research funding and
license fees of $30.0 million, of which $15.0 million had been received as of
December 31, 1995. Additionally, the Company has entered into an exclusive
supply agreement with Charles River Laboratories, Inc. ("CRL") for the supply of
miniswine cells and organs.

The Company has a number of established research collaborations. The most
significant of these is with Dr. David H. Sachs and The Massachusetts General
Hospital ("MGH"), where Dr. Sachs is the Director of the Transplantation Biology
Research Center. Both the AlloMune and the XenoMune Systems are based on Dr.
Sachs' work.

The Company was incorporated under the laws of the State of Delaware on
March 20, 1990. The Company's principal executive offices are currently located
at Building 75, Third Avenue, Charlestown Navy Yard, Charlestown, Massachusetts
02129, and its telephone number is (617) 241-5200.

4
<PAGE> 8

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered.................................. 2,800,000 shares
Common Stock Outstanding after this Offering.......... 8,128,748 shares(1)
Use of Proceeds....................................... To fund research and development, preclinical and
clinical programs, working capital and general
corporate purposes.
Nasdaq National Market Symbol......................... BTRN
Risk Factors.......................................... The Common Stock offered hereby involves a high degree
of risk. See "Risk Factors."
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues..................................................... $ 14 $ 114 $ 2,691 $ 3,163 $10,043
Total expenses............................................... 2,651 6,302 10,440 14,431 12,131
Net loss..................................................... (2,637) (6,188) (7,749) (11,268) (2,087)
Pro forma net loss per share(2).............................. $ (.44)
Shares used in computing pro forma net loss
per share(2)............................................... 4,697
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
-------- ------------ -----------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 2,849 $ 8,754 $ 33,042
Working capital.............................................. 86 6,047 30,335
Total assets................................................. 5,372 11,277 35,565
Long-term obligation under capital leases, net of current
portion.................................................... 615 615 615
Convertible notes payable to stockholders.................... 1,000 -- --
Redeemable convertible preferred stock....................... 29,241 -- --
Stockholders' equity (deficit)............................... (28,840) 7,362 31,650
</TABLE>

- ---------------
(1) Excludes an aggregate of 752,269 shares of Common Stock issuable pursuant to
options and warrants outstanding as of March 1, 1996, at a weighted average
exercise price of $3.37 per share. Includes 5,202,154 shares of Common Stock
issuable upon conversion of the Company's outstanding Preferred Stock,
effective as of the completion of this Offering. See "Capitalization,"
"Management -- Stock Option Plan," "Management -- 1994 Directors' Equity
Plan" and "Description of Capital Stock."

(2) Computed on the basis described in Note 2(b) of Notes to Consolidated
Financial Statements.

(3) Presented on a pro forma basis to give effect to (i) the sale subsequent to
December 31, 1995 of 2,967,500 shares of Series D Convertible Preferred
Stock ("Series D Stock") (convertible into 741,875 shares of Common Stock)
and the receipt of $5,905,000 in net proceeds therefrom, (ii) the issuance
in February 1996 of 527,909 shares of Series D Stock (convertible into
131,975 shares of Common Stock) upon the conversion of outstanding notes
payable and accrued interest thereon, and (iii) the automatic conversion of
all outstanding shares of Preferred Stock into 5,202,154 shares of Common
Stock upon the closing of this Offering (including 431,724 additional shares
to be issued to Sandoz).

(4) Adjusted to reflect the sale of 2,800,000 shares of Common Stock offered
hereby and receipt by the Company of the estimated net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
---------------------
Unless otherwise indicated, all information in this Prospectus (i) assumes
the Underwriters' over-allotment option is not exercised, (ii) reflects a
one-for-four reverse stock split effected on May 6, 1996 and (iii) reflects
conversion of all outstanding shares of the Company's Preferred Stock into an
aggregate of 5,202,154 shares of Common Stock (including 431,724 additional
shares to be issued to Sandoz), which will occur upon the completion of this
Offering. See "Capitalization," "Description of Capital Stock" and
"Underwriting."

BioTransplant(TM), AlloMune(TM), BTI-322(TM) and XenoMune(TM) are
trademarks of the Company. All other trademarks and trade names referenced in
this Prospectus are the property of their respective owners.

5
<PAGE> 9

RISK FACTORS

Prospective investors in the shares offered hereby should carefully
consider the following risk factors, in addition to the other information
appearing in this Prospectus.

Lack of Commercial Products; No Assurance of Successful Product
Development. The Company is in the early development stage and has been
engaged, to date, primarily in organizational and research and development
activities. The Company has not yet completed the development of, or conducted
significant human testing with respect to, any product. The Company has no
products available for sale and does not expect to have any of its potential
products available for at least the next several years, if at all. The Company's
potential products will require significant additional development, preclinical
and clinical testing, regulatory approval and additional investment prior to
commercialization. The Company's potential products are subject to the risks of
failure inherent in the development of products based on new technologies. In
particular, the Company's AlloMune and XenoMune Systems face technical issues
which have not been resolved and require the development of multiple novel
technologies to create a successful product. No approach to transplanting organs
from other animals into humans has, to date, shown any long-term clinical
utility. There can be no assurance that any of the Company's products will be
successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, obtain required regulatory approvals, be
capable of being produced in commercial quantities at reasonable costs or be
successfully marketed.

History of Losses and Accumulated Deficit; No Assurance of Revenue or
Operating Profit. The Company has generated no revenues from product sales and
has experienced significant operating losses since inception. As of December 31,
1995, the Company's accumulated deficit was approximately $30.1 million. The
Company expects to incur substantial additional costs, including costs related
to ongoing research and development activities (both internal and external),
preclinical studies, clinical trials and the expansion of its laboratory and
administrative activities, resulting in significant and increasing losses for at
least the next several years. Revenues, if any, that the Company may receive in
the next few years will be limited to payments under the Company's agreements
with Sandoz and MedImmune, and any other research or product development
relationships that the Company may hereafter establish, and interest income. See
"Business -- Collaborations and Agreements." The Company's ability to achieve
significant revenue or profitability is dependent on successfully completing the
development of its products, obtaining required technology licenses and
regulatory approvals, and manufacturing and marketing its products. There can be
no assurance, however, that the Company will successfully develop,
commercialize, manufacture or market any of its potential products, obtain
regulatory approvals, patents or third-party licenses to technology or ever
achieve profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Need for Substantial Additional Funds. The Company will need substantial
additional funds before it can expect to realize significant product revenue.
The Company's working capital needs and additional funding requirements will
depend upon numerous factors, including the progress of the Company's research
and development programs and the external research and development programs
being supported by the Company, the timing and results of preclinical and
clinical testing, the timing and costs of obtaining regulatory approvals, the
level of resources that the Company commits to the development of manufacturing,
marketing and sales capabilities, the ability of the Company to maintain
existing and establish new collaborative arrangements with other companies to
provide funding to the Company, the technological advances and activities of
competitors, and other factors. The Company anticipates that the net proceeds
from this Offering, including interest thereon, together with the Company's
existing funds, will be sufficient to fund its operating expenses and capital
requirements as currently planned through the end of 1997. Substantial
additional funds will be required to support the Company's operations. The
Company anticipates that these funds will be obtained from external sources and
intends to seek additional equity, debt or lease financing to fund future
operations. The Company also expects to seek additional collaborative
arrangements with corporate partners in order to fund its research and
development programs. There can be no assurance, however, that the Company will
be able to negotiate such arrangements or obtain the additional funding that it
will require on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate certain
of its product development programs or to license to others rights to
commercialize products or technologies that the Company would otherwise seek to
develop and commercial-

6
<PAGE> 10

ize itself, any of which would have a material and adverse affect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Reliance upon Third Parties; Risks Relating to Mergers or
Consolidations. The Company's strategy for development and commercialization of
its products entails entering into arrangements with corporate, government and
academic collaborators, third party manufacturers, licensors, licensees and
others. There can be no assurance that the Company will be able to maintain its
existing arrangements or establish additional collaborative arrangements or
license agreements that the Company deems necessary or acceptable to develop and
commercialize its potential pharmaceutical products or that such collaborative
arrangements or license agreements will be successful or that current or
potential collaborators will not seek alternative means of developing the
products.

The Company has entered into several important collaborative agreements to
date including: with MedImmune for the development of products to treat and
prevent organ transplant rejection; with Dr. David H. Sachs and MGH for the
development of the Company's AlloMune and XenoMune Systems; with Sandoz to
develop xenotransplantation products utilizing gene transduction, and with CRL
for the exclusive supply of proprietary miniswine cells and organs for the
Company's xenotransplantation products. CRL has the right to terminate the
agreement with BioTransplant on 60 days' prior written notice. Although CRL
would then be required to transfer to BioTransplant all miniswine and related
technology and know how, there can be no assurance that BioTransplant would have
the capability of maintaining the miniswine herds or supplying the needs of
itself or its collaborators.

There can be no assurances that outside parties and collaborators will
perform their obligations as expected or that any revenue will be derived from
outside arrangements. The amount and timing of resources to be devoted to
developing and commercializing the Company's products by such partners is not
within the control of the Company. Furthermore, there can be no assurance that
the interests of the Company will coincide with those of its collaborators or
that disagreements over rights to technology or other proprietary information
will not occur. Both of the Company's corporate collaborators are independently
developing products that may be competitive with products they are developing in
collaboration with BioTransplant. In addition, the Company is entitled to
receive royalties on MEDI-500, a product proprietary to MedImmune, and any such
royalties are wholly dependent on the efforts of MedImmune to develop and market
such product.

If any of the Company's collaborators breaches or terminates its agreement
with the Company, or otherwise fails to conduct its collaborative activities in
a timely manner, the development or commercialization of the product candidate
or research program under such collaborative agreement may be delayed, the
Company may be required to undertake unforeseen additional responsibilities or
to devote unforeseen additional resources to such development or
commercialization, or such development or commercialization could be terminated.
Any such event could adversely affect the Company's financial condition,
intellectual property position and operations. In addition, there have been a
significant number of recent consolidations among pharmaceutical companies. Such
consolidations among the companies with which the Company is collaborating could
result in the diminution or termination of, or delays in, the development or
commercialization of the product candidates or research programs under one or
more of the Company's collaborative agreements. For example, it has recently
been announced that Sandoz plans to merge with Ciba-Geigy AG. Although Sandoz
remains obligated under the collaboration agreement with the Company, it is
possible that as a result of the merger and ensuing transition, the priorities
of Sandoz will be evaluated and the Company's programs focusing on the
development and commercialization of xenotransplantation products could be
adversely affected. See "Business -- Collaborations and Agreements."

Novel Therapeutic Approach; Technological Uncertainties. While the
Company's BTI-322 antibody has the ability to induce antigen specific
hyporesponsiveness in vitro, the Company has not proven that this activity can
be induced clinically. BTI-322 has been tested in relatively few patients. There
can be no assurance that the clinical activity already seen will continue to be
encouraging. Although the Company has developed a humanized form of BTI-322,
this form has not yet been tested in humans and there can be no assurance that

7
<PAGE> 11

this form of BTI-322 will have clinical benefits. Failure to develop a humanized
form of BTI-322 would limit uses and indications requiring multiple
administrations.

The Company's AlloMune and XenoMune Systems are based on creating long-term
specific transplantation tolerance by inducing mixed bone marrow chimerism or
gene transduction. These approaches are novel and, to the Company's knowledge,
have never been achieved in humans, including by the Company. There can be no
assurance that the Company will be successful in achieving long-term specific
transplantation tolerance, that the AlloMune and XenoMune Systems will be useful
clinically or that physicians will adopt such novel therapeutic approachs.

The Company's XenoMune System is based on the transplantation of organs
from miniswine into humans. There is little precedent for such procedures and
previous attempts by others in the xenotransplantation field (inter-species
transplantation) have not been successful. There has been only limited research
in this area, and results obtained in research conducted to date are
inconclusive as to whether the XenoMune System will be safe or effective.
Although several companies are focusing in this area, xenotransplantation-based
products represent a novel therapeutic approach that has not yet been subject to
extensive clinical testing. No xenogeneic organ or living tissue has been
approved by the FDA for use in humans. There can be no assurance that any
xenotransplantation-based products, including the XenoMune System, will be
approved by the FDA or other regulatory authorities, or that, even if so
approved, will be accepted by the medical community or third party payors.

The risk that viruses or other pathogens from animals will be
unintentionally transmitted to a human patient is a risk associated with
xenotransplantation. Furthermore, unfavorable publicity resulting from
unsuccessful efforts by others in the xenotransplantation field, or from certain
individuals for whom xenotransplantation presents ethical issues, could have an
adverse impact on the Company's ability to successfully commercialize the
XenoMune System.

Uncertainty Associated with Preclinical and Clinical Testing. Before
obtaining regulatory approvals for the commercial sale of any of the Company's
potential products, the products will be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy in humans. The Company
has limited experience in conducting clinical trials. The Company is dependent
on MedImmune to conduct clinical trials for BTI-322, Sandoz to conduct clinical
trials for the development of xenotransplantation products utilizing gene
transduction and may become dependent on other third parties to conduct future
clinical trials of its AlloMune System and any other products. To date, the
Company has administered BTI-322 to only approximately 50 patients in a human
clinical safety trial and additional pilot studies conducted in Europe. Results
of initial preclinical and clinical testing of products under development by the
Company are not necessarily predictive of results that will be obtained from
subsequent or more extensive preclinical and clinical testing. For example,
although the Company has found similarities in in vitro studies between rodent
and humanized forms of BTI-322 there can be no assurance that similar results
will be obtained in clinical trials with the humanized antibodies. In addition,
clinical trials are often conducted with patients having the most advanced
stages of disease. During the course of treatment, these patients can suffer
adverse medical effects or die for reasons that may not relate to the product
being tested, but which can nevertheless affect adversely the clinical trials.
Furthermore, there can be no assurance that clinical trials of products under
development will demonstrate the safety and efficacy of such products at all or
to the extent necessary to obtain regulatory approvals. Companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials. The failure to
adequately demonstrate the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product and would
have a material adverse effect on the Company.

The Company's XenoMune System is dependent on miniswine maintained on
behalf of the Company. While the miniswine are maintained at multiple locations,
it is possible that a disease epidemic or other catastrophe could destroy all or
a portion of the miniswine herd which would interrupt or significantly delay the
testing of the XenoMune System. See "Business -- Government Regulation."

Uncertainties Regarding Patents and Proprietary Rights; Potential Third
Party Claims. The Company's success depends, in part, on its ability to obtain
patent protection for its products. The Company has filed, or has licensed
exclusively, patents and patent applications in connection with various aspects
of its products under

8
<PAGE> 12

development. The patent position of biotechnology firms is highly uncertain and
involves complex legal and factual questions. There is no consistent policy
regarding the breadth of claims allowed in biotechnology patents. Accordingly,
there can be no assurance that patent applications relating to the Company's
products or technology will result in patents being issued or that, if issued,
the patents will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company. In
addition, patents may have been granted, or may be granted, covering products or
processes that are necessary for or useful to the development of the Company's
products. Holders of these patents could prevent the Company from
commercializing its products or require the Company to obtain licenses to
develop, manufacture or market its products. There can be no assurance that the
Company will be able to obtain such licenses on commercially reasonable terms,
if at all, or that the patents underlying the licenses will be valid and
enforceable. There has been significant litigation in the industry regarding
patents and other proprietary rights. If the Company became involved in
litigation regarding its intellectual property rights, the cost of such
litigation could be substantial.

The Company is aware of granted patents which claim monoclonal antibodies
which bind to T cells and the therapeutic use thereof. These patents are held by
Johnson & Johnson, which manufactures and sells OKT3, a T cell binding
monoclonal antibody with which the Company expects BTI-322 to compete. Although
BTI-322 is also a monoclonal antibody which binds to T cells, the Company
believes that BTI-322 is distinguishable from the monoclonal antibodies claimed
in such patents and does not infringe such patents either literally or under the
doctrine of equivalents. Notwithstanding such belief, there is a risk that the
patent owner could initiate patent infringement litigation to prevent the
manufacture, sale and use of BTI-322. If the patentee should prevail in such
litigation, the Company could be required to pay damages and reimburse the
patentee for the cost of such litigation. In addition, if the patentee was not
prepared to grant a license to the Company, an injunction could issue which
would prevent the manufacture, sale and use of BTI-322. In addition, MEDI-500 is
also a monoclonal antibody which binds to T cells, and may be subject to similar
risks as BTI-322. If the manufacture, sale or use of MEDI-500 infringes such
patents, the royalties, if any, relating to MEDI-500 may be reduced or
eliminated.

To date, the Company has used a rodent form of BTI-322 in its pilot studies
and early stage clinical trials. Although the Company believes that the rodent
antibody is acceptable for use in the treatment and prevention of allograft
organ rejection, it may not be appropriate for diseases which require multiple
administrations. Therefore, the Company has developed a humanized version of
BTI-322. The Company has reviewed issued patents which include claims relating
to the process for producing humanized monoclonal antibodies. These patents are
held by biotechnology companies, academic institutions and government agencies.
The Company intends to seek licenses under these patents. However, there can be
no assurance that the Company will be able to obtain such licenses on acceptable
terms, if at all. Failure to obtain such licenses could require the Company to
suspend or modify its humanized version of BTI-322 and would limit the use of
BTI-322 to indications not requiring multiple administrations.

The Company is also aware of a granted United States patent directed to the
production of transgenic animals by the use of a microinjection technique, which
the Company believes is licensed to a competitor. Such patent could have an
adverse impact on the Company's ability to produce transgenic animals by
microinjection. In addition, the Company is aware of a pending United States
patent application which is directed to embryonic stem cells. If such patent
application should mature into a patent, such patent may have an adverse impact
on the Company's program for producing transgenic swine by the use of embryonic
stem cells.

Some of the Company's know-how and technology is not patentable. For
example, there are no patents or patent applications covering the miniswine
supplied by CRL. To protect its rights, the Company requires all employees,
consultants, advisors and collaborators to enter into confidentiality agreements
with BioTransplant. There can be no assurance, however, that these agreements
will provide meaningful protection for the Company's trade secrets, know-how or
other proprietary information in the event of any unauthorized use or
disclosure. Further, in the absence of patent protection, the Company's business
may be adversely affected by competitors who independently develop substantially
equivalent technology. See "Business -- Patents and Proprietary Rights."

9
<PAGE> 13

No Assurance of FDA Approval; Comprehensive and Evolving Government
Regulation; Limited Regulatory Precedent. The Company's research, development
and clinical programs, as well as its manufacturing operations, are subject to
extensive regulation by numerous government authorities in the United States and
other countries. All of the Company's products require governmental approvals
for commercialization, none of which have yet been obtained. Preclinical and
clinical trials and manufacturing of many of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. There is presently limited
regulatory precedent for approval of products based on monoclonal antibodies,
and no such products have been approved by the FDA for use in induction therapy.
The FDA has not yet established definitive regulatory guidelines for
xenotransplantation and for assessing the risks of animal pathogens, but is
planning to announce guidelines in the future in an attempt to reduce the risk
of contamination of transplanted organs with infectious agents. There can be no
assurance that such guidelines will be issued, or that the Company will be able
to comply with any guidelines that may be issued. The regulatory process, which
includes preclinical, clinical and post-clinical testing of the Company's
products to establish their safety and efficacy, requires many years to complete
and the expenditure of substantial resources. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. In addition, delays or rejection
may be encountered based upon changes in, or additions to, regulatory policies
for drug approval during the period of product development and regulatory
review, particularly because the AlloMune and XenoMune Systems are novel and
regulatory requirements for such products are evolving and uncertain. Delays in
obtaining such approvals could adversely affect the marketing of products under
development by the Company and the Company's ability to generate commercial
product revenues. There can be no assurance that requisite regulatory approvals
will be obtained within a reasonable period of time, if at all. Moreover, if
regulatory approval of a product is granted, such approval may impose
limitations on the indicated uses for which such product may be marketed.
Further, even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections, and later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer, including withdrawal of the product from the market.
Failure to comply with the applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution.

Additionally, the Company is or may become subject to various federal,
state and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research and development work, including the
regulations of the United States Department of Agriculture, the Environmental
Protection Agency and the Nuclear Regulatory Commission. The Company is unable
to predict the extent of restrictions that might arise from any governmental or
administrative action. There can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws and
regulations, or any assurance that the operations, business or assets of the
Company will not be materially adversely affected by current or future
environmental laws or regulations. See "Business -- Government Regulation."

Intense Competition. The products being developed by the Company compete
with existing and new products being created by pharmaceutical,
biopharmaceutical and biotechnology companies, as well as universities and other
research institutions. Many of these entities have significantly greater
research and development capabilities, as well as substantial marketing,
manufacturing, financial and managerial resources, and represent significant
competition for the Company. There can be no assurance that developments by
others will not render the Company's products or technologies obsolete or
noncompetitive or that the Company will be able to keep pace with technological
developments. Many of the competitors have developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely different
approach than products being developed by the Company and may be more effective
and less costly. In addition, many of these competitors have significantly
greater experience than the Company in undertaking preclinical testing and human
clinical trials of products and obtaining FDA and other regulatory approvals of
such products. Accordingly, the

10
<PAGE> 14

Company's competitors may succeed in commercializing products more rapidly than
the Company. In addition, colleges, universities, government agencies and other
public and private research organizations conduct research and may market
commercial products on their own or through joint ventures. These institutions
are becoming more active in seeking patent protection and licensing arrangements
to collect royalties for use of technology that they have developed. These
institutions also compete with the Company in recruiting and retaining highly
qualified scientific personnel.

In particular, there are several commercially available anti-rejection
drugs that will compete with BTI-322 and MEDI-500, including OKT3, ATGAM(R),
marketed by Pharmacia & Upjohn, Inc. ("ATGAM"), and Thymoglobuline(R), marketed
in Europe by Institut Pasteur Merieux ("Thymoglobuline"). Thymoglobuline has
been licensed in the United States to SangStat Medical Corporation ("SangStat")
and is currently in Phase III clinical trials. To the extent that these
therapeutics address the problems associated with transplantation on which the
Company has focused, they may represent significant competition.

In addition, the Company is aware of other biotechnology companies
attempting xenotransplants, including Imutran Ltd., Nextran Inc., a wholly-owned
subsidiary of Baxter HealthCare, Alexion Pharmaceuticals, Inc. and SangStat.
Some of the Company's competitors are using organs derived from genetically
modified donor pigs, which are designed to eliminate hyperacute transplant
rejection in humans. There can be no assurance that others will not be
successful in developing xenotransplantation-based products, including products
designed to induce specific transplantation tolerance. In addition, the
development of superior immunosuppressive therapeutics, mechanical organ systems
and other improvements in therapies for end-stage organ disease could adversely
affect the Company's potential products. See "Business -- Competition."

Risk of Technical Obsolescence. The development of human therapeutic
products is marked by rapid and significant technological change. The Company
expects that the technologies associated with its research and development will
continue to develop rapidly, and the Company's future success will depend in
large part on its ability to maintain a competitive position with respect to
these technologies. Technological developments by the Company or others may
result in the obsolescence of products or processes before the Company recovers
the research, development and commercialization expenses it has incurred. There
can be no assurance that the Company will successfully address these
technological challenges or others that may arise in the course of development.
Any failure of the Company to anticipate or respond adequately to technological
developments will have a material adverse effect on the Company's prospects and
financial condition. In addition, advances in disease prevention and treatment
could reduce the need for organ transplantation products.

Dependence on Key Personnel. The Company depends to a considerable degree
on a limited number of key personnel. During the Company's limited operating
history, many key responsibilities within the Company have been assigned to a
relatively small number of individuals. The Company does not maintain "key man"
insurance on any of its employees. The loss of certain senior management could
adversely affect the business of the Company.

Recruiting and retaining qualified scientific personnel to perform research
and development work is critical to the Company's success. There is intense
competition for qualified personnel in the areas of the Company's activities,
and there can be no assurance that the Company will be able to attract and
retain such personnel on acceptable terms. With respect to the development of
the Company's AlloMune and XenoMune Systems, the Company is dependent in large
part on the efforts of Dr. David H. Sachs, Chairman of the Company's Scientific
Advisory Board. The Company currently has a consulting contract with Dr. Sachs
which may be terminated by him at any time upon 30 days' written notice, and
there can be no assurance of his continued consultation with the Company. In
addition, the Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as production and marketing,
will require the addition of new management personnel. The failure to attract
and retain such personnel could adversely affect the Company's business. See
"Business -- Employees" and "-- Scientific Advisory Board."

Limited Manufacturing and Marketing Capabilities. Because of the
relatively early stage of the Company's research and development programs, the
Company has not yet invested significantly in manufacturing, marketing,
distribution or product sales resources. The Company currently does not have the
capacity to

11
<PAGE> 15

manufacture its potential products, and is dependent on contract manufacturers
or collaborative partners for the production of its potential products for
preclinical research and clinical trial purposes and may be dependent on such
manufacturers or collaborative partners for commercial production. There can be
no assurance that the Company will be able to enter into arrangements with third
parties for such purposes. In the event that the Company is unable to establish
its own manufacturing facilities or obtain contract manufacturing on
commercially acceptable terms, it may not be able to commercialize its products
as planned. The Company has no experience in manufacturing pharmaceutical or
other products or in conducting manufacturing testing programs or in the
clinical evaluations required to obtain FDA and other regulatory approvals. See
"Business -- Manufacturing and Supply."

The Company has no experience in marketing products. The Company has
granted exclusive marketing rights to BTI-322 to MedImmune, and holds worldwide
marketing rights to the AlloMune System and to any xenotransplantation product
that does not utilize gene transduction, for which it has no corporate partners.
The Company has exclusively licensed worldwide marketing rights to Sandoz for
the XenoMune System utilizing gene transduction and has retained certain rights
to co-promote in North America. The Company may seek to collaborate with a third
party to market those products for which it has retained marketing rights, or
may seek to market such products on its own. There can be no assurance that the
Company will be able to establish such arrangements or, even if such
arrangements are entered into, that the Company will be able to market its
products effectively. To market the AlloMune System, the XenoMune System or any
other product directly, the Company would have to develop a marketing and sales
force with technical expertise and supporting distribution capability. There can
be no assurance that the Company would be able to develop such a sales force
with technical expertise and supporting distribution capability. See
"Business -- Marketing."

Uncertainty Relating to Third-Party Reimbursement and Product Pricing. The
successful commercialization of the Company's products will depend substantially
on reimbursement of the costs of such products and related treatments at
acceptable levels from government authorities, private health insurers and other
organizations, such as health maintenance organizations ("HMOs"). There can be
no assurance that reimbursement in the United States or foreign countries will
be available for any products the Company may develop or, if available, will not
be decreased in the future, or that reimbursement amounts will not reduce the
demand for, or the price of, the Company's products, thereby adversely affecting
the Company's business. Currently, no reimbursement plan exists for the costs
associated with the Company's AlloMune and XenoMune Systems.

Third-party payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations such as HMOs, which can
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 result in lower prices for therapeutic
products. The cost containment measures that health care providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform, could materially adversely affect the
Company's ability to sell its products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business. See
"Business -- Reimbursement."

Potential Product Liability; Limited Product Liability Insurance. The
Company's business exposes it to potential product liability risks which are
inherent in the testing, manufacturing, marketing and sale of human therapeutic
products, and there can be no assurance that the Company will be able to avoid
significant product liability exposure. Product liability insurance for the
biopharmaceutical industry is generally expensive, if available at all. The
Company currently has limited product liability insurance covering its clinical
trials. However, there can be no assurance that it will be able to maintain such
insurance on acceptable terms, that such insurance will provide adequate
protection against potential liabilities or that the Company will be able to
obtain product liability insurance for the use of its potential commercial
products. Any inability to obtain sufficient insurance coverage at an acceptable
cost or otherwise to protect against potential product liability claims could
prevent or limit the commercialization of products developed by the Company.
Furthermore, a product liability claim, and any related adverse publicity, could
have a material adverse effect on the business or financial condition of the
Company.

12
<PAGE> 16

Control by Principal Stockholders. Immediately following this Offering,
the principal stockholders of the Company will beneficially own approximately
58% of the outstanding Common Stock. Accordingly, they collectively will have
the ability to control the election of all of the Company's directors and most
corporate actions. Certain HealthCare venture capital fund partnerships
("HealthCare") will hold 33% of the outstanding Common Stock of the Company
after the Offering and consequently will have the ability to significantly
affect the election of the Company's directors and most corporate actions.
William W. Crouse, a director of the Company, serves as the Vice Chairman of
HealthCare Investment Corporation, the management company of HealthCare and as
one of the individual general partners of the general partner of HealthCare.
HealthCare is also a principal stockholder of MedImmune. A representative of
HealthCare also serves on the board of directors of MedImmune. See
"Business -- Collaborations and Agreements" and "Principal Stockholders."

No Prior Public Market; Stock Price Volatility. Prior to this Offering
there has been no public market for the Common Stock. Accordingly, there can be
no assurance that an active trading market will develop and continue upon
completion of this Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock was determined by negotiations between the Company and
the Representatives of the Underwriters. See "Underwriting." The market price of
the Company's securities, like those of the securities of many other emerging
biotechnology companies, are likely to be highly volatile. Factors such as the
results of preclinical studies and clinical trials by the Company or its
competitors, other evidence of the safety or efficacy of products of the Company
or its competitors, announcements of technological innovations 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 biotechnology stocks in general
could have a significant impact on the future price of the Common Stock.

Possible Adverse Impact of Shares Eligible for Future Sale. Of the
approximately 8,128,748 shares of Common Stock to be outstanding after this
Offering, approximately 2,858,616 shares (including the 2,800,000 shares sold in
this Offering) will be eligible for resale in the public market without
restriction immediately following this Offering (holders of approximately
5,292,473 shares have agreed not to sell such shares for 180 days following the
date of this Prospectus). Additional shares of Common Stock will become eligible
for resale in the public market at subsequent dates. In addition, certain
holders of Common Stock have the right under certain circumstances to require
the Company to register their shares under the Securities Act for resale to the
public. Sales of substantial numbers of shares of Common Stock in the public
market could adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."

Potential Anti-Takeover Effect of Certain Charter and By-Law
Provisions. Pursuant to the Company's Restated Certificate of Incorporation, to
be effective upon the closing of this Offering (the "Restated Certificate of
Incorporation"), special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company, the Board of Directors or holders of 20% or more of the then
outstanding shares of capital stock of the Company. Under the Company's Amended
and Restated By-laws (the "By-laws"), in order for any matter to be considered
"properly brought" before a meeting, a stockholder holding less than 5% of the
outstanding shares of capital stock of the Company must comply with certain
requirements regarding advance notice to the Company. The affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend the
Company's Restated Certificate of Incorporation and By-laws. Furthermore, the
Company is subject to the anti-takeover provisions of Section 203 of the General
Corporation Law of Delaware which 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. These provisions may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management of
the Company, including transactions in which stockholders might otherwise
receive a premium for their shares over then-current market prices. These
provisions may limit the ability of stockholders to approve transactions that
they may deem to be in their best interests. In addition, the stockholders of
the Company have granted the Board of Directors authority to issue Preferred
Stock and to determine its rights and preferences in order to eliminate delays
associated with a stockholder vote on specific issuances. The Company has no
present plans to issue any

13
<PAGE> 17

shares of Preferred Stock. The issuance of Preferred Stock could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, a majority of the outstanding voting
stock of the Company. See "Description of Capital Stock."

Dilution. The initial public offering price is substantially higher than
the book value per share of the currently outstanding Common Stock. Investors
purchasing shares of Common Stock in this Offering will therefore suffer
immediate dilution in net tangible book value of $5.62 per share. This dilution
will be increased to the extent that the holders of outstanding options or
warrants to purchase Common Stock at prices below the initial public offering
price exercise such options or warrants. See "Dilution."

Absence of Dividends. The Company has never declared or paid cash
dividends and does not intend to declare or pay any cash dividends in the
foreseeable future. See "Dividend Policy."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $24,288,000
($27,998,700 if the Underwriters' over-allotment option is exercised in full),
after deduction of the underwriting discounts and commissions and estimated
offering expenses associated with the Offering.

The Company intends to use the net proceeds for research and development,
preclinical and clinical programs, working capital and general corporate
purposes. The Company may also use a portion of the net proceeds to acquire or
license products or technologies complementary to the Company's business,
although the Company has no agreements or commitments for any such acquisition.
See "Risk Factors -- Need for Substantial Additional Funds."

The Company's working capital needs and additional funding requirements
will depend upon numerous factors, including the progress of the Company's
research and development programs and the external research and development
programs being supported by the Company, the timing and results of preclinical
and clinical testing, the timing and costs of obtaining regulatory approvals,
the level of resources that the Company commits to the development of
manufacturing, marketing and sales capabilities, the ability of the Company to
maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company, the technological advances and
activities of competitors, and other factors. Pending use, the Company intends
to invest the net proceeds in short-term, interest-bearing investment grade
securities.

DIVIDEND POLICY

The Company has not declared or paid any dividends on its capital stock
since its inception and does not anticipate paying cash dividends in the
foreseeable future.

14
<PAGE> 18

CAPITALIZATION

The following table sets forth at December 31, 1995 the (i) actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
as described in Note 1 below, and (iii) the pro forma capitalization of the
Company as adjusted to reflect the receipt of the estimated proceeds from the
sale of 2,800,000 shares of Common Stock being offered by the Company hereby
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. This table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------
Pro Forma
Actual Pro Forma(1) As Adjusted(1)(2)
-------- --------------- -----------------
(in thousands)
<S> <C> <C> <C>
Long-term obligation under capital leases, net of
current portion................................... 615 615 615
Convertible notes payable to stockholders........... 1,000 -- --
Redeemable convertible preferred stock at net amount
paid in, 15,586,345 shares issued and outstanding;
no shares issued and outstanding pro forma and pro
forma as adjusted................................. 29,241 -- --
Stockholders' equity (deficit)(1)(2):
Preferred Stock, $.01 par value, 2,000,000
shares authorized, none issued and
outstanding, pro forma and pro forma as
adjusted..................................... -- -- --
Common Stock, $.01 par value, 25,000,000 shares
authorized, 126,594 shares issued and
outstanding; 5,328,748 shares issued and
outstanding pro forma and 8,128,748 shares
issued and outstanding pro forma as
adjusted..................................... 1 53 81
Additional paid-in capital..................... 1,231 37,381 61,641
Deficit accumulated during the development
stage........................................ (30,072) (30,072) (30,072)
-------- -------- --------
Total stockholders' equity (deficit)...... (28,840) 7,362 31,650
-------- -------- --------
Total capitalization...................... $ 2,016 $ 7,977 $ 32,265
======== ======== ========
</TABLE>

- ---------------
(1) Presented on a pro forma basis to give effect to (i) the sale subsequent to
December 31, 1995 of 2,967,500 shares of Series D Stock (convertible into
741,875 shares of Common Stock) and the receipt of $5,905,000 in net
proceeds therefrom, (ii) the issuance in February 1996 of 527,909 shares of
Series D Stock (convertible into 131,975 shares of Common Stock) upon the
conversion of outstanding notes payable and accrued interest thereon, and
(iii) the automatic conversion of all outstanding shares of Preferred Stock
into 5,202,154 shares of Common Stock upon the closing of this Offering.

(2) Adjusted to reflect the sale of 2,800,000 shares of Common Stock offered
hereby and receipt by the Company of the estimated net proceeds therefrom.
See "Use of Proceeds."

15
<PAGE> 19

DILUTION

As of December 31, 1995, the Company had a pro forma net tangible book
value of $7,262,000, or $1.36 per share. Pro forma net tangible book value per
share is determined by dividing the pro forma net tangible book value (tangible
assets less liabilities) of the Company by 5,328,748 shares of Common Stock
outstanding at such date, after giving effect to the (i) sale subsequent to
December 31, 1995 of 2,967,500 shares of Series D Stock (convertible into
741,875 shares of Common Stock) and the receipt of $5,905,000 in net proceeds
therefrom, (ii) the issuance in February 1996, of 527,909 shares of Series D
Stock (convertible into 131,975 shares of Common Stock) upon the conversion of
outstanding notes payable and the accrued interest thereon, and (iii) the
conversion of all outstanding shares of Preferred Stock into 5,202,154 shares of
Common Stock effective upon the closing of this Offering. Pro forma net tangible
book value dilution per share represents the difference between the amount per
share paid by purchasers of Common Stock in this Offering and the pro forma net
tangible book value per share of Common Stock immediately after the completion
of this Offering. Without taking into account any changes in pro forma net
tangible book value after December 31, 1995 other than as described above and to
give effect to the sale by the Company of the 2,800,000 shares of Common Stock
offered hereby and the receipt by the Company of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of December
31, 1995 would have been $3.88 per share. This represents an immediate increase
in the pro forma net tangible book value of $2.52 per share to existing
investors and an immediate dilution in net tangible book value of $5.62 per
share to new investors purchasing shares of Common Stock in this Offering.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $9.50
Pro forma net tangible book value per share as of December 31,
1995......................................................... $1.36
Increase per share attributable to this Offering............... 2.52
-----
Pro forma net tangible book value per share after this
Offering..................................................... 3.88
Dilution per share to new investors............................ $5.62
</TABLE>

The following table summarizes on a pro forma basis as of March 1, 1996,
the total number of shares of Common Stock purchased from the Company (adjusted
to give effect to the automatic conversion of all outstanding shares of
Preferred Stock into 5,202,154 shares of Common Stock upon the closing of this
Offering), the total consideration paid, and the average price per share paid by
existing stockholders and by new investors:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price
Number Percent Amount Percent Per Share
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 5,328,748 65.6% $36,579,255 57.9% $ 6.86
New investors........................... 2,800,000 34.4 26,600,000 42.1 9.50
--------- ----- ---------- -----
Total......................... 8,128,748 100.0% $63,179,255 100.0%
========= ===== =========== =====
</TABLE>

The foregoing table assumes no exercise of outstanding options or warrants
to purchase Common Stock after March 1, 1996. At March 1, 1996, there were
outstanding options to purchase an aggregate of 375,134 shares of Common Stock
at a weighted average exercise price of $3.39 per share and the Company had
reserved an additional 365,843 shares of Common Stock for future option and
restricted stock grants. In addition, at March 1, 1996 there were outstanding
warrants to purchase 377,135 shares of Common Stock at a weighted average
purchase price of $3.34 per share. The exercise of these options and warrants
would result in further dilution to new investors. See "Management -- Stock
Option Plan", "Certain Transactions" and Note 8 of Notes to Consolidated
Financial Statements.

16
<PAGE> 20

SELECTED CONSOLIDATED FINANCIAL DATA

The following Selected Consolidated Financial Data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto, the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial information included elsewhere in
this Prospectus. The data set forth below, as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 and for the
period from inception (March 20, 1990) to December 31, 1995 are derived from the
Company's consolidated financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Prospectus. The selected consolidated financial data as of December 31,
1991, 1992 and 1993 and for the years ended December 31, 1991 and 1992 are
derived from the Company's consolidated financial statements not included in
this Prospectus, all of which have been audited by Arthur Andersen LLP,
independent public accountants.

<TABLE>
<CAPTION>
Years Ended December 31, Period from Inception
---------------------------------------------------------- (March 20, 1990) to
1991 1992 1993 1994 1995 December 31, 1995
------- ------- -------- -------- -------- ---------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
License fees.......................... $ -- $ -- $ 1,500 $ 1,500 $ 4,000 $ 7,000
Research and development.............. -- -- 1,125 1,500 5,875 8,500
Interest income....................... 14 114 66 163 168 525
-------- -------- -------- --------- --------- ---------
Total revenues...................... 14 114 2,691 3,163 10,043 16,025
-------- -------- -------- --------- --------- ---------
Expenses:
Research and development.............. 1,821 4,985 8,218 11,767 9,461 36,275
General and administrative............ 776 1,235 1,680 2,518 1,939 8,266
Interest.............................. 54 82 542 146 731 1,556
-------- -------- -------- --------- --------- ---------
Total expenses...................... 2,651 6,302 10,440 14,431 12,131 46,097
-------- -------- -------- --------- --------- ---------
Net loss............................ $(2,637) $(6,188) $ (7,749) $(11,268) $ (2,087) $ (30,072)
======== ======== ======== ========= ========= =========
Pro forma net loss per share(1)......... $ (.44)
Shares used in computing pro forma net
loss
per share(1).......................... 4,697
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------- Pro Forma(2)
1991 1992 1993 1994 1995 December 31, 1995
------- ------- -------- -------- -------- -------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,452 $ 2,298 $ 6,880 $ 2,343 $ 2,849 $ 8,754
Working capital.......................... 155 1,386 6,225 148 86 6,047
Total assets............................. 2,241 3,488 8,500 4,801 5,372 11,277
Long-term obligation under capital
leases, net of current portion......... 31 439 334 1,066 615 615
Redeemable convertible preferred stock... 3,248 10,918 23,029 23,772 29,241 --
Stockholders' equity (deficit)........... (2,753) (8,942) (16,108) (27,030) (28,840) 7,362
</TABLE>

- ---------------
(1) Computed on the basis described in Note 2(b) of Notes to Consolidated
Financial Statements.

(2) Presented on a pro forma basis to give effect to (i) the sale subsequent to
December 31, 1995 of 2,967,500 shares of Series D Stock (convertible into
741,875 shares of Common Stock) and the receipt of $5,905,000 in net
proceeds therefrom, (ii) the issuance in February 1996, of 527,909 shares of
Series D Stock (convertible into 131,975 shares of Common Stock) upon the
conversion of outstanding notes payable and accrued interest thereon, and
(iii) the automatic conversion of all outstanding shares of redeemable
convertible preferred stock into 5,202,154 shares of Common Stock upon the
closing of this Offering.

17
<PAGE> 21

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 Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors."

OVERVIEW

Since commencement of operations in 1990, the Company has been a
development stage company engaged primarily in the research and development of
proprietary anti-rejection pharmaceuticals and organ transplantation systems
which represent a comprehensive approach to inducing long-term specific
transplantation tolerance in humans. The major sources of the Company's working
capital have been the proceeds of private equity placements, sponsored research
funding and license fees and capital lease financings. The Company has not
generated any revenues from the sale of products to date, and does not expect to
receive any product revenues for several years. The Company will be required to
conduct significant research, development, testing and regulatory compliance
activities that, together with general and administrative expenses, are expected
to result in significant and increasing operating losses for at least the next
several years.

In 1993, and as amended and restated in September 1995, the Company and
Sandoz entered into a collaboration agreement for the development and
commercialization of xenotransplantation products utilizing gene transduction.
Under the agreement, Sandoz has committed research funding through March 1998 of
$20.0 million, of which $10.0 million had been received as of December 31, 1995,
and agreed to pay license fees of $10.0 million, of which $5.0 million had been
received as of December 31, 1995. Sandoz has also agreed to fund certain
development and premarketing costs of such products, portions of which, under
certain circumstances, may be repayable from the Company's operating profits
from sales of such products.

In October 1995, the Company and MedImmune entered into a collaborative
research agreement for the development of products to treat and prevent organ
rejection. MedImmune paid the Company a $2.0 million license fee at the time of
execution of the agreement, and agreed to fund and assume responsibility for
clinical testing and commercialization of BTI-322 and other related products.
MedImmune has agreed to provide research support and make milestone payments
which could total up to an additional $14.0 million, up to $12.0 million of
which is repayable from royalties on BTI-322 or MEDI-500.

RESULTS OF OPERATIONS

Years Ended December 31, 1995 and 1994

Revenues increased to $10.0 million in 1995 from $3.2 million in 1994. The
increase in revenues was due to an increase in license fees and research and
development revenues which consisted of increased funding of $4.6 million from
Sandoz in 1995 as a result of the amendment and restatement of the collaboration
agreement and $2.0 million in license fees received and $250,000 in research
support revenue recognized in connection with the collaboration formed with
MedImmune.

Research and development expenses decreased to $9.5 million in 1995 from
$11.8 million in 1994. This decrease was primarily due to decreased expenditures
related to the human clinical safety trials for BTI-322 and a reduction in
outside collaborative research funding.

General and administrative expenses decreased to $1.9 million in 1995 from
$2.5 million in 1994 reflecting, in part, the Company's cost-cutting efforts in
1995 to preserve cash. This decrease was primarily due to decreased salary and
related expenses for general and administrative functions, and decreased outside
professional services related to the design and construction monitoring of the
facility which was occupied by the Company in 1994.

18
<PAGE> 22

Interest expense increased to $731,000 in 1995 from $146,000 in 1994
primarily due to interest on the $4.4 million in convertible notes payable at
December 31, 1994 and the $1.0 million in convertible notes payable at December
31, 1995. The $4.4 million in convertible notes payable, and the accrued
interest thereon, was converted into 2,424,947 shares of the Company's Series D
Stock in October 1995 (convertible into 606,233 shares of Common Stock). In
February 1996, the $1.0 million in convertible notes payable and the accrued
interest thereon, was converted into 527,909 shares of the Company's Series D
Stock (convertible into 131,975 shares of Common Stock).

Years Ended December 31, 1994 and 1993

Revenues increased to $3.2 million in 1994 from $2.7 million in 1993. The
increase in revenues was primarily due to an increase of $400,000 in revenue
recognized under the collaboration agreement with Sandoz in 1994 as compared to
1993.

Research and development expenses increased to $11.8 million in 1994 from
$8.2 million in 1993. This increase was primarily due to expenses associated
with the initiation of human clinical safety trials in connection with BTI-322
as well as increases in outside collaborative research and contractor costs,
including contract research organizations and a payment of $1.0 million to Stem
Cell Sciences for collaborative research. Additional expenses resulted from
increases in research and development staff together with the associated
increases in supplies and support services.

General and administrative expenses increased to $2.5 million in 1994 from
$1.7 million in 1993. This increase resulted primarily from increased salary and
related expenses for general and administrative functions associated with an
increase in the number of employees and outside professional services related to
the design and construction monitoring of a new facility which was occupied by
the Company in 1994.

Interest expense decreased to $146,000 in 1994 from $542,000 in 1993. This
decrease was primarily due to the issuance of warrants in connection with bridge
financing in 1993, the fair value of which was recorded as interest expense in
1993.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company's operations have been funded principally
through the net proceeds of an aggregate of $36.2 million from private
placements of redeemable convertible preferred stock. The private placements
included the sale, subsequent to December 31, 1995, of 2,967,500 shares of
Series D Stock (convertible into 741,875 shares of Common Stock) for net cash
proceeds of $5.9 million and the conversion, subsequent to December 31, 1995, of
the $1.0 million of convertible notes payable to stockholders and the interest
accrued thereon into 527,909 shares of Series D Stock (convertible into 131,975
shares of Common Stock). The Company has also received $15.0 million from the
collaboration agreement with Sandoz, $2.3 million from the collaboration
agreement with MedImmune and $2.2 million in equipment lease financing. The
proceeds of the private placements, notes payable, capital leases and cash
generated from the corporate collaborations with Sandoz and MedImmune have been
used to fund operating losses of approximately $30.1 million and the investment
of approximately $3.7 million in equipment and leasehold improvements through
December 31, 1995. In the years ended December 31, 1994 and 1995, the Company's
capital expenditures totaled approximately $1.4 million and $716,000,
respectively, primarily for the acquisition of laboratory equipment and the
build-out of the Company's facilities which it occupied in October 1994. The
Company had no significant commitments as of December 31, 1995 for capital
expenditures.

Subsequent to December 31, 1995, the Company agreed to provide Stem Cell
Sciences with $500,000 for research support and to maintain its pro rata equity
interest in Stem Cell Sciences. In addition, the Company has an option to
purchase additional shares of Stem Cell Sciences prior to July 1996, to maintain
its pro rata equity interest and provide research support. If the Company does
not make such further investment, its rights to certain technologies become
nonexclusive.

19
<PAGE> 23

The Company had cash and cash equivalents and working capital of $8.8 and
$6.0 million, respectively, on a pro forma basis as of December 31, 1995,
reflecting the sale subsequent to December 31, 1995, of shares of Series D Stock
as described above.

The Company has entered into sponsored research and consulting agreements
with certain hospitals, academic institutions and consultants, requiring
periodic payments by the Company. Aggregate minimum funding obligations under
these agreements, which include certain cancellation provisions, total
approximately $5.0 million, which includes approximately $2.4 million and
$776,000 in 1996 and 1997, respectively. See "Business -- Collaborations and
Agreements."

The Company will need substantial additional funds before it can expect to
realize significant product revenue. The Company's working capital needs and
additional funding requirements will depend upon numerous factors, including the
progress of the Company's research and development programs and the external
research and development programs being supported by the Company, the timing and
results of preclinical and clinical testing, the timing and costs of obtaining
regulatory approvals, the level of resources that the Company commits to the
development of manufacturing, marketing and sales capabilities, the ability of
the Company to maintain existing and establish new collaborative arrangements
with other companies to provide funding to the Company, the technological
advances and activities of competitors, and other factors. The Company
anticipates that the net proceeds from this Offering, including interest
thereon, together with the Company's existing funds, will be sufficient to fund
its operating expenses and capital requirements as currently planned through the
end of 1997. Substantial additional funds will be required to support the
Company's operations. The Company anticipates that these funds will be obtained
from external sources and intends to seek additional equity, debt or lease
financing to fund future operations. The Company also expects to seek additional
collaborative arrangements with corporate partners in order to fund its research
and development programs. There can be no assurance, however, that the Company
will be able to negotiate such arrangements or obtain the additional funding
that it will require on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate certain
of its product development programs or to license to others the right to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself, any of which would have a material and adverse
affect on the Company. See "Risk Factors -- Need for Substantial Additional
Funds."

20
<PAGE> 24

BUSINESS

THE COMPANY

The Company is developing proprietary anti-rejection pharmaceuticals and
organ transplantation systems which represent a comprehensive approach to
inducing long-term specific transplantation tolerance in humans. Specific
transplantation tolerance would allow a transplant recipient to accept a donor
organ as self, while maintaining the remainder of the recipient's immune
defenses. The Company's product candidates are intended to reduce or eliminate
the need for lifelong immunosuppressive therapy, minimize infections and
complications associated with organ transplantation, reduce the cost of treating
end-stage organ disease, and increase the supply of transplantable organs.

BioTransplant and MedImmune entered into an agreement in October 1995
relating to products to treat and prevent organ rejection derived from
BioTransplant's BTI-322 and MedImmune's MEDI-500. BTI-322 is a novel and
proprietary monoclonal antibody being developed as an anti-rejection product and
as an important component in the Company's AlloMune and XenoMune Systems for
organ transplantation. A monoclonal antibody is a single antibody which reacts
with a specific molecule, called an antigen, which triggers a response from the
immune system. The Company has retained exclusive rights to the use of BTI-322
in its AlloMune and XenoMune Systems. By selectively inhibiting T cells in an
antigen specific manner, preliminary studies indicate that BTI-322 leaves the
remainder of the immune system competent to respond to pathogens (foreign
organisms that cause disease) subsequent to BTI-322 administration. The Company
believes that BTI-322 offers unique advantages both as a treatment for acute
organ rejection and as an agent, administered at the time of transplantation,
for the prevention of acute organ rejection. MEDI-500 is a monoclonal antibody
that suppresses most T cells. Studies to date suggest that it has a similar
efficacy profile to, and an improved side effect profile over, OKT3, a widely
used therapy for the treatment of acute rejection.

The AlloMune System is designed to reduce or eliminate the need for
lifelong immunosuppressive therapy in human to human organ transplantation by
inducing long-term, specific transplantation tolerance through the creation of
mixed bone marrow chimerism between the donor and the recipient. Mixed bone
marrow chimerism re-educates the recipient's immune system to recognize the
donor organ as self, while maintaining the remainder of the recipient's immune
defenses. The Company is currently conducting preclinical studies in which
kidneys of intentionally mismatched donor monkeys are being transplanted into
monkey recipients which have undergone the Company's proprietary bone marrow
chimerization procedure. To date, six out of six recipient monkeys have achieved
mixed bone marrow chimerism with normal kidney function for periods ranging from
6 to 27 months without the need for chronic immunosuppressive therapy. The
Company is seeking to optimize the AlloMune System through additional
preclinical testing in primates prior to filing an IND with the FDA for human
clinical trials.

21
<PAGE> 25

consequence of the recipient having preformed antibodies against donor
antigens). In addition, the Company is actively pursuing the genetic
manipulation of the recipient's bone marrow with an MHC gene from the miniswine
donor ("gene transduction") as an alternate means for inducing long-term
specific tolerance. The Company has entered into a strategic alliance with
Sandoz to develop xenotransplantation (transplantation of organs between
different species) products utilizing gene transduction. Pursuant to the
Company's agreement with Sandoz, BioTransplant will receive research funding and
license fees of $30.0 million, of which $15.0 million had been received as of
December 31, 1995. Additionally, the Company has entered into an exclusive
supply agreement with CRL for the supply of miniswine cells and organs.

OVERVIEW OF ORGAN TRANSPLANTATION

Organ Transplant Market

During the last two decades organ transplantation has become an established
therapy for end-stage organ disease due to the significant progress that has
been made since the introduction of cyclosporine by Sandoz in 1984. In 1995,
over 35,000 organ transplants were performed in patients suffering from
end-stage kidney, liver, heart and lung disease in the United States and Western
Europe. The Company estimates that over $5 billion is spent annually in the
United States on organ transplantation. However, the success of these procedures
is frequently limited by the rejection of the transplanted organ by the
recipient's immune system. To prevent rejection of the transplanted organ,
recipients must maintain a lifelong regimen of immunosuppressive therapy. Over
half of the costs of organ transplantation on a patient by patient basis are
attributable to care subsequent to the transplant, including lifelong
immunosuppressive therapy and hospitalizations due to complications resulting
from the chronic use of immunosuppressive drugs, infections and transplant
rejections. Other treatments for end-stage organ disease, such as kidney
dialysis, are even more expensive. Accordingly, improvements in transplantation
technology that reduce the wait for suitable organs and minimize infections and
other complications, including retransplantation and the chronic use of
immunosuppresive drugs, can be expected to lower the overall cost of treating
end-stage organ disease.

There is a critical shortage of organs worldwide and waiting lists have
been established for potential organ transplant recipients. Over 43,000 patients
in the United States suffering from end-stage organ disease were on waiting
lists for a lifesaving organ transplant in 1995, based on data provided by the
United Network for Organ Sharing ("UNOS"). This number has more than doubled
since 1988, and the number of deaths of people on the waiting list has increased
proportionately. If an adequate supply of transplant organs were available and
the complications of transplantation minimized, the Company estimates that an
additional 100,000 critically ill patients each year could benefit from organ
transplantation as a replacement for disease damaged organs and as an
alternative to artificial devices.

Efforts to ease this organ shortage through public campaigns and
advertisements to enlarge the pool of potential organ donors have been only
moderately successful. Increased automotive safety has adversely affected the
donation rate. The potential for allotransplantation (transplantation of organs
between different individuals of the same species) to spread infectious disease
has also limited the potential donor pool. While the number of cadaveric donors
has increased in the last ten years, the demand for organs has increased more
rapidly. Advances have been made in obtaining multiple organs from a single
donor and in organ preservation techniques, but a severe shortage of organs
still exists and the backlog of patients awaiting transplantation continues to
grow. The shortage of donor organs restricts the number of transplant procedures
performed and forces many patients to undergo costly and less effective
alternatives to transplantation for as long as possible. This delay renders
transplant candidates much sicker than they would have been if the organ
transplant had been possible sooner.

Transplantation Biology

The immune system is one of the major biological defense mechanisms
protecting the individual against disease and invasion by pathogens. It can
distinguish self from specific foreign substances (known as antigens) and
produce a specific biological response to clear and destroy the source of the
foreign ("non-self") antigen.

22
<PAGE> 26

When an individual receives an organ transplant, the recipient's immune
system generally recognizes the transplanted tissue as foreign and initiates an
immune response against the organ, resulting in organ rejection. The immune
response results from the recognition by the immune system of foreign antigens
(histocompatibility antigens) on the surface of the cells of the donor which are
different from those of the recipient. If, as in the case of identical twins,
the histocompatibility antigens of the donor and the recipient are identical, no
rejection response occurs. In all other cases, antigenic differences can provide
sufficient stimulus to cause an immune response and, consequently, rejection of
the organ.

The biological specificity of the immune response is controlled by a subset
of white blood cells known as T cells. Throughout an individual's life, the
immune system reacts to foreign antigens and develops T cells capable of
recognizing and responding to specific foreign antigens, including specific T
cells capable of recognizing and reacting to specific foreign histocompatibility
antigens. T cells learn to distinguish self from non-self when they mature in
the thymus, and this maturation step induces tolerance to the individual's own
antigens. When mature antigen specific T cells recognize histocompatibility
antigens in transplanted tissue, they become activated and initiate a cascade of
events, including the proliferation of T cells and B cells. Certain activated T
cells can kill cells bearing foreign antigens and B cells are capable of
producing antigen specific proteins called antibodies. Antibodies can bind to
foreign cells or proteins and lead to their destruction or clearance from the
body.

There are two primary types of immune response to transplanted foreign
tissue -- hyperacute and acute rejection. Hyperacute rejection occurs
immediately upon transplantation and results from the reactivity of pre-existing
antibodies with antigens presented by the donor tissue. In hyperacute rejection,
the donor organ is destroyed within hours and no treatment is currently
available. Acute rejection occurs after transplantation of an organ when T cells
recognize the histocompatibility antigens of the donor as foreign, become
activated and, over a period of days or weeks, initiate a rejection response
which may lead to the ultimate loss of the organ. The current approach to
preventing acute organ rejection in transplant patients is to administer a
combination of immunosuppressive medications which non-specifically suppress the
ability of T cells to recognize and respond to antigens. These medications,
however, not only inhibit T cells from recognizing histocompatibility antigens
of donor organs, but also block the patient's T cells from recognizing other
foreign antigens. As a result, the transplant recipient is rendered vulnerable
to viral, bacterial and fungal infections. In addition, long-term use of these
immunosuppressive drugs can lead to cardiovascular disease, kidney and liver
damage, as well as an increased incidence of certain types of cancer such as
skin and lip cancer and lymphomas. Most importantly, despite the administration
of various immunosuppressive medications, instances of organ rejection still
occur frequently and may necessitate increased doses of immunosuppressive drugs
or inclusion of other anti-rejection therapies, thus compounding unwanted side
effects and complications. If the rejection cannot be controlled, the rejected
organ must be removed and another transplant will be required.

Current Transplantation Procedures

A patient with end-stage failure of a major organ (kidney, liver, heart or
lung) or a patient in need of a bone marrow transplant must undergo a long
process of treatment prior to and after transplantation. First, an attending
physician must decide that the patient's organ is irreversibly damaged and
unable to sustain life and that the patient is able to undergo the surgical and
medical procedures associated with transplantation and post-transplantation
therapy. Then, the patient must undergo tests to determine his or her
histocompatibility antigens, called tissue typing. Once the patient's tissue
type is known, a suitable donor organ or bone marrow must be located. During the
waiting period, samples are taken from the potential recipient and tested for
the presence of antibodies to a panel of histocompatibility antigens
representative of the population of prospective donors. This procedure is known
as the Panel Reactivity Antibody test and is used to determine the potential for
hyperacute rejection of a transplant by an individual recipient.

Once a potential donor is found, a cross-match test is performed in order
to determine whether a potential recipient is likely to experience hyperacute
rejection of the organ. The cross-match is designed to determine whether the
patient has circulating antibodies to the foreign tissue of the potential donor,
or related antigens developed in response to transfusion, pregnancy or prior
transplantation which may react with the donor cells and thus the donor organ.
The search for a reasonable tissue match based on histocompatibility

23
<PAGE> 27

antigens can prolong the time spent on the organ transplant waiting list for a
donor organ. In the event that an organ is found with characteristics that
suggest the likelihood of a good outcome, the organ transplant is performed.

Neither tissue typing nor cross match technology is precise. Therefore,
foreign antigens will always be found on a donor organ, except in the case of
transplants from an identical twin. The differences in donor and recipient
antigens will cause the recipient's immune system to maintain a continuous
response against the donor organ until rejection occurs, unless the immune
response is suppressed. Following the transplantation procedure, the challenge
in patient management is to prevent acute rejection of the organ by inhibiting T
cell activation. The success of the transplant is dependent on the
immunosuppressive regimen which is initiated on the day of surgery and is
continued daily for the rest of the patient's life. Lifelong immunosuppressive
therapy usually consists of the administration of a combination of
immunosuppressants such as Sandimmune(R) or Neoral(R) (also known as cyclosporin
A), prednisone (a steroid), and Imuran(R), (an anti-metabolite, also known as
azathioprine). Chronic immunosuppressant medications have a narrow therapeutic
window; that is, the administration of dosages which are too low results in
organ rejection, while the administration of dosages which are too high can
result in unacceptable toxicity, risk of cancer and infection. Because these
medications also block the patient's T cells from recognizing foreign pathogenic
antigens, they render the patient susceptible to infections and tumors. In
addition, patient noncompliance with the prescribed immunosuppressive therapy is
a significant clinical problem due to the fact that such drugs require life-long
administration.

All patients receive chronic systemic immunosuppressants at the time of
transplantation (called "induction therapy") in order to reduce the probability
of subsequent rejection of the organ. Some patients also receive an anti-T cell
antibody such as OKT3 or ATGAM in an attempt to further decrease the probability
of rejection. The efficacy of OKT3 or ATGAM for use in induction therapy has not
been established, and neither of these drugs, nor any other anti-T cell
antibodies have been approved by the FDA for use in induction therapy.

Approximately 50% of transplant patients will experience an acute rejection
episode in the first year after transplantation. Additional intermittent
episodes of acute rejection are common, often requiring rehospitalization for a
course of more intensive immunosuppression or retransplantation. Acute rejection
episodes are treated with a short course of high dose steroids, anti-thymocyte
globulin (such as ATGAM and Thymoglobuline), or OKT3. In many cases these
treatments are successful in reversing the acute rejection response. If these
treatments are successful in reversing the acute rejection response, the
recipient resumes chronic immunosuppressive drug maintenance therapy. However,
the treatment of these rejection episodes is associated with increased
complications due to the additional immunosuppression. Patients treated with
antibody-based therapies (ATGAM, Thymoglobuline or OKT3) respond by producing
antibodies specific to the therapeutic antibody. This response can limit the
ability of the physician to use these agents more than once in a given patient.
All of the immunosuppressive drugs used to suppress the rejection response are
toxic to the recipient and carry a variety of potentially serious side effects,
including complications such as fever, shortness of breath, headaches, diarrhea,
seizures or life-threatening cardiac reactions as well as increased infection
and a higher incidence of cancer. Long-term use can cause liver and kidney
damage and bone marrow depletion which may lead to incapacitation or death.

An additional problem occurs in bone marrow transplantation. T cells from
the donor are present in the marrow to be transplanted into the recipient. These
T cells can respond to the recipient's antigens and cause Graft-versus-Host
Disease ("GvHD"), which is a rejection of the recipient by the T cells in the
donor bone marrow. The therapies for GvHD are similar to solid organ rejection.
However, a significant number of GvHD patients that do not respond to steroids
will also fail to respond to any other currently available anti-lymphocytic
agents and will die as a result of the GvHD.

BIOTRANSPLANT'S SOLUTION: SPECIFIC TRANSPLANTATION TOLERANCE

In order to address the problems of organ transplantation described above,
BioTransplant is developing a portfolio of proprietary anti-rejection
pharmaceuticals and organ transplant systems with the goal of inducing long-term
specific transplantation tolerance in humans. The Company is developing methods
of selectively

24
<PAGE> 28

inhibiting T cells responsible for organ rejection and modifying a patient's
immune system to accept foreign organs as if they were self by creating mixed
bone marrow chimerism.

The Company believes that its potential products and systems (once tested,
developed and approved) will have the following advantages over current
transplantation procedures:

- Reduce or Eliminate Chronic Systemic Immunosuppressive Therapy. As a
result of the induction of specific immune tolerance, the Company
believes the need for long-term immunosuppression will be reduced or
eliminated. Therefore, the patient will remain immunocompetent and suffer
fewer of the complications associated with lifelong immunosuppressive
therapy. It will also reduce potential noncompliance in taking chronic
medication as a contributing factor to graft loss.

- Lower the Cost of Treatment. Achieving long-term specific immune
tolerance in organ transplantation will substantially reduce the cost of
transplantation by reducing or eliminating the cost associated with
lifelong immunosuppressive therapy (greater than $7,000 per patient per
year). More significantly, hospitalizations resulting from the incidence
of rejection, infection and toxicity associated with immunosuppressants
and retransplantation will be reduced.

- Improve Quality of Life for Recipients. The elimination or reduction of
the need for lifelong immunosuppressive therapy will allow patients to
lead healthier, more productive lives with fewer of the complications
associated with current therapies.

- Efficient Use of Organ Supply. Long-term specific immune tolerance would
"blind" the recipient's immune system to the histocompatibility antigens
of transplanted tissue from other humans. Therefore, the need to find
exact or extremely similar donor tissue-type matches for the recipient
would be reduced, thus facilitating the supply of organs to patients most
needing transplants and minimizing the wait for matching organs. Many
recipients experience a rejection or failure of their organ within five
to ten years of transplantation and require another transplant. An
additional benefit will be to eliminate some of the restrictions for
donation of kidneys by family members and friends.

- Increase Supply and Quality of Organs. The ability to induce specific
immune tolerance may ultimately make possible the transplantation of
miniswine organs into humans thereby addressing the shortage of human
donor organs. The ability to raise miniswine in a controlled,
pathogen-free environment will ameliorate concerns relating to the
transfer of infectious agents as compared to allotransplantation. An
additional benefit will be that healthier recipients (because of a
decrease in time on the waiting list) will receive a healthier organ.

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<PAGE> 29

PRODUCTS UNDER DEVELOPMENT

<TABLE>
BioTransplant and its collaborators are developing proprietary
anti-rejection therapeutics and entire organ transplant systems which are
designed to induce specific immune tolerance to organ transplants in humans. The
following table summarizes the status of the products under development by the
Company and its collaborators, as well as MEDI-500, a proprietary product of
MedImmune for which the Company is entitled to receive royalties:

<CAPTION>
PRODUCT INDICATION STATUS* CORPORATE PARTNER
- ------------------ ------------------------- ------------------------- -------------------------
<S> <C> <C> <C>
BTI-322 - Treatment of acute Phase I/II (US, Eur) MedImmune
transplant rejection
- Prevention of acute Phase I/II (Eur)
transplant rejection
- Treatment of Graft vs. Phase I/II (Eur)
Host disease
- Prevention of Graft vs. Preclinical
Host disease
- Treatment of autoimmune Preclinical
diseases
MEDI-500 - Treatment of acute Phase I/II (US) Proprietary to MedImmune
transplant rejection
- Ex vivo treatment of Phase III (US)
bone marrow prior to
transplantation
AlloMune System - Transplantation of Preclinical Rights retained by
mismatched human organs BioTransplant
with reduced need for
chronic
immunosuppression
XenoMune System - Transplantation of Research/Preclinical Sandoz, Charles River
miniswine organs into Laboratories
humans

<FN>
- ---------------
* "Phase I/II (US)" means that an IND has been filed with the FDA and that the
product candidate is in clinical trials to evaluate safety and potential
efficacy. "Phase I/II (Eur)" means that the Company is providing BTI-322 for
use in physician-sponsored trials with the approval of a hospital ethics
committee to evaluate safety and potential efficacy. "Preclinical" means that
the product is being evaluated or optimized in primate models. "Research"
means that the product is being evaluated or optimized in rodent or in vitro
systems.

</TABLE>

BTI-322

BTI-322 is a novel and proprietary monoclonal antibody therapeutic
candidate being developed as an anti-rejection product and as an important
component in the Company's AlloMune and XenoMune Systems. By selectively
inhibiting T cells in an antigen specific manner, it is believed that BTI-322
leaves the remainder of the immune system competent to respond to pathogens
subsequent to BTI-322 administration. The Company believes that BTI-322 offers
unique advantages both as a treatment for acute organ rejection and, when
administered at the time of transplantation, as an agent for the prevention of
acute organ rejection.

BTI-322 is a monoclonal antibody that binds to CD2, an important
therapeutic target on the surface of T cells. The Company believes that BTI-322
interferes with signaling through CD2, thereby preventing T cell activation.
Other therapies used for the treatment of acute rejection only inhibit T cell
activation around the time of the treatment period. However, based on in vitro
experiments, the Company expects that BTI-322 will have a lasting effect even
after completion of administration and will continue to selectively suppress T
cell responsiveness to the donor antigens. If the mechanism of action is
substantiated by further data, the Company believes that BTI-322 may be
effective against T cell mediated diseases (such as psoriasis, inflammatory
bowel disease, Crohn's disease and rheumatoid arthritis). BTI-322 (then known as
LO-CD2a) was discovered in the Experimental Immunology Unit of the Catholic
University of Louvain, Belgium, by

26
<PAGE> 30

Drs. Herve Bazin and Dominique Latinne. The Company obtained exclusive rights to
develop and commercialize this antibody in early 1993.

Clinical Development. Early clinical results and research data suggest
that BTI-322 has the potential to be a safe and effective agent for the
prevention and treatment of allograft (intra-species transplants) and xenograft
(inter-species transplants) rejection and GvHD. Prior to the grant of an
exclusive license to BTI-322 to the Company in 1993, four patients had been
treated for either acute kidney rejection or GvHD under a compassionate use
protocol approved by the Catholic University of Louvain hospital ethical
committee.

In 1994, the Company conducted a physician-sponsored safety trial for the
treatment of acute rejection of renal transplants in two centers in Belgium
under a protocol approved by the hospital ethical committees. Twenty-four
patients were treated. One patient withdrew from the study. A total of 13
patients completed treatment for their first rejection episode, 12 of whom
responded to the treatment. A second group of 10 patients who had experienced
multiple rejections, or had failed to respond to conventional treatment
(including steroids and OKT3), were also treated. Seven of these patients
responded to treatment. The majority of patients received the antibody without
the steroid coverage typically used to reduce effects associated with T cell
specific antibodies, and the therapy was well tolerated. Non-life-threatening
side effects of limited duration were observed, mainly during the first of ten
daily doses administered to each patient. These side effects were less severe
than those generally observed in similar patients treated with steroid coverage
and OKT3 or ATGAM. The results of this study were submitted to the FDA as part
of an IND in early 1995. The Company and MedImmune are currently conducting a
Phase I/II trial of BTI-322 at MGH under this IND for the treatment of acute
renal rejection with steroid coverage for the first dose.

The Company is supporting a a physician-sponsored Phase I/II clinical trial
at the Catholic University of Louvain, for the use of BTI-322 as a component of
induction therapy in renal allograft transplantation. Induction therapy is a
clinical protocol used at the time of transplantation to reduce the probability
of subsequent organ rejection by the recipient. Twenty patients have been
treated, the last being entered into the trial in February 1996. The rate of
acute rejection after the administration of induction therapy with BTI-322 is
lower than that of a concurrent randomized control group of twenty patients that
were not given BTI-322 for their induction therapy. A physician-sponsored Phase
I/II clinical trial of BTI-322 for induction therapy for liver allograft
transplantation has been approved by the Catholic University of Louvain hospital
ethical committee and will commence in 1996.

Under a compassionate use protocol, BTI-322 has also been used to treat
steroid-resistant GvHD. Six patients have been treated with BTI-322 and five
patients demonstrated reversal of certain of their symptoms during the course of
treatment with BTI-322. Two patients have shown no relapse of symptoms in the
absence of chronic steroid treatment for six and seven months, respectively,
after the antibody therapy. The other four patients suffered relapse of their
GvHD after completion of BTI-322 administration and subsequently died due to the
consequences of their disease. The Company believes that BTI-322 administered at
the onset of GvHD symptoms has a greater probability of long-term clinical
success. A physician-sponsored Phase I/II trial for the early treatment of
steroid-resistant GvHD recently commenced in Europe and MedImmune plans to begin
a Phase I/II clinical trial in the United States in 1996.

To date, the Company has used a rodent form of BTI-322 in its early stage
clinical trials. Although the Company believes the rodent antibody is acceptable
in the prevention and treatment of allograft organ rejection, it may not be
appropriate for diseases which require multiple courses of the drug, such as T
cell mediated diseases (including psoriasis, inflammatory bowel disease, Crohn's
disease and rheumatoid arthritis). Therefore, the Company has developed a
humanized form of BTI-322 by incorporating the specificity of BTI-322 on the
backbone of a human antibody molecule. The Company expects that the humanized
version of BTI-322 will be available for use in clinical testing in 1997. In
experiments done to date by the Company, the humanized form of the antibody has
similar functional effects to those of the rodent antibody.

MEDI-500

In October 1995, the Company and MedImmune formed a collaboration to
develop and commercialize products to treat and prevent organ transplant
rejection. The collaboration is based upon the development of

27
<PAGE> 31

products derived from BTI-322 and MEDI-500. Under the terms of the collaboration
agreement between MedImmune and the Company, MedImmune is required to pay
royalties to the Company on sales of BTI-322 and MEDI-500. MEDI-500 is a novel
and proprietary monoclonal antibody therapeutic candidate being developed by
MedImmune as a treatment for acute organ rejection and for the ex vivo depletion
of mature T cells in bone marrow prior to transplantation. MEDI-500 binds to the
antigen-specific T cell receptor on the surface of most T cells.

Clinical Development. A Phase II trial in 76 kidney transplant patients
completed in 1994 compared MEDI-500 with OKT3, the only commercially available
monoclonal antibody for treatment of rejection. Results of the trial, summarized
below, suggest that MEDI-500 has an efficacy profile similar to that of OKT3,
but with significantly reduced side effects.

- Long-term graft survival of 87% for the patients receiving MEDI-500 and
79% for those receiving OKT3 (p = 0.55);

- Within 48 hours of initiation of treatment, kidney function was
significantly improved in patients receiving MEDI-500 compared with those
receiving OKT3 (p<0.001);

- Cytokine levels were significantly less elevated with MEDI-500 compared
with OKT3 (p<0.005) (cytokines are thought to cause many of the side
effects associated with some therapies for rejection);

- Side effects such as fever, gastrointestinal, neurological and
respiratory problems were observed significantly less frequently with
MEDI-500 than with OKT3 (p<0.000001 to 0.039);

- Serious opportunistic infections, such as CMV pneumonia and Pneumocystis
carinii, occurred only in those receiving OKT3.

MedImmune is currently collecting additional clinical data to assess the
safety and efficacy of MEDI-500 in a Phase I/II bioequivalence trial for
treatment of organ graft rejection in kidney transplant patients.

In addition, a Phase III trial sponsored by the National Heart, Lung and
Blood Institute is currently evaluating MEDI-500 as an ex vivo agent to deplete
donor bone marrow of T cells prior to transplantation as a method of preventing
GvHD in allogeneic bone marrow transplant patients. MedImmune is also developing
a humanized form of MEDI-500 as a second generation product.

28
<PAGE> 32

The AlloMune System

The Company's AlloMune System is designed to allow the transplantation of
mismatched organs from human donors, so as to reduce or eliminate the need for
lifelong systemic immunosuppressive therapy. The proposed AlloMune System
incorporates several components into a proprietary and integrated system to
create mixed bone marrow chimerism leading to specific immune tolerance.

<TABLE>
The various elements of the AlloMune System under development are described
in the following table:
- --------------------------------------------------------------------------------
<CAPTION>
GOAL COMPONENT
<S> <C>
- ----------------------------------------------------------------------------------------------------
Reduce donor T cell reactivity to alloantigen Anti-T cell antibody (BTI-322) plus
short course (28 days post-transplant)
immunosuppressive therapy
- ----------------------------------------------------------------------------------------------------
Create "space" in recipient marrow to allow Irradiation
seeding of allogeneic bone marrow
- ----------------------------------------------------------------------------------------------------
Establish alloantigen specific tolerance by Preparation of bone marrow from allograft donor
bone marrow transplantation
- ----------------------------------------------------------------------------------------------------
Detection of bone marrow chimerism Diagnostic to monitor status of bone marrow
chimerism
- ----------------------------------------------------------------------------------------------------
Detection of tolerance Diagnostic to monitor status of tolerance
</TABLE>
- --------------------------------------------------------------------------------

The AlloMune System is being designed to achieve specific immune tolerance
to the mismatched organ through the creation of mixed bone marrow chimerism.
Chimeric bone marrow contains the genetic characteristics of both the donor and
the recipient. The creation of the mixed chimeric state will cause the newly
differentiated T cells to become specifically tolerant to the donor antigens and
regard them as self. The advantage of the induction of donor specific immune
tolerance is that the recipient will retain its ability to respond to the
antigens of foreign pathogens without responding to the donor antigens on the
organ transplant. Specific immune tolerance will reduce or eliminate the need
for lifelong immunosuppressive therapy. The Company has exclusive rights to
patent applications directed towards producing chimeric bone marrow.

Prior to transplantation of the donor bone marrow, the recipient is given
injections of an anti-T cell antibody in order to block the recipient's immune
response to the new foreign antigens from the donor. Concurrent with the
administration of the anti-T cell antibody, the recipient receives doses of
radiation to make space in the recipient's bone marrow and allow the
transplanted bone marrow to "seed" the newly created space. Bone marrow from the
donor is then injected into the recipient, the organ is transplanted and a short
course (expected to last approximately 28 days) of immunosuppressive therapy is
administered.

Preclinical Development. The Company is currently conducting preclinical
studies in which kidneys of intentionally fully mismatched donor monkeys are
being transplanted into recipient monkeys which have undergone the bone marrow
chimerization procedure. The first recipient has achieved mixed bone marrow
chimerism with normal kidney function for over 27 months, without chronic
systemic immunosuppressive therapy. In addition, the recipient has demonstrated
specific transplantation tolerance to a skin graft from the donor monkey, in the
absence of immunosuppressive drugs. However, the recipient monkey has rejected
skin grafts transplanted from another monkey (third party donor), indicating
that the monkey is specifically tolerant to the antigens of the donor and thus
has a normal ability to respond to foreign antigens. To date, the creation of
mixed bone marrow chimerism and normal kidney function has been replicated in
five out of five additional monkeys for periods from 6 to 26 months. The Company
has analyzed the ability of T cells from the chimeric monkeys to respond to
cells from the donor and other monkeys. The Company has

29
<PAGE> 33

demonstrated that the T cells from the chimeric monkeys do not become activated
by donor cells in culture but will respond to cells from other monkeys (third
party donors).

The Company is continuing to evaluate modifications to the conditioning
regimen in rodent and primate models. Recent evidence from the Company's rodent
models has demonstrated the ability to eliminate or greatly reduce the level of
irradiation needed to establish a state of mixed bone marrow chimerism, and the
Company intends to evaluate this approach in primate models.

In order to demonstrate the feasibility of the induction of long-term
tolerance to allografts, the Company intends to optimize the AlloMune System
through additional preclinical trials in primates prior to filing an IND with
the FDA for clinical trials. The Company expects that its academic collaborators
may initiate a physician initiated IND under the approval of a hospital
institutional review board and begin a pilot proof of principle evaluation of
the AlloMune System in humans in the next twelve months.

The XenoMune System

Xenotransplantation is designed to address the issue of limited human organ
availability. With the XenoMune System, BioTransplant hopes to build upon the
Company's proprietary knowledge and technology developed with the AlloMune
System to achieve transplantation of organs from animals into humans, using
organs derived from miniswine. Many of the components of the proposed AlloMune
System are also part of the proposed XenoMune System. However, a unique feature
of the XenoMune System will be procedures to eliminate the problem of hyperacute
rejection.

The proposed XenoMune System is expected to include miniswine kidneys,
hearts, lungs and other organs for transplantation. Pursuant to a collaboration
agreement with CRL, the Company has obtained exclusive rights to miniswine which
are being specifically developed by CRL for use in xenotransplantation. These
miniswine are an appropriate donor choice for xenotransplantation because of
their size, physiology, inbreeding at swine histocompatibility genes, long-term
medical history and breeding capacity. The Company uses these miniswine as a
potential donor of xenogeneic organs because the animals suffer less from the
negative characteristics associated with other species, such as non-human
primates, where there is increased risk of the transmission of viruses to the
recipient and the donor's status as an endangered species may raise biological
and ethical concerns.

Untreated swine-to-primate organ transplants normally result in hyperacute
organ rejection within hours of the transplant. One of the significant
challenges in xenotransplantation is overcoming hyperacute rejection, which is
mediated by pre-existing antibodies in the recipient which react with the donor
tissue ("natural antibodies"). To avoid the hyperacute rejection of a miniswine
organ, BioTransplant is using a proprietary absorption technique, licensed from
a third party, to absorb natural antibodies from the recipient's blood prior to
the transplant of miniswine organs into monkeys.

To prevent acute rejection of the transplanted miniswine organ, the Company
is working to achieve mixed bone marrow chimerism between cross-species donors
and recipients. As an alternative method of inducing specific tolerance, the
Company is actively pursuing gene transduction.

Research and Preclinical Development. To avoid hyperacute rejection of
miniswine kidneys by baboons and cynomolgus monkeys the Company has used its
absorption technique. Up to 15 day survival of the miniswine kidneys has been
achieved without pathological signs of hyperacute rejection. Based on
preliminary data, the Company believes that this technique will also remove
natural antibodies from human blood.

The Company has achieved mixed bone marrow chimerism and long-term
xenograft tolerance between rat and mouse models. The Company has also
demonstrated chimerism and long-term acceptance of miniswine skin grafts on
immunocompetent rodents. In addition, the Company has established mixed bone
marrow chimerism in the miniswine-to-primate model. The Company has developed a
proprietary method to promote the engraftment of swine bone marrow in primates
and has thereby achieved miniswine-to-primate bone marrow chimerism engraftment
for 300 days. The use of this technique in a protocol similar to the AlloMune
System has produced long-term chimerism in three out of three primates and has
resulted in a diminished miniswine-specific T cell response from the chimeric
monkeys. These results demonstrate the generation of specific immune tolerance
to miniswine antigens.

30
<PAGE> 34

A gene transduction approach to xenotransplantation is also being
developed. The Company has demonstrated that gene transfer of a single
histocompatibility complex gene from one inbred line of miniswine to another by
retroviral gene transfer into the recipient's own bone marrow cells can induce
specific immune tolerance to a donor kidney without chronic immunosuppressive
therapy. Based on this observation, the Company has performed miniswine to
primate experiments using similar gene transduction techniques. In these
experiments multilineage expression of the miniswine MHC gene was demonstrated
in the initial primate recipient for eight months. The Company has entered into
a strategic alliance with Sandoz for the development of xenotransplantation
products utilizing gene transduction and with CRL for the supply of miniswine.
See "Collaborations and Agreements -- Sandoz" and "-- Charles River
Laboratories."

COLLABORATIONS AND AGREEMENTS

As part of its strategy, the Company has established alliances with
pharmaceutical and other biotechnology companies, academic institutions and
scientists and government laboratories. Currently, its principal strategic
alliances are the following:

Dr. David H. Sachs/The Massachusetts General Hospital

In January 1991, the Company entered into a ten-year agreement with MGH
under which BioTransplant funds a portion of the research of Dr. Sachs and other
MGH personnel, including Drs. A. Benedict Cosimi, Megan Sykes, Christian LeGuern
and Jay Fishman in the area of transplantation of organs and tissues and, in
particular, xenograft transplantation involving primates, mice and miniswine. In
exchange for such research funding, MGH has granted the Company exclusive
worldwide rights to technology and inventions developed in the course of the
Company funded research, subject to a royalty to be paid to MGH and subject to
the usual retention rights of the United States Government. BioTransplant also
has a right of first refusal in connection with any additional research
proposals in the field of tissue and organ transplantation to be submitted by
Dr. Sachs and his colleagues (who are funded by BioTransplant) to other
commercial sponsors. See "-- Scientific Advisory Board."

Sandoz

In April 1993, the Company entered into a five-year collaboration agreement
with Sandoz, the world's leading supplier of transplantation therapeutics, which
was amended and restated in September 1995 (the "Sandoz Agreement"), to develop
and commercialize xenotransplantation products utilizing gene transduction.
Pursuant to the Sandoz Agreement, the Company will receive research funding of
$20.0 million, of which $10.0 million had been received as of December 31, 1995,
and license fees of $10.0 million, of which $5.0 million had been received as of
December 31, 1995, in connection with the research by the Company of certain
xenotransplantation products. In addition, in 1992 Sandoz purchased $5.0 million
of the Company's Series B Convertible Preferred Stock ("Series B Stock"), which
will convert into 532,125 shares of Common Stock upon consummation of this
Offering. Pursuant to the terms of the Sandoz Agreement, Sandoz is obliged to
fund the development costs associated with certain xenotransplantation products
developed by the Company subject to reimbursement of a portion thereof by the
Company, if the Company elects to co-promote such products. The Company has the
right to co-promote such products solely in North America and to receive an
agreed upon share of profits, if any, derived from North American sales. The
Company is entitled to receive royalties on the sale of such licensed products
by Sandoz outside of North America and, to the extent that the Company elects
not to co-promote in North America, on sales in North America as well. Royalties
and profits from any licensed products developed will depend, in part, upon the
efforts of Sandoz to perform clinical testing, obtain regulatory approvals and
market and sell such products both within and outside of the United States. The
amount and timing of the resources devoted to these activities by Sandoz will be
controlled by Sandoz. Under certain circumstances, Sandoz may develop or market
products competitive with the Company's xenotransplantation products utilizing
the gene transduction approach. Pursuant to the Sandoz Agreement, Sandoz has an
option under certain circumstances to obtain an exclusive license to inventions
developed in the course of BioTransplant research funded by Sandoz for use
outside the field of xenotransplantation.

MedImmune

31
<PAGE> 35

upon the development of products derived from BTI-322, MEDI-500 and future
generations of products derived from these two molecules. Pursuant to the
collaboration, the Company granted MedImmune an exclusive worldwide license to
develop and commercialize BTI-322 and any products based on BTI-322, other than
the use of BTI-322 in kits or systems for xenotransplantation or
allotransplantation. MedImmune paid BioTransplant a $2.0 million license fee at
the time of formation of the collaboration, and agreed to fund and assume
responsibility for clinical testing and commercialization of any resulting
products. MedImmune has agreed to provide research support and make milestone
payments which could total up to an additional $14.0 million, up to $12.0
million of which is repayable from royalties on BTI-322 or MEDI-500, as well as
to pay royalties on any sales of BTI-322, MEDI-500 and future generations of
products, if any. MedImmune is entitled to a credit against royalty payments for
certain milestone payments that it makes. Royalties will depend, in part, upon
the efforts of MedImmune to perform clinical testing, obtain regulatory
approvals and market and sell BTI-322 and MEDI-500. The amount and timing of the
resources devoted to these activities by MedImmune will be controlled by
MedImmune.

Charles River Laboratories

In March 1991, BioTransplant entered into an exclusive research and supply
agreement with CRL, a wholly-owned subsidiary of Bausch & Lomb, Inc., which
assigned its rights in the agreement to an affiliate, Wilmington Partners L.P.,
in 1993. CRL is a leading company in providing genetically-defined and
"pathogen-free" animals to the biomedical community. Pursuant to the agreement,
CRL is the exclusive supplier of miniswine and/or miniswine organs to be
delivered by the Company as part of the XenoMune System. CRL contributes
miniswine from its proprietary colony at no cost to the Company during the
research and development stage. During this stage, CRL has and will continue to
assume all of the costs of maintaining, expanding and improving the miniswine
herd, including extensive research and development costs associated with
achieving "specific pathogen-free" status for the herd in support of the
delivery of transplantable organs. Pursuant to the agreement, the Company will
make payments to CRL based on commercial sales of miniswine organs. CRL is the
exclusive owner of the miniswine herd, and has agreed to assign all of its
proprietary rights to the Company in exchange for an exclusive organ supply
relationship.

Stem Cell Sciences

The Company has entered into a strategic alliance with Stem Cell Sciences
Pty Ltd. ("Stem Cell Sciences") for the purpose of genetically engineering
miniswine. BioTransplant has been granted worldwide, exclusive rights, subject
to the payment of a royalty, to technology, products and processes for the
derivation and manipulation of porcine embryonic stem cells developed during the
research term and useful in xenotransplantation in humans. In addition, Stem
Cell Sciences will be creating relevant transgenic miniswine for the Company.
BioTransplant has made equity investments in Stem Cell Sciences, which represent
30% of the outstanding shares of that company. At least half of the
consideration received by Stem Cell Sciences from the Company's equity
investment will be used to fund research in the development of germ line
competent porcine embryonic stem cells and, in particular, the development of
technology, products and processes useful for xenotransplantation in humans.
BioTransplant has an option to make an additional investment in Stem Cell
Sciences in 1996 to maintain its 30% ownership position and support additional
research. If the Company does not make such further investment then its rights
become nonexclusive.

Other Arrangements

Catholic University of Louvain (Belgium). BioTransplant is funding
research at the Experimental Immunology Unit of the Catholic University of
Louvain, Belgium (Drs. Herve Bazin and Dominique Latinne), for the development
of monoclonal antibodies. The Company has exclusive worldwide commercialization
rights to discoveries, including BTI-322, made in laboratories under the
Company's sponsorship, subject to a royalty.

Alberta Research Council (Canada). BioTransplant has entered into a
worldwide license (subject to a royalty) with the Alberta Research Council for
specified patents and patent applications covering technology potentially useful
for removal of natural antibodies against xenografts. The license is exclusive,
except for one patent application directed to the removal of natural antibodies
against xenografts which is co-owned by one

32
<PAGE> 36

of the inventors. The Alberta Research Council has also granted to BioTransplant
a non-exclusive, worldwide license to use any of its information, data, formulas
or processing information which pertain to the manufacture, development or use
of any products resulting from the licensed patents in the field of
xenotransplantation.

MANUFACTURING AND SUPPLY

The Company currently has no manufacturing facilities or staff for clinical
or commercial production of any compounds or systems under consideration as
product candidates. The Company plans to rely on third parties initially to
manufacture certain of its product candidates for research, preclinical testing,
clinical trials and commercialization, if any, with a long-term objective to
develop internal manufacturing capability where appropriate. There is no
assurance that the Company will be able to develop or contract for manufacturing
capabilities of any of its products or systems on acceptable terms.

Materials for preclinical studies and ongoing and planned clinical trials
with the rodent BTI-322 were manufactured by a contractor in Europe. Supplies of
humanized BTI-322 required for preclinical studies, clinical trials and
commercial products will be manufactured by MedImmune using its own
manufacturing facilities and the Company expects supplies to be available for
clinical testing in 1997.

The manufacture of the Company's AlloMune and XenoMune Systems may require
the production of cytokines, monoclonal antibodies and gene transfer vectors.
The Company has the capacity to produce these materials in sufficient quantity
and of sufficient quality to support preclinical studies. Materials of the
quality suitable for clinical trials will have to be produced by third party
manufacturers. In addition, the Company expects that it will need to enter into
an agreement with a third party to provide a system for handling, transferring
and purifying donor bone marrow. CRL has agreed to supply miniswine and
miniswine organs exclusively for BioTransplant in connection with
xenotransplantation.

MARKETING

MedImmune has exclusive worldwide marketing rights to BTI-322, as well as
to its proprietary product, MEDI-500. MedImmune has disclosed that it is
developing a sales and marketing organization and has recently recruited four
regional business directors, each with 15 or more years of sales, marketing or
managed care experience, to manage four regional business units established by
MedImnune. MedImmune has disclosed that its sales and marketing organization
will serve both the transplantation and infectious disease markets, and that
MedImmune currently intends to have approximately 70 people in its sales and
marketing organization by the end of 1996.

BioTransplant currently holds all marketing rights to the AlloMune System,
although the Company may seek a corporate partner to support the development and
commercialization of the AlloMune System. In the United States, the Company
currently intends to market the AlloMune System and related products and systems
to organ transplant centers (estimated at approximately 275), which the Company
believes will allow significant market coverage with relatively few sales
personnel. To implement this marketing strategy, the Company intends to hire a
limited number of sales and marketing personnel. In foreign markets, the Company
expects to use local pharmaceutical companies to market its products and systems
due to the complexities of foreign regulations and medical practices.

Pursuant to the collaboration agreement between BioTransplant and Sandoz,
Sandoz has been granted exclusive worldwide rights to market xenotransplantation
products based on gene transduction, subject to the Company's right to
co-promote in North America. The Company currently intends to exercise this
co-promotion right at such time as Sandoz has submitted an application for
regulatory approval of the XenoMune System to the FDA. To the extent the Company
develops a xenotransplantation product that does not utilize gene transduction,
the Company may seek to collaborate with a third party or may seek to market
such product on its own.

Due to the early stage of the Company's development efforts, the Company
has no marketing or sales personnel. There can be no assurance that the Company
will be able to successfully develop an effective marketing and sales
organization or enter into acceptable collaborative agreements with third
parties for the marketing of those products for which the Company has retained
marketing rights.

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<PAGE> 37

PATENTS AND PROPRIETARY RIGHTS

As of March 1, 1996, there were 16 patent applications pending in the
United States Patent and Trademark Office relating to the products under
development by BioTransplant, including 11 patents licensed exclusively to the
Company by MGH. The Company has also filed corresponding patent applications in
selected foreign countries for certain of these U.S. patent applications. In
addition, the Company has licensed from third parties certain rights under
various patents and patent applications. BioTransplant believes that its
proprietary rights in its technology are important to its ability to develop and
commercialize products and to profit from its research.

The Company's strategy is to pursue aggressively a strong patent portfolio.
There can be no assurance that patent applications owned by or licensed to the
Company will issue or that, if issued, they will provide the Company with
significant protection against competitors. There can be no assurance that
BioTransplant will not need to acquire licenses under patents belonging to
others for technology potentially useful or necessary to BioTransplant, and the
cost and availability of such licenses are currently unknown. Moreover, there
can be no assurance that any patents issued to or licensed by the Company will
not be challenged, invalidated, infringed upon or designed around by others or
that others will not hold patent rights that prevent the Company from
commercializing the patented invention. See "Risk Factors -- Uncertainties
Regarding Patents and Proprietary Rights; Potential Third Party Claims."

The Company is aware of granted patents which claim monoclonal antibodies
which bind to T cells and the therapeutic use thereof. These patents are owned
by Johnson & Johnson, which manufactures and sells OKT3, a T cell binding
monoclonal antibody with which the Company expects BTI-322 to compete. Although
BTI-322 is also a monoclonal antibody which binds to T cells, the Company
believes that BTI-322 is distinguishable from the monoclonal antibodies claimed
in such patents, and does not infringe such patents either literally or under
the doctrine of equivalents. Notwithstanding such belief, there is a risk that
the patent owner could initiate patent infringement litigation to prevent the
manufacture, sale and use of BTI-322. If the patentee should prevail in such
litigation, the Company could be required to pay damages and reimburse the
patentee for the cost of such litigation. In addition, if the patentee was not
prepared to grant a license to the Company, an injunction could issue which
would prevent the manufacture, sale and use of BTI-322. In addition, MEDI-500 is
a monoclonal antibody which binds to T cells, and may be subject to similar
risks as BTI-322. If the manufacture, sale or use of MEDI-500 infringes these
patents, the royalties, if any, relating to MEDI-500 may be reduced or
eliminated.

The Company has reviewed issued patents which include claims relating to
the process for producing humanized rodent monoclonal antibodies. These patents
are held by biotechnology companies and an academic institution. While BTI-322
is a rodent antibody, the Company and MedImmune intend to commercialize a
humanized version of BTI-322. The Company intends to seek licenses from these
entities under these patents. However, there can be no assurance that the
Company will be able to obtain such licenses on acceptable terms, if at all.
Failure to obtain such licenses could require the Company to suspend or modify
its humanized version of BTI-322 and would limit the use of BTI-322 to
indications not requiring multiple administrations.

Pursuant to a collaboration with CRL, the Company has obtained exclusive
rights to a herd of miniswine being developed by CRL for xenotransplantation
purposes. Although there are no United States or foreign patents or patent
applications relating to CRL's miniswine, the Company considers these animals to
be a valuable part of its XenoMune System and plans to work with CRL to apply
for patent protection for specific swine strains developed by genetic
manipulation. See "Collaborations and Agreements -- Charles River Laboratories."

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<PAGE> 38

Some of the Company's know-how and technology is not patentable. To protect
its rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements with BioTransplant. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.

COMPETITION

The products being developed by the Company compete with existing and new
products being created by pharmaceutical, biopharmaceutical, biotechnology
companies and universities. Many of these entities have significantly greater
research and development capabilities, as well as substantial marketing,
manufacturing, financial and managerial resources and represent significant
competition for the Company. There can be no assurance that developments by
others will not render the Company's products or technologies obsolete or
noncompetitive or that the Company will be able to keep pace with technological
developments. Many of the competitors have developed or are in the process of
developing technologies that are, or in the future may be, the basis for
competitive products. Some of these products may have an entirely different
approach than products being developed by the Company and may be more effective
and less costly. In addition, many of these competitors have significantly
greater experience than the Company in undertaking preclinical testing and human
clinical trials of products and obtaining FDA and other regulatory approvals of
such products. Accordingly, the Company's competitors may succeed in
commercializing products more rapidly than the Company. In addition, colleges,
universities, government agencies and other public and private research
organizations conduct research and may market commercial products on their own
or through joint ventures. These institutions are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed. These institutions also compete with
the Company in recruiting and retaining highly qualified scientific personnel.

In particular, there are several commercially available anti-rejection
drugs that will compete with BTI-322 and MEDI-500 products, including OKT3,
ATGAM and Thymoglobuline. To the extent that these therapeutics address the
problems associated with transplantation on which the Company has focused, they
may represent significant competition.

In addition, the Company is aware of other biotechnology companies
attempting xenotransplants, including Imutran Ltd., Nextran Inc., a wholly-owned
subsidiary of Baxter HealthCare, Alexion Pharmaceuticals, Inc. and SangStat.
Some of the Company's competitors are using organs derived from genetically
modified transgenic donors which are designed to eliminate hyperacute rejection
in humans. Despite the Company's progress in creating specific immune tolerance
for transplantation, there can be no assurance that others will not be
successful in inducing specific immune tolerance. In addition, the development
of superior immunosuppressant therapeutics, mechanical organ systems and other
improvements in therapies for end stage organ disease could adversely effect the
size of the Company's available markets. See "Risk Factors -- Intense
Competition."

GOVERNMENT REGULATION

The development and commercialization of the Company's products will be
subject to regulation in the United States by the FDA and by comparable
regulatory authorities in foreign countries.

Based upon initial discussions with the FDA, the Company believes that
BTI-322 will be classified as a "biologic" and regulated under the Public Health
Service Act and the Federal Food, Drug and Cosmetic Act. The Company expects the
AlloMune and XenoMune Systems to be classified as a Combination Product, with
the Center for Biologics Evaluation and Research ("CBER") assuming principal
responsibilities for the review, assisted by the Center for Devices. Development
of a therapeutic product for human use under either act is a multi-step process.
First, in vitro or animal testing must establish the potential safety and
efficacy of the experimental product in a given disease. Once the product has
been found to be reasonably safe and

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<PAGE> 39

potentially efficacious in animals, suggesting that human testing would be
appropriate, an IND must be submitted to the FDA as a precondition to human
clinical trials.

Clinical trials typically involve three phases, although those phases can
overlap. Phase I is conducted to evaluate the safety of the experimental product
in humans, and if possible, to gain early indications of efficacy. Phase I
studies also evaluate various routes, dosages and schedules of product
administration. If acceptable product safety is demonstrated, Phase II studies
are initiated. Phase II trials are designed to evaluate the effectiveness of the
product in the treatment of a given disease and typically involve a relatively
small number of patients. The optimal routes, dosages and schedules of
administration are confirmed in these studies. If Phase II trials indicate
safety and efficacy, Phase III studies will be commenced. Phase III studies
further test for product safety and efficacy in an expanded patient population
in order to evaluate the overall risk/benefit relationship of the product and to
provide an adequate basis for physician labeling. These studies also may compare
the safety and efficacy of the product with currently available products. It is
not possible to estimate the time in which Phase I, II and III studies will be
completed with respect to a given product, although the time period may last as
long as several years.

Following completion of these clinical investigations, the preclinical and
clinical evidence that has been accumulated, together with manufacturing data,
is submitted to the FDA as part of a product license application ("PLA") for a
biologic or as part of a new drug application ("NDA") for a non-biologic drug in
the United States. Approval of the PLA or NDA is necessary before a company may
market the product. The approval process can be very lengthy and depends upon
the time it takes to review the submitted data, the FDA's comments on the
application and the time required for the Company to provide satisfactory
answers or additional clinical data when requested. The FDA has ongoing adverse
experience reporting requirements once the PLA is approved.

The results of all preclinical, development/manufacturing and Phase I, II
and III clinical study data generated in Europe or the United States may also be
submitted to the European Medicines Evaluation Agency ("EMEA"), the counterpart
of the FDA, for approval as a Marketing Approval Application ("MAA"), which is
the equivalent of a PLA. The application procedure is known as the "Centralized"
procedure. The MAA is assigned to a "rapporteur", who coordinates the assessment
of the application by a team of "experts" in the preclinical, product
manufacturing and clinical areas. An overview of the results of the assessment
are then presented to the Committee on Proprietary Medicinal Products ("CPMP").
The CPMP, which is comprised of two members from each Member State of the
European Union, evaluates both the MAA and the rapporteur's recommendations and
forms an opinion on the approval or rejection of the MAA. This opinion is then
referred to the European Commission, and the European Council if appropriate,
for a final decision. Approval of the MAA permits product marketing within all
countries of the European Union. This MAA procedure takes a minimum of 300 days,
excluding the time taken by the applicant to respond to questions raised by the
CPMP.

The manufacture of xenograft products for human transplantation can be
expected to present novel questions concerning both the safety of the products
produced thereby and compliance with current good manufacturing practices in the
production of biologics. In addition to the PLA in the United States, a company
may also be required to file an establishment license application ("ELA") prior
to marketing a biological product. The ELA will not be approved unless
manufacturing procedures and facilities comply with strict FDA requirements
concerning good manufacturing practices as well as any special requirements
imposed as a part of the PLA approval. A portion of the Phase III clinical
trials of a biological product must use material produced by such procedures and
in such facilities. Continued compliance with current good manufacturing
practice is required to be eligible to continue to market the products once they
are approved.

The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases, those where fewer than 200,000 persons in the United States at the
time of application for orphan drug designation would be likely to receive the
treatment. BioTransplant intends to pursue this designation with respect to any
of its products intended for patient populations in the United States of less
than 200,000.

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<PAGE> 40

A product that receives orphan drug designation by the FDA and is the first
product to receive FDA marketing approval for its indication is entitled to a
seven-year exclusive marketing period in the United States for that indication.
A product that is considered by the FDA to be different from a particular orphan
drug or is approved for different indications is not barred from sale in the
United States during the seven-year exclusive marketing period. In the European
Union, although there are some minor orphan drug provisions in some countries,
there is, as yet, no equivalent overall process to that followed in the United
States.

REIMBURSEMENT

Major health insurance programs in the United States, including Blue Cross
and Blue Shield and other managed care plans which cover more than 125 million
Americans, pay for most non-kidney transplantation costs for their members.
Kidney transplants (and dialysis) are funded by Medicare, a federally supported
program which pays for over 65% of the costs associated with end-stage renal
disease. The Company expects that private health insurance and the Medicare
program will continue to reimburse transplant expenses at current levels in the
majority of cases. The Company plans to design its clinical trials to
demonstrate lower overall treatment costs for end-stage organ disease compared
to alternative therapies. Since the Company's organ transplantation systems are
designed to allow rescue from life-threatening disease for which there are no
alternative treatments, the Company believes that its products will receive
reimbursement commensurate with current practices. However, pending or future
health care reform proposals could result in significant changes in the United
States reimbursement climate.

FACILITIES

Since October 1994, the Company has occupied a 27,000 square foot facility
containing office and laboratory space located in the Charlestown Navy Yard in
Boston, Massachusetts, pursuant to a 10-year lease which expires in 2004. The
Company has the option to extend the lease for an additional five-year term. The
Company believes that these leased facilities are adequate to meet the Company's
purposes for at least the next three years.

EMPLOYEES

As of March 1, 1996, the Company had 47 full-time employees. No Company
employees are represented by a labor union or covered by a collective bargaining
agreement. The Company believes that its employee relations are generally good.

SCIENTIFIC ADVISORY BOARD

The Company's Scientific Advisory Board is a multi-disciplinary and
multi-national assemblage of scientists and physicians in the fields of
molecular biology, immunology, transplantation biology and surgery. The
Scientific Advisory Board meets regularly to assess the scientific and medical
direction of the Company, to review development progress and to assess new
technologies relevant to the Company's development efforts.

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

David H. Sachs, M.D. is Chairman of the Company's Scientific Advisory
Board. Dr. Sachs is the Director of the Transplantation Biology Research Center
("TBRC") at MGH and the Paul S. Russell/Warner-Lambert Professor of Surgery and
Immunology at the Harvard Medical School. Prior to joining the TBRC, Dr. Sachs
was Chief, Immunology Branch and Chief, Transplantation Biology Section at the
National Cancer Institute in Bethesda, Maryland. Dr. Sachs has authored or
co-authored over 335 scientific publications in the field of transplantation
biology and immunology. He serves as editor of Xenotransplantation and is on the
editorial boards of several other journals including Transplantation, Bone
Marrow Transplantation, Clinical Transplantation, Immunological Reviews and The
Journal of Experimental Medicine. Dr. Sachs has received several awards and
honors including a Fulbright Fellowship, a Public Health Service Commendation
Medal and a Public Health Service Meritorious Service Award. He has been honored
as a Councillor of the Transplantation Society from 1988 through 1994. Dr. Sachs
received his A.B. from Harvard College, a D.E.S. (M.S. equivalent) in organic
chemistry from University of Paris (France) and his M.D. from Harvard Medical
School.

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<PAGE> 41

Hugh Auchincloss, Jr., M.D. is Chief, Pancreas Transplantation Unit, MGH
and Associate Professor of Surgery, Harvard Medical School. His main research
interests are in the control of xenogeneic rejection, the mechanisms of
tolerance to allografts and the in vivo use of monoclonal antibodies for
treatment of allograft rejection. Dr. Auchincloss received his B.A. and M.A.
(Economics) from Yale University and his M.D. from Harvard Medical School.

Melvin Balk, D.V.M., M.S. is Senior Vice President and Scientific Director,
CRL, Wilmington, Massachusetts. His main research interests are rodent disease
management, biosecurity, gnotobiology and barrier room operations. Dr. Balk
received his B.A. in Biology from Carthage College, his M.S. in Laboratory
Animal Medicine from Pennsylvania State University and his D.V.M. from the
University of Illinois.

J. Richard Batchelor, M.D. was, until 1995, Professor of Immunology,
Department Head and Director of Service for Immunology, Department of
Immunology, Royal Postgraduate Medical School, Hammersmith Hospital, London,
England. Dr. Batchelor is now Emeritus Professor in the Department of
Immunology. His main research interests are in the fields of transplantation
immunology, immunogenetics of the Human Leukocyte Antigen ("HLA") region genes,
and autoimmune diseases associated with particular HLA polymorphisms. He
received his B.A. from Emmanuel College, Cambridge, England and his M.D. from
University of Cambridge (England).

Barbara E. Bierer, M.D. is Director of Pediatric Bone Marrow
Transplantation at the Dana-Farber Cancer Institute and Chief of Bone Marrow
Transplantation at the Children's Hospital, and an Associate Professor of
Medicine, Harvard Medical School. Her scientific laboratory interests involve T
lymphocyte signal transduction pathways, mechanisms of immunosuppression, and
transplantation biology. Dr. Bierer received her M.D. from Harvard Medical
School.

Robert B. Colvin, M.D. is Chief, Department of Pathology, MGH and Benjamin
Castleman Professor of Pathology, Harvard Medical School. Dr. Colvin's major
research interests are in the study of immunopathologic mechanisms in
transplantation and renal disease and fibronectin and clotting factors in
inflammation and wound healing. He received his B.S. from the Massachusetts
Institute of Technology and his M.D. from Harvard Medical School.

A. Benedict Cosimi, M.D. is Chief of the Transplantation Unit, MGH and
Claude E. Welch Professor of Surgery, Harvard Medical School. Dr. Cosimi's main
research interests include the evaluation of new approaches to immunosuppression
and the monitoring of immune responses in immunosuppressed allograft recipients.
He received his B.S. from Regis College and his M.D. from the University of
Colorado School of Medicine.

Laurie Glimcher, M.D. is Irene Heinz Given Professor of Immunology,
Department of Cancer Biology, Harvard School of Public Health and a Professor of
Medicine at Harvard Medical School. Dr. Glimcher's main research interests are
the study of the cellular and molecular biology of the immune system. She
received her B.A. in biology from Radcliffe College and her M.D. from Harvard
Medical School.

Christian Le Guern, Ph.D. is an Associate Professor of Surgery
(Immunology), Harvard Medical School and Associate in Immunology, TBRC, MGH. His
major research interests include the study of the molecular approaches to
transplantation tolerance and the molecular analysis of genes and products of
the major histocompatibility complex. He received his B.A. and M.S. degrees in
Immunology, Virology and Biochemistry and Ph.D. in Immunology from the
University of Paris (France).

Paul S. Russell, M.D. is John Homans Professor of Surgery, Visiting
Surgeon, MGH. Dr. Russell founded the Transplantation Unit at MGH and has a
long-term interest in the use of antibodies to modify immune responses both in
experimental animals and patients. He received his B.S. and M.D. from University
of Chicago and received an honorary M.S. from Harvard University.

Jonathan Sprent, M.D., Ph.D. is a member of the Department of Immunology,
The Scripps Research Institute, La Jolla, California and an Adjunct Professor,
Department of Biology, University of California San Diego. His research
interests include the formation, function and lifespan of T cells, the role of T
cells in transplantation immunity and the mechanics involved in immunological
tolerance. Dr. Sprent received his M.D. from the University of Queensland
Medical School (Australia) and his Ph.D. in immunology at the Walter and Eliza
Hall Institute, Royal Melbourne Hospital (Australia).

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<PAGE> 42

Calvin R. Stiller, M.D., F.R.C.P. is a Professor of Medicine, University of
Western Ontario; Chief, Multi-Organ Transplant Service, and Director,
Transplantation Immunology Laboratory, University Hospital, London, Ontario;
Director, Immunology Group, Robarts Research Institute at University Hospital,
University of Western Ontario, London, Ontario; and Chairman, Center for
Transplant Studies, London, Ontario. Dr. Stiller received his M.D. from the
University of Saskatchewan.

Megan Sykes, M.D. is an Associate Professor of Surgery and Medicine
(Immunology), Harvard Medical School and an Immunologist (Surgery and Medicine),
TBRC, MGH. Her major research interests include studying new approaches to
preventing GvHD, the graft-vs-leukemic effect in allogeneic bone marrow
transplantation and xenogeneic and allogeneic bone marrow transplantation as a
means of inducing tolerance. Dr. Sykes received her M.D. from the University of
Toronto (Canada).

In addition to members of the Scientific Advisory Board and strategic
collaborations described previously, the Company has contractual relationships
with a variety of individual consultants in particular fields of science and
medicine to assist the Company with specific technologies related to its
research and development activities.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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<PAGE> 43

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES

<TABLE>
The following table sets forth certain information with respect to
executive officers, directors and other key employees of the Company:

<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Elliot Lebowitz, Ph.D. ................. 55 President and Chief Executive Officer; Director
James Hope, Ph.D. ...................... 45 Senior Vice President of Development
Julia L. Greenstein, Ph.D. ............. 39 Senior Vice President of Research and Chief Scientific Officer
Mary White-Scharf, Ph.D. ............... 45 Vice President of Research
Richard V. Capasso, C.P.A. ............. 34 Director of Finance
William W. Crouse(1).................... 53 Director
James C. Foster, J.D.(2)................ 45 Director
Daniel O. Hauser, Ph.D. ................ 58 Director
Daniel P. Kearney, J.D.................. 56 Director
Francis H. Spiegel, Jr.(1)(2)........... 61 Director
Robert A. Vukovich, Ph.D.(1)............ 52 Director

<FN>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee

</TABLE>

Dr. Lebowitz has served as President and Chief Executive Officer and as a
member of the Board of Directors of the Company since April 1991. From 1985 to
1991, he served as Vice President for Research and Development at C.R. Bard,
Inc., directing internal and collaborative research and development programs for
Bard's Vascular Systems, Cardiosurgery and Cardiopulmonary Divisions. From 1981
until 1985, Dr. Lebowitz served as Director of Long Range Research and
Development at DuPont Corporation, developing immunopharmaceuticals. From 1977
until 1981, he served as Division Manager of the Medical Products Division of
New England Nuclear Corporation which developed, manufactured and sold
radiopharmaceuticals for in vivo diagnosis. Earlier in his career, Dr. Lebowitz
served at Brookhaven National Laboratories, where he developed Thallium-201, a
radiopharmaceutical for the diagnosis of coronary artery disease. Dr. Lebowitz
was a founder of Diagnostic Isotopes, Inc., a radiopharmaceutical company which
was subsequently acquired by Hoffmann-La Roche Inc., a pharmaceutical company.
He was also a founder of Procept, Inc., a biopharmaceutical company which
focuses on rational drug design. He holds a B.A. from Columbia College and a
Ph.D. from Columbia University.

Dr. Hope has served as Senior Vice President of Development of the Company
since December 1995. From August 1992 until December 1995, he served as Vice
President of Development of the Company. From 1990 until 1992, he served as
Executive Director of Operations Technical Support of Serono Laboratories, Inc.
where he directed the transfer, scale-up and validation of biopharmaceutical
manufacturing processes. From 1986 until 1990, he served as the Director of
Bioprocess Development and Production at Invitron Corp., a contract manufacturer
for the development and scale-up of mammalian, cell-based biopharmaceutical
manufacturing processes. Dr. Hope received a B.S. in microbiology and chemistry
from the University of Reading (U.K.) and a Ph.D. in biochemistry from the
University of London (U.K.).

Dr. Greenstein has served as Senior Vice President of Research and Chief
Scientific Officer of the Company since December 1995. From February 1994 until
December 1995, she served as Vice President of Research of the Company. From
1992 until 1994, she served as Vice President, Discovery Research, and from 1991
until 1992, as Director of Immunology, at ImmuLogic Pharmaceutical Corporation,
a biotechnology company which she joined in 1987 and worked on a T cell mediated
approach to allergy desensitization. From 1986 until 1987, Dr. Greenstein was an
Assistant Professor of Pathology at Harvard Medical School and the Dana Farber
Cancer Institute. She received her B.A. from Russell Sage College and her Ph.D.
in microbiology from the University of Rochester Medical School.

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<PAGE> 44

Dr. White-Scharf has served as Vice President of Research of the Company
since December 1995. From September 1991 until December 1995 she served as
Director of Monoclonal Antibody Development of the Company where she directed
the BTI-322 program and the Company's hybridoma discovery, scale-up, antibody
purification and antibody engineering. From 1989 to 1991, she served as a
Research Scientist at Repligen Corporation, a biotechnology company, where she
directed its efforts to generate a broadly neutralizing monoclonal antibody to
HIV-1. Dr. White-Scharf received her B.S. in biology from Southern Methodist
University, her M.A. in physiology from the University of Texas Medical Branch
and her Ph.D. in medical microbiology from Stanford University School of
Medicine.

Mr. Capasso has served as Director of Finance of the Company since December
1994. From December 1991 until December 1994 he served as Controller of the
Company. From 1988 to 1991, he served as Manager of Financial Reporting and
Controller at Softbridge, Inc., a computer software development company. From
1984 to 1988, he served as a member of the professional staff of the Enterprise
Group of Arthur Andersen LLP, an international public accounting firm. Mr.
Capasso received his B.S. from Northeastern University with a major in
accounting and received his C.P.A. in 1987.

Mr. Crouse has served as a director of the Company since June 1995. Since
1994, Mr. Crouse has served as Vice Chairman of HealthCare Investment
Corporation and as a general partner of HealthCare Partners I, L.P. ("HP I"),
HealthCare Partners II, L.P. ("HP II"), HealthCare Partners III, L.P. ("HP III")
and HealthCare Partners IV, L.P. ("HP IV"), the general partners of HealthCare
Ventures I, L.P. ("HCV I"), HealthCare Ventures II, L.P. ("HCV II"), HealthCare
Ventures III, L.P. ("HCV III"), and HealthCare Ventures IV, L.P. ("HCV IV"),
respectively. Mr. Crouse served as Worldwide President of Ortho Diagnostic
Systems and Vice President of Johnson & Johnson International from 1987 to 1994.
Mr. Crouse has more than 30 years experience in the pharmaceutical industry. He
also serves as a director of Activated Cell Therapy, Inc., Human Genome
Sciences, Inc., Trophix Pharmaceuticals, Inc., PharmaGenics, Inc., Raritan
Bancorp, The New York Blood Center and Liberty Science Center. Mr. Crouse
received his B.S. in finance and economics from Lehigh University and his M.B.A.
from Pace University.

Mr. Foster has served as a director of the Company since February 1992.
Since 1992, he has served as President and Chief Executive Officer of the CRL
Division of Bausch & Lomb, Inc., a supplier of research animals and
animal-related products and services. Previously, he has served in various
capacities with Charles River Laboratories since 1976. Mr. Foster received his
B.S. in psychology from Lake Forest College, his J.D. from the Boston University
School of Law and his M.A. in Science and Management from the Massachusetts
Institute of Technology.

Dr. Hauser has served as a director of the Company since January 1994.
Since 1992, he has served as President of Sandoz Research Institute in East
Hanover, New Jersey and as Senior Vice President of Research and Development for
Sandoz Pharmaceuticals Corporation. From 1965 to 1992, he served in various
positions at the Pharma Division of Sandoz Ltd. (Switzerland) and from 1985 to
1992, served as Senior Vice President. Dr. Hauser received his M.S. and Ph.D. in
chemistry from the Swiss Federal Institute of Technology (Switzerland) and was a
Post-doctoral Research Fellow in the Department of Chemistry at the Israel
Institute of Technology (Haifa). From 1992 to 1994, Dr. Hauser served on the
Board of Directors of Systemix, Inc.

Mr. Kearney has served as a director of the Company since March 1996. Since
1991, Mr. Kearney has served as President of Aetna Life Insurance and Annuity
Company, a wholly owned subsidiary of Aetna Life & Casualty Company, an
insurance company. In addition, he serves as Executive Vice President and Chief
Investment Officer of Aetna Life & Casualty Company. Prior to joining Aetna in
1991, Mr. Kearney served as President and Chief Executive Officer of the
Resolution Trust Corporation Oversight Board. Immediately prior to joining the
Oversight Board, Mr. Kearney was a principal at Aldrich, Eastman and Waltch,
Inc., a pension fund advisor. Mr. Kearney graduated from Michigan State
University and received a Masters in Economics from Michigan State University.
He received his J.D. from the University of Chicago Law School. He also serves
on the Board of Directors of MBIA, Inc.

Mr. Spiegel has served as a Director of the Company since June 1995. Mr.
Spiegel was employed by Merck & Co., Inc. ("Merck") from 1966 to 1995, and since
1993 had been Executive Vice President responsible for the operations of the
Merck Consumer Healthcare Group, the DuPont Merck Pharmaceutical Company and

41
<PAGE> 45

the Kelco Specialty Chemical Company for Worldwide Human Resources, Internal
Auditing, Strategic Planning and External Growth. Prior to that, since 1987, Mr.
Spiegel was Senior Vice President responsible for Worldwide Finance, Human
Resources, Strategic Planning and External Growth. Since 1967, he has held
various financial and other management positions with Merck including Chief
Financial Officer and was responsible for Finance from 1985 to 1992. Mr. Spiegel
was also a non-executive member of the Merck Board of Directors, and Executive,
Compensation & Benefits and Audit Committees since 1985. Mr. Spiegel holds a
Bachelor's degree in accounting from Lehigh University and earned his C.P.A.
certificate in 1963. Mr. Spiegel serves on the Board of Directors of various
healthcare and biotechnology companies, including Alteon, Inc. and Diacrin,
Inc., both biotechnology companies.

Dr. Vukovich has served as a director of the Company since March 1994.
Since 1983, he has served as Chairman of the Board and Chief Executive Officer
of Roberts Pharmaceutical Corporation, a pharmaceutical company which he
founded. From 1979 to 1983, he served as the Director of the Division of
Developmental Therapeutics of the Revlon Health Care Group, a pharmaceutical
company. He received his B.S. from Allegheny College and his Ph.D. in
Pharmacology-Toxicology with a minor in Pathology from Jefferson Medical
College. Dr. Vukovich also serves on the Board of Directors of Cypros
Pharmaceutical Corp.

Mr. Foster and Dr. Hauser have been elected to the Board of Directors
pursuant to agreements among certain holders of the Company's Preferred Stock,
which agreements will terminate upon the closing of this Offering.

Under a consulting agreement with Dr. Sachs, the Company has agreed, at Dr.
Sachs' request, to recommend to its stockholders that he be elected as a member
to the Board of Directors. To date, Dr. Sachs has not requested that he be
elected to the Board.

All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Each officer is
appointed by and serves at the discretion of the Board of Directors. There are
no family relationships among any of the executive officers, directors or key
employees of the Company.

DIRECTOR COMPENSATION

Prior to this Offering the Company has not paid any cash compensation to
its directors for their services as directors. The Company pays reasonable
travel and out-of-pocket expenses incurred by non-employee directors in
connection with attendance at meetings to transact the business of the Company
or attendance at meetings of the Board of Directors or any committee thereof.

Upon the closing of this Offering, each outside, independent director will
receive a fee of $1,000 for each Board meeting attended and will be reimbursed
for expenses incurred in connection with their attendance. In addition, upon
joining the Board each director who is not an employee of the Company will be
granted automatically the Initial Options and Restricted Stock described below.

1994 DIRECTORS' EQUITY PLAN

The Company's 1994 Directors' Equity Plan (the "Directors' Equity Plan")
was adopted by the Board of Directors on June 27, 1994, and approved by the
stockholders on August 12, 1994. The Directors' Equity Plan provides that
Directors of the Company who are not officers or employees of the Company or of
any subsidiary of the Company, nor affiliated with HealthCare Investment
Corporation, Sandoz or CRL, each shall receive (i) nonstatutory options to
purchase 3,125 shares of Common Stock at fair market value ("Initial Options")
and (ii) 625 shares of restricted stock subject to a repurchase option, at a
purchase price of $.04 per share (the "Restricted Stock"). The Restricted Stock
will vest over a four year period. A total of 15,000 shares of Common Stock may
be issued under the Directors' Equity Plan, subject to adjustments as provided
therein.

The Board of Directors may suspend or discontinue the Directors' Equity
Plan or amend it in any respect; provided, however, that without the approval of
the stockholders, no amendment may change the number of shares subject to the
Directors' Equity Plan, change the designation of the class of Directors
eligible to receive

42
<PAGE> 46

options, or materially increase the benefits accruing to participants under the
Directors' Equity Plan. The Directors' Equity Plan may not be amended more than
once in any six-month period.

EXECUTIVE COMPENSATION

<TABLE>
The following table sets forth certain information with respect to the
annual and long-term compensation paid by the Company during the fiscal year
ended December 31, 1995 to the Chief Executive Officer and three other most
highly compensated executive officers (the "Named Executive Officers") whose
1995 compensation exceeded $100,000.

SUMMARY COMPENSATION TABLE

<CAPTION>
Annual Long-Term
Compensation Compensation(1)
-------------------------------------- -------------------------------------------------
Other Restricted Shares All
Annual Stock Subject to Other
Name and Principal Position Salary($) Bonus($) Compensation($) Awards($) Options Granted(#) Compensation($)
- ------------------------------------- --------- -------- --------------- ---------- ------------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Elliot Lebowitz...................... 215,000 -- -- -- 16,218 --
President and Chief Executive
Officer
James Hope........................... 147,784 -- -- -- 10,312 --
Senior Vice President of
Development
Julia L. Greenstein.................. 168,586 -- -- -- 8,000 --
Senior Vice President of Research
and Chief Scientific Officer
Mary White-Scharf.................... 108,171 -- -- -- 10,936 --
Vice President of Research

<FN>
- ---------------
(1) The Company does not have a long-term compensation program that includes
long-term incentive payouts. No restricted stock awards or SARs were granted
to any of the Named Executive Officers during fiscal 1995.

</TABLE>

<TABLE>
The following table sets forth certain information with respect to grants
of stock options made during 1995 under the amended 1991 Stock Option Plan to
the Named Executive Officers.

OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1995

<CAPTION>
Potential
Realizable
Value At Assumed
Percentage Annual Rates of
Number of of Total Stock
Securities Options Price Appreciation
Underlying Granted to Exercise For Option Term(3)
Options Employees Price Expiration ------------------
Name Granted(#)(1)(2) in Fiscal 1995 ($/Sh) Date 5%($) 10%($)
- -------------------------------- ---------------- -------------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Elliot Lebowitz................. 16,218 22.9% 4.00 05/22/05 40,798 103,389
James Hope...................... 6,875 9.7 4.00 05/22/05 17,295 43,828
3,437 4.8 4.00 12/08/05 8,646 21,911
Julia L. Greenstein............. 5,000 7.1 4.00 05/22/05 12,578 31,875
3,000 4.2 4.00 12/08/05 7,547 19,125
Mary White-Scharf............... 2,030 2.9 4.00 05/22/05 5,107 12,941
8,906 12.6 4.00 12/08/05 22,404 56,775

<FN>
- ---------------
(1) No stock appreciation rights were granted during 1995.

(2) Options granted in 1995 become exercisable in four equal annual
installments, commencing 12 months after the vesting commencement date,
which is typically the date of grant.

(3) Amounts represent hypothetical gains that could be achieved if options were
exercised at the end of the option term. These gains are based on assumed
rates of stock price appreciation of 5% and 10% compounded annually from
the date the options were granted to their expiration date. The Company has
used $4.00 per share as the fair market value of the Common Stock on the
date of grant, as determined by the Company's Board of Directors. This
table does not take into account any appreciation in the price of Common
Stock to date.

</TABLE>

43
<PAGE> 47

<TABLE>
The following table sets forth certain information regarding the value of
unexercised stock options held by the Named Executive Officers as of December
31, 1995. No options were exercised by the Named Executive Officers in 1995.

OUTSTANDING GRANTS AND OPTION VALUES AS OF DECEMBER 31, 1995

<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
Name Exercisable/Unexercisable(#) Exercisable/Unexercisable($)(1)
- ----------------------------------------------------- ---------------------------- -------------------------------
<S> <C> <C>
Elliot Lebowitz...................................... 43,317/53,992 47,918/36,384
James Hope........................................... 20,000/17,812 24,000/11,062
Julia L. Greenstein.................................. 12,500/20,500 2,500/ 4,100
Mary White-Scharf.................................... 7,186/11,875 22,999/ 2,688

<FN>
- ---------------
(1) Based on the value of the Common Stock on December 31, 1995 ($4.20 per
share), as determined by the Company's Board of Directors, less the exercise
price, multiplied by the number of shares covered by the option.

</TABLE>

SEVERANCE AGREEMENTS WITH EXECUTIVE OFFICERS

Under the terms of an agreement with Dr. Lebowitz, the Company's President
and Chief Executive Officer, in the event of involuntary termination of Dr.
Lebowitz' employment, he is eligible to receive six months of base salary from
the Company. Under the terms of agreements with Dr. Hope, Senior Vice President
of Development, Dr. Greenstein, Senior Vice President of Research and Chief
Scientific Officer and Dr. White-Scharf, Vice President of Research, in the
event of a termination of employment without cause, the terminated officer is
eligible to receive six months of base salary, which will be discontinued if the
officer secures other employment. Furthermore, if at the end of such six-month
period Dr. Hope is unable to secure other employment, then Dr. Hope and the
Company have agreed to negotiate an additional severance payment of up to six
months of base salary.

STOCK OPTION PLAN

The Company has adopted its Amended 1991 Stock Option Plan (the "Option
Plan") under which it may grant incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended ("incentive stock
options"), stock options not intended to qualify as incentive stock options
("non-qualified stock options") and stock appreciation rights. Stock options may
be granted under the Option Plan to employees, directors, consultants and
advisors of the Company. Options granted to non-employee directors and
consultants must be non-qualified stock options only. A total of 750,000 shares
of Common Stock may be issued under the Option Plan, subject to adjustments as
provided therein. The maximum number of shares with respect to which options may
be granted to any employee under the Option Plan shall not exceed 100,000 shares
of Common Stock during any calendar year.

The Option Plan is administered by the Compensation Committee of the Board
of Directors. Subject to the provisions of the Option Plan, the Compensation
Committee (or the Board of Directors) has the authority to determine (i) to whom
options will be granted, (ii) the time when options may be granted, (iii) the
number of shares to be covered by each option, (iv) when the option becomes
exercisable, (v) the exercise price of the option (which price, in the case of
incentive stock options, shall not be less than the fair market value of the
Common Stock on the date of grant, or in the case of incentive stock options
granted to employees who own, directly or indirectly, more than 10% of the total
combined voting power of all classes of stock of the Company, 110% of the fair
market value of the Common Stock on the date of grant) and (vi) any restrictions
on sale and repurchase rights which shall be placed on shares purchased upon
exercise of an option.

Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash and Common Stock or by any other method approved by
the Board of Directors consistent with the purposes of the Option Plan and
applicable rules and regulations, including, without limitation, Section 422 of

44
<PAGE> 48

the Code and Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
Options are not assignable or transferable except by will or the laws of descent
and distribution.

As of March 1, 1996, the Company has approximately 47 employees who would
have been eligible to participate in the Option Plan. The number of persons
receiving stock options and awards varies from year to year depending on various
factors, such as the number of promotions and the Company's hiring needs during
the year, and thus the Company cannot now determine award recipients.

As of March 1, 1996, options to purchase 368,884 shares of Common Stock
were outstanding under the Option Plan and 358,343 additional shares of Common
Stock were reserved for future option grants.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

In 1995, the members of the Compensation Committee of the Board of
Directors were Mr. Foster and Dr. Vukovich, neither of whom is an employee of
the Company.

45
<PAGE> 49

CERTAIN TRANSACTIONS

In March 1991, the Company entered into a supply agreement with CRL. Under
the terms of the agreement, CRL will provide the Company with miniswine and
miniswine organs for research and development purposes in exchange for payments
based on future commercial sales of miniswine products by the Company. The
agreement is for a period of ten years, provided that at the end of three years,
CRL may terminate the Agreement on 60 days' prior written notice. In connection
with such agreement, CRL purchased 2,856 shares of Common Stock, at a purchase
price of $.04 per share. James C. Foster, President and Chief Executive Officer
of CRL, is a director of the Company. See "Business -- Collaborations and
Agreements -- Charles River Laboratories."

In October 1991, the Company issued 74,074 shares of Common Stock at a
purchase price of $.04 per share, to Dr. Elliot Lebowitz, the President and
Chief Executive Officer and a founder of the Company. These shares were issued
pursuant to a Restricted Stock Purchase Agreement containing provisions which
permitted the Company to repurchase the shares in accordance with a vesting
schedule over four years. All repurchase rights terminated in 1995.

In May 1992, the Company sold 401,606 shares of its Series B Stock to
Sandoz at a price of $12.45 per share (100,401 shares at a price of $49.80 on a
common equivalent basis). In the event that the price per share at which the
Common Stock is offered to the public in a public offering is less than $49.80,
each common equivalent share of Series B Stock shall automatically convert into
a number of shares of Common Stock equal to $49.80 divided by the initial public
offering share price, rounded up to the nearest one-tenth of a share (5.3
shares, at the public offering price of $9.50 per share). Accordingly, upon the
closing of this Offering, the shares of Series B Stock issued to Sandoz will
convert into 532,125 shares of Common Stock. In 1993, the Company and Sandoz
entered into a collaboration agreement for the development and commercialization
of xenotransplantation products utilizing gene transduction, which was
subsequently amended and restated in September 1995. Under the agreement, Sandoz
has committed research funding of $20.0 million of which $10.0 million had been
received as of December 31, 1995, and agreed to pay license fees of $10.0
million of which $5.0 million has been received as of December 31, 1995. Sandoz
has also agreed to fund all of the development and pre-marketing costs of the
licensed products, a portion of which may be repayable from the Company's
operating profits from sales of the XenoMune System if the Company elects to
co-promote, and a portion of which must be repaid within 90 days following PLA
submission for such products. Daniel O. Hauser, Ph.D., the President of Sandoz
Research Institute, and a Senior Vice President of Research and Development for
Sandoz Pharmaceuticals Corporation, is a director of the Company. See
"Business -- Collaborations and Agreements -- Sandoz."

In June 1995, the Company entered into a Consulting Agreement with Mr.
Spiegel, a director of the Company. The Consulting Agreement is for a term of
three years and is terminable by the Company upon 30 days' prior written notice.
In consideration for the performance of services by Mr. Spiegel under the
Consulting Agreement, pursuant to the Option Plan the Company granted to Mr.
Spiegel a non-statutory stock option to purchase 22,500 shares of Common Stock,
at an exercise price of $4.00 per share, the fair market value of the Company's
Common Stock on the date of grant.

In August 1995, the Company consummated a financing in which it issued
promissory notes in aggregate principal amount of $1.0 million and warrants to
purchase 25,000 shares of Common Stock, at an exercise price of $.04 per share,
to a group of stockholders including HCV III, HCV IV, H&Q HealthCare Investors
("H&Q Health"), H&Q Life Sciences Investors ("H&Q Life"), Everest Trust
("Everest") and Hudson Trust ("Hudson"). Mr. Crouse, a director of the Company,
is a general partner of HP III, the general partner of HCV III and is a general
partner of HP IV, the general partner of HCV IV.

In October 1995, the Company and MedImmune entered into a collaborative
agreement for the development and commercialization of products to treat and
prevent organ rejection. MedImmune paid to the Company a $2.0 million license
fee at the time of execution of the agreement, and agreed to fund and assume
responsibility for clinical testing and commercialization of BTI-322 and other
related products. MedImmune has agreed to provide research support and make
milestone payments which could total up to an additional $14.0 million, up to
$12.0 million of which is repayable from royalties on BTI-322 or MEDI-500. HCV I
and

46
<PAGE> 50

HCV II own approximately 30% of the outstanding common stock of MedImmune. Mr.
Crouse, a director of the Company, is a general partner of HP I and HP II, the
general partners of HCV I and HCV II, respectively.

In October 1995, the Company sold an aggregate of 2,424,947 shares of its
Series D Stock (convertible into 606,233 shares of Common Stock) to a group of
existing investors, including HCV III, HCV IV, H&Q Life, H&Q Health and Everest,
at a purchase price of $2.00 per share ($8.00 on a common equivalent basis). The
Series D Stock purchase price was paid solely by the cancellation and conversion
of the outstanding principal and interest due under promissory notes previously
issued to such investors.

In January 1996, the Company entered into a Consulting Agreement with Dr.
Vukovich, a director of the Company. The Consulting Agreement is for a period of
three years and is terminable by the Company upon 30 days prior written notice.
In consideration for the performance of services by Mr. Vukovich under the
Consulting Agreement, pursuant to the Option Plan the Company granted to Dr.
Vukovich a non-statutory stock option to purchase 12,500 shares of Common Stock,
at an exercise price of $4.20 per share, the fair market value of the Company's
Common Stock on the date of grant.

In January 1996 and February 1996, the Company issued and sold an aggregate
of 3,495,409 shares of its Series D Stock (convertible into 873,850 shares of
Common Stock), at a purchase price of $2.00 per share ($8.00 on a common
equivalent basis), to a group of existing and new investors, including Everest,
Hudson, H&Q Life, H&Q Health, HCV II, Mr. Foster, Henry L. Foster, Mr. Spiegel,
and Dr. Vukovich. Mr. Foster is a director of the Company. Henry L. Foster is
the father of Mr. Foster. Mr. Spiegel and Dr. Vukovich are directors of the
Company. Mr. Crouse, a director of the Company, is a general partner of HP II,
the general partner of HCV II. The purchase price of the Series D Stock was paid
in part by the conversion and cancellation of promissory notes (plus accrued
interest) previously issued by the Company to certain investors.

For a description of certain transactions between the Company and certain
directors see "Management -- Director Compensation."

The Company has adopted a policy that transactions between the Company and
its officers, directors or other affiliates (i) must be approved by a majority
of the members of the Board of Directors and by a majority of the disinterested
members of the Board of Directors, (ii) must be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties and (iii)
that any loans by the Company to its officers, directors or other affiliates be
for bona fide business purposes only.

47
<PAGE> 51

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 1, 1996, giving effect to
the conversion of all outstanding shares of the Company's Preferred Stock into
an aggregate of 5,202,154 shares of Common Stock by (i) each person known to the
Company to be the beneficial owner of more than 5% of the shares of Common
Stock, (ii) each director of the Company, (iii) each of the Named Executive
Officers and (iv) all current directors and executive officers as a group.

<TABLE>
<CAPTION>
Percent Owned
Shares -----------------------------
Beneficially Before the After the
Name and Address of Beneficial Owner Owned(1) Offering Offering
- --------------------------------------------------- ------------ ---------- ----------
<S> <C> <C> <C>
HealthCare Ventures II, L.P. ...................... 1,570,886(2) 29.0% 19.1%
Twin Tower at Metro Park
379 Thornall Street
Edison, New Jersey 08837
HealthCare Ventures III, L.P. ..................... 874,539(3) 16.1 10.6
Twin Tower at Metro Park
379 Thornall Street
Edison, New Jersey 08837
HealthCare Ventures IV, L.P. ...................... 258,075(4) 4.8 3.2
Twin Tower at Metro Park
379 Thornall Street
Edison, New Jersey 08837
Funds Managed by
Hambrect & Quist Capital Management Inc............ 460,450(5) 8.6 5.6
50 Rowes Wharf
Boston, Massachusetts 02110
Everest Trust...................................... 750,284(6) 14.0 9.2
c/o Rho Management Company, Inc.
767 Fifth Avenue
New York, New York 10153
Hudson Trust....................................... 313,061(7) 5.9 3.8
c/o Pyrenees Management
Company, Inc.
666 Plainsboro Road
Plainsboro, New Jersey 08854
Sandoz Pharma Ltd. ................................ 532,125(8) 9.8 6.5
Lichstrasse 35
CH-40002 Basel
Switzerland
Elliot Lebowitz.................................... 117,391(9) 2.2 1.5
James Hope......................................... 20,000(10) * *
Julia L. Greenstein................................ 12,500(11) * *
Mary White-Scharf.................................. 7,186(12) * *
William W. Crouse.................................. 2,703,500(13) 48.8 32.4
James C. Foster.................................... 15,356(14) * *
Daniel O. Hauser................................... 532,125(15) 9.8 6.5
Daniel P. Kearney.................................. 0 * *
Francis H. Spiegel................................. 25,000 * *
Robert A. Vukovich................................. 4,531(16) * *
All current directors and executive officers as a
group (10 persons)............................... 3,437,588(17) 59.5 40.1
</TABLE>

48
<PAGE> 52

- ---------------
* Represents beneficial ownership of less than 1% of the Common Stock.

(1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities and Exchange Act of
1934, as amended. Shares of Common Stock issuable pursuant to options,
warrants and convertible securities, to the extent such securities are
currently exercisable or convertible, or are exercisable or convertible
within 60 days of March 1, 1996, are treated as outstanding for computing
the percentage of the person holding such securities but are not treated as
outstanding for computing the percentage of any other person.

(2) Includes 78,877 shares of Common Stock which HCV II has the right to
acquire within 60 days of March 1, 1996 upon the exercise of warrants.

(3) Includes 99,705 shares of Common Stock which HCV III has the right to
acquire within 60 days of March 1, 1996 upon the exercise of warrants.

(4) Includes 29,571 shares of Common Stock which HCV IV has the right to
acquire within 60 days of March 1, 1996 upon the exercise of warrants.

(5) Includes 249,108 shares held by H&Q Health (including 10,210 shares which
H&Q Health has the right to acquire within 60 days of March 1, 1996 upon
the exercise of warrants) and 211,342 shares held by H&Q Life (including
17,722 shares which H&Q Life has the right to acquire within 60 days of
March 1, 1996 upon the exercise of warrants). Hambrecht & Quist Capital
Management Inc. serves as the investment advisor to H&Q Health and H&Q
Life. The respective General Partners of H&Q Health and H&Q Life exercise
sole voting and investment power with respect to the shares held by each
fund.

(6) Includes an aggregate of 38,464 shares of Common Stock which Everest Trust
has the right to acquire within 60 days of March 1, 1996 upon the exercise
of warrants. Jan Philipp F. Reemtsma, Joshua Ruch and Fero Ventures Limited
may be deemed to beneficially own the shares held by Everest Trust
("Everest"), retain voting and dispositive rights for such shares and the
right to revoke such shares from Everest.

(7) Includes an aggregate of 16,100 shares of Common Stock which Hudson Trust
has the right to acquire within 60 days of March 1, 1996 upon the exercise
of warrants. Bernd Diethelm Honer may be deemed to beneficially own the
shares held by Hudson Trust ("Hudson"), retains voting and dispositive
rights for such shares and the right to revoke such shares from Hudson.

(8) Includes 100,401 shares of Common Stock issuable upon the conversion of the
Series B Stock and 431,724 additional shares of Common Stock to be issued
to Sandoz pursuant to the anti-dilution rights of the Series B Stock.

(9) Includes 43,317 shares of Common Stock which Dr. Lebowitz has the right to
acquire within 60 days of March 1, 1996 upon exercise of stock options.

(10) Consists solely of shares of Common Stock which Dr. Hope has the right to
acquire within 60 days of March 1, 1996 upon the exercise of stock options.

(11) Consists solely of shares of Common Stock which Dr. Greenstein has the
right to acquire within 60 days of March 1, 1996 upon exercise of stock
options.

(12) Consists solely of shares of Common Stock which Dr. White-Scharf has the
right to acquire within 60 days of March 1, 1996 upon the exercise of stock
options.

(13) Consists solely of shares held of record HCV II, HCV III and HCV IV. Mr.
Crouse is a general partner of HP II, HP III and HP IV the general
partners, respectively, of HCV II, HCV III and HCV IV. Mr. Crouse, together
with the other general partners of HCV II, HCV III and HCV IV,
respectively, share voting and investment control with respect to the
shares owned by HCV II, HCV III and HCV IV. The same individuals serve as
general partners of HP II, HP III and HP IV, respectively. Mr. Crouse does
not own any shares in his individual capacity.

(14) Includes 2,856 shares of Common Stock owned by CRL. Mr. Foster, a director
of the Company, is the President and Chief Executive Officer of CRL and may
be deemed to beneficially own the shares held by CRL although he disclaims
beneficial ownership.

(15) Consists solely of shares of Common Stock owned by Sandoz. Dr. Hauser, a
director of the Company, is the President of the Sandoz Research Institute
and is a Senior Vice President of Research and Development of Sandoz
Pharmaceuticals Corporation, an affiliate of Sandoz. Dr. Hauser may be
deemed to beneficially own the shares held by Sandoz although he disclaims
beneficial ownership.

(16) Includes 781 shares of Common Stock which Dr. Vukovich has the right to
acquire within 60 days of March 1, 1996 upon exercise of stock options.

(17) Includes 291,937 shares of Common Stock which all directors and officers as
a group may acquire upon exercise of outstanding stock options and warrants
exercisable within 60 days of March 1, 1996.

49
<PAGE> 53

DESCRIPTION OF CAPITAL STOCK

Upon the completion of this Offering, the Company will be authorized to
issue 25,000,000 shares of Common Stock, $.01 par value per share, of which
8,128,748 shares will be issued and outstanding, and 2,000,000 shares of
undesignated Preferred Stock, $.01 par value per share, of which no shares will
be issued and outstanding.

COMMON STOCK

Upon the closing of this Offering, the Company's Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") will authorize the
issuance of up to 25,000,000 shares of Common Stock, $.01 par value per share.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor and subject to any preferential dividend rights
of any then outstanding Preferred Stock. Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after the payment of all debts
and other liabilities and subject to any preferential dividend rights of any
then outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares offered by the Company in this Offering will be, when
issued and paid for, fully paid and nonassessable.

As of March 1, 1996, there were 5,328,748 shares of Common Stock
outstanding held by 40 stockholders (after giving effect to conversion of all
outstanding shares of Preferred Stock into an aggregate of 5,202,154 shares of
Common Stock effective upon the closing of this Offering).

PREFERRED STOCK

Upon the closing of the Offering, the Restated Certificate will have an
authorized class of undesignated preferred stock consisting of 2,000,000 shares,
$.01 par value per share. The Board of Directors will be authorized, subject to
any limitations prescribed by law, without further stockholder approval, to
issue from time to time up to 2,000,000 shares of preferred stock, in one or
more series. Each such series of preferred stock shall have such number of
shares, designations, preferences, voting powers, qualifications and special or
relative rights or privileges as shall be determined by the Board of Directors,
which may include, among others, dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights.

The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Such rights may include voting and conversion rights which
could adversely affect the holders of Common Stock. Satisfaction of any dividend
preferences of outstanding preferred stock would reduce the amount of funds
available, if any, for the payment of dividends on Common Stock. See "Dividend
Policy." Holders of preferred stock would typically be entitled to receive a
preference payment in the event of a liquidation, dissolution or winding up of
the Company before any payment is made to the holders of Common Stock.
Additionally, the issuance of preferred stock could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of preferred
stock.

WARRANTS

As of March 1, 1996, there were outstanding warrants to purchase 377,135
shares of Common Stock at exercise prices ranging from $.04 per share to $49.80
per share. All of such warrants expire 10 years from the date of grant and do
not confer upon the holder thereof any voting or other rights as a stockholder
of the Company.

50
<PAGE> 54

REGISTRATION RIGHTS

Upon completion of this Offering, certain persons and entities (the
"Rightsholders") will be entitled to certain rights with respect to the
registration under the Securities Act, for resale to the public, of a total of
5,564,320 shares of Common Stock (including holders of warrants to purchase
362,166 shares of Common Stock) (collectively, the "Registrable Shares"). In the
event the Company proposes to register any of its securities under the
Securities Act for its own account or otherwise, the Rightsholders are entitled
to include Registrable Shares in such registration, subject to certain
conditions and limitations, which include the right of the managing underwriter
of any such offering to exclude some of the Registrable Shares from such
registration if it determines that the inclusion of all Registrable Shares
proposed to be issued would interfere with successful marketing of the
securities.

Rightsholders are also entitled to a minimum of two demand registrations in
connection with Registrable Shares held by them. Rightsholders holding at least
50% of the Registrable Shares may require the Company, on one occasion, whether
or not the Company proposes to register its Common Stock for sale, to register
all or part of their Registrable Shares for sale to the public under the
Securities Act, subject to certain conditions and limitations. Thereafter,
Rightsholders holding at least 15% of the Registrable Shares may require the
Company, whether or not the Company proposes to register its Common Stock for
sale, to register all or part of their Registrable Shares for sale to the public
under the Securities Act, subject to the same limitations and conditions. In
addition to these demand registrations, the Rightsholders may require the
Company to register all or part of their Registrable Shares on a Form S-2 or
Form S-3 Registration Statement if the Company qualifies for the use of such
form, subject to certain conditions and limitations including the requirement
that the requested registration of Registrable Shares have a proposed aggregate
offering price of at least $500,000. The Company is required to bear the
expenses of all such registrations (except underwriting discounts and
commissions).

Any future exercise of such registration rights may hinder efforts by the
Company to arrange financings which may adversely effect the market price of the
Company's shares.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 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. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.

The Restated Certificate of Incorporation provides that after the closing
of this Offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting.
The Restated Certificate of Incorporation further provides that special meetings
of the stockholders may only be called by the Chairman of the Board of
Directors, the Chief Executive Officer or, if none, the President of the Company
or by the Board of Directors or holders of 20% of the then outstanding shares of
capital stock of the Company. Under the Company's Amended and Restated By-Laws
(the "By-Laws"), in order for any matter to be considered "properly brought"
before a meeting, a stockholder holding less than 5% of the then outstanding
shares of capital stock of the Company must comply with certain requirements
regarding advance notice to the Company.

The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's Certificate of Incorporation or By-Laws,
unless a corporation's Certificate of Incorporation or By-Laws, as the case may
be, requires a greater percentage.

51
<PAGE> 55

The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.

52
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
8,128,748 shares of Common Stock. Of these shares, the 2,800,000 shares sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining 5,328,748 shares outstanding upon completion of this Offering will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Sales of Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock. The executive officers, directors, employees and certain other
stockholders of the Company who beneficially own an aggregate of 5,292,473
shares of Common Stock outstanding prior to this Offering have agreed that they
will not, without the prior written consent of UBS Securities LLC, offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock owned by them for a period of 180 days after the
effective date of this Offering (the "Lock-Up Period"). See "Underwriting."

Upon expiration of the Lockup Period, approximately 28,496 Restricted
Shares held by non-affiliates will be eligible for sale in the public market
without restriction pursuant to Rule 144(k) and approximately 3,502,447
Restricted Shares held by affiliates and approximately 216,250 Restricted Shares
held by non-affiliates will be so eligible subject to compliance with the volume
limitations of Rule 144 described below. The remaining 1,557,531 Restricted
Shares may be sold pursuant to Rule 144 only after they have been fully paid for
and held for at least two years from the later of the date of issuance by the
Company or acquisition from an affiliate (which dates do not occur until after
the expiration of the Lockup Period).

Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon exercise of options granted by the Company prior to the date of
this Prospectus will also be eligible for sale in the public market pursuant to
Rule 701 under the Securities Act. In general, Rule 701 permits resales of
shares issued pursuant to certain compensatory benefit plans and contracts
commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities and Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. If all the requirements of
Rule 701 are met, upon expiration of the Lockup Period an aggregate of 24,024
shares of Common Stock currently outstanding, and an additional 375,134 shares
of Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale pursuant to such rule.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned Restricted Shares for at
least two years, including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding the sale, and who has beneficially owned for at least three years the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above.

The Company is unable to estimate accurately the number of Restricted
Shares that will be sold under Rule 144 since this will depend in part on the
market price for the Common Stock, the personal circumstances of the sellers and
other factors.

Rule 144A under the Securities Act would permit, subject to certain
conditions, the sale by the current holders of Restricted Shares of all or a
portion of their shares to certain "qualified institutional buyers," as defined
in Rule 144A.

The Company intends to file a Form S-8 registration statement under the
Securities Act to register all shares of Common Stock issuable under the Option
Plan and the Directors' Equity Plan. Those registration

53
<PAGE> 57

statements are expected to be filed approximately 180 days after the date of
this Prospectus and are expected to become effective immediately upon filing.
Shares covered by those registration statements will be eligible for resale in
the public market after the effective date of such registration statements,
subject to Rule 144 limitations applicable to affiliates and to the Lockup
Period, if applicable.

In addition, upon completion of this Offering, the holders of 5,564,320
shares of Common Stock (including holders of warrants to purchase 362,166 shares
of Common Stock) will be entitled to certain rights with respect to registration
of such shares under the Securities Act. Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by affiliates
of the Company) immediately upon the effectiveness of such registration. See
"Description of Capital Stock -- Registration Rights."

54
<PAGE> 58

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC and
Pacific Growth Equities, Inc. are acting as representatives (the
"Representatives"), have agreed to purchase from the Company the following
respective number of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------- ---------
<S> <C>
UBS Securities LLC............................................ 1,200,000
Pacific Growth Equities, Inc.................................. 800,000
Cowen & Company............................................... 112,500
Montgomery Securities......................................... 112,500
Morgan Stanley & Co. Incorporated............................. 112,500
Nesbitt Burns Securities Inc.................................. 112,500
Advest, Inc................................................... 50,000
Dain Bosworth Incorporated.................................... 50,000
Kaufman Bros., L.P............................................ 50,000
Needham & Company, Inc........................................ 50,000
Tucker Anthony Incorporated................................... 50,000
Vector Securities International, Inc.......................... 50,000
Volpe, Welty & Company........................................ 50,000
---------
Total............................................... 2,800,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if any
Underwriter defaults in its obligation to purchase shares, and the aggregate
obligations of the Underwriters so defaulting do not exceed 10% of the shares
offered hereby, the remaining Underwriters, or some of them, must assume such
obligations.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover of this Prospectus, and to certain dealers at such price
less a concession not in excess of $.40 per share. The Underwriters may allow
and such dealers may reallow a concession not in excess of $.10 per share to
certain other dealers. After the public offering of the shares of Common Stock,
the offering price and other selling terms may be changed by the Underwriters.

The Company has granted the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 420,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
number of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the option, to sell such shares to the Underwriters to the extent
the option is exercised.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

55
<PAGE> 59

The executive officers, directors, employees and certain other stockholders
of the Company who beneficially own an aggregate of 5,292,473 shares of Common
Stock outstanding prior to this Offering have agreed that they will not, without
the prior written consent of UBS Securities LLC, offer, sell or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable for or convertible into shares of Common
Stock owned by them for a period of 180 days after the effective date of this
Offering. The Company has agreed that it will not, without the prior written
consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock for a period
of 180 days after the date of this Prospectus, except that the Company may grant
additional options under its stock option plans, or issue shares upon the
exercise of outstanding stock options.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.

In January 1996, an affiliate of one of the Underwriters purchased 25,000
shares of Series D Stock (convertible into 6,250 shares of Common Stock) for
$2.00 per share ($8.00 on a common equivalent basis).

Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price was negotiated among the
Company and the Representatives. Among the factors considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market and economic conditions, were certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present stage of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to change as a result of market conditions and other factors. There can
be no assurance that an active trading market will develop for the Common Stock
or that the Common Stock will trade in the public market subsequent to this
Offering at or above the initial offering price.

The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "BTRN".

LEGAL MATTERS

Hale and Dorr, Boston, Massachusetts will pass on the validity of the
shares offered hereby for the Company. Steven D. Singer, a partner of Hale and
Dorr, is Secretary of the Company. Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts will pass upon certain legal matters for the Underwriters.

EXPERTS

The audited consolidated financial statements of the Company included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

The statements in this Prospectus under the captions "Risk
Factors -- Uncertainties Regarding Patents and Proprietary Rights; Potential
Third Party Claims" and "Business -- Patents and Proprietary Rights" have been
reviewed and approved by Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart &
Olstein, Roseland, New Jersey, patent counsel to the Company, as experts on such
matters, and are included herein in reliance upon that review and approval. A
member of Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein holds
limited partnership interests in HCV I, HCV II and HCV III.

56
<PAGE> 60

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act") with respect to the shares of Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are qualified
in all respects by such reference. For further information with respect to the
Company and the Common Stock, reference is hereby made to the Registration
Statement and to the exhibits and schedules thereto, which may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: the New York Regional Office located at 7 World Trade Center, Suite
1300, New York, New York 10048 and the Chicago Regional Office located at the
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of this material also may be obtained from the Commission's Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited consolidated financial information.

57
<PAGE> 61

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants...................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995.................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and
for the period from inception (March 20, 1990) to December 31, 1995......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from inception
(March 20, 1990) to December 31, 1995....................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
for the period from inception (March 20, 1990) to December 31, 1995......................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
</TABLE>

F-1
<PAGE> 62

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To BioTransplant Incorporated:

We have audited the accompanying consolidated balance sheets of
BioTransplant Incorporated (a Delaware corporation in the development stage) and
subsidiary as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1995 and for the period from
inception (March 20, 1990) to 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
BioTransplant Incorporated and subsidiary as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 and for the period from inception (March
20, 1990) to December 31, 1995, in conformity with generally accepted accounting
principles.

Boston, Massachusetts
February 5, 1996 (except with respect
to the matters discussed in Notes 6(a)
and 14, as to which the dates are
May 6, 1996 and February 13, 1996,
respectively)

ARTHUR ANDERSEN LLP

F-2
<PAGE> 63

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
------------ ------------ PRO FORMA
1995
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2,343,126 $ 2,848,549 $ 8,753,549
Accounts receivable...................................... -- 250,000 250,000
Deposits and other prepaid expenses...................... 397,054 343,303 343,303
------------ ------------ ------------
Total current assets............................. 2,740,180 3,441,852 9,346,852
------------ ------------ ------------
Property and equipment, at cost:
Equipment under capital leases........................... 2,210,170 2,210,170 2,210,170
Laboratory equipment..................................... 581,968 647,044 647,044
Leasehold improvements................................... -- 619,584 619,584
Office equipment......................................... 133,749 164,963 164,963
------------ ------------ ------------
2,925,887 3,641,761 3,641,761
Less -- accumulated depreciation......................... 998,121 1,811,542 1,811,542
------------ ------------ ------------
1,927,766 1,830,219 1,830,219
------------ ------------ ------------
Other assets............................................... 132,750 99,563 99,563
------------ ------------ ------------
$ 4,800,696 $ 5,371,634 $ 11,276,634
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current obligation under capital leases.................. $ 545,963 $ 450,768 $ 450,768
Accounts payable......................................... 352,850 187,225 187,225
Accrued expenses......................................... 1,318,722 967,430 911,614
Deferred revenue......................................... 375,000 1,750,000 1,750,000
------------ ------------ ------------
Total current liabilities........................ 2,592,535 3,355,423 3,299,607
------------ ------------ ------------
Long-term obligation under capital leases.................. 1,065,707 614,939 614,939
------------ ------------ ------------
Convertible notes payable to stockholders.................. 4,400,000 1,000,000 --
------------ ------------ ------------
Commitments (Notes 10 and 12)
Redeemable convertible preferred stock, $.01 par value --
Authorized -- 15,615,112 shares
Issued and outstanding -- 12,851,606 shares in 1994,
15,586,345 shares in 1995 and no shares pro forma
(will automatically convert into shares of common
stock upon the closing of the proposed public offering
(see Note 2(a))....................................... 23,771,996 29,241,474 --
------------ ------------ ------------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value --
Authorized -- 2,000,000 shares Issued and
outstanding -- no shares.............................. -- -- --
Common stock, $.01 par value --
Authorized -- 25,000,000 shares
Issued and outstanding -- 121,291 shares in 1994,
126,594 shares in 1995 and 5,328,748 shares pro
forma................................................. 1,213 1,266 53,287
Additional paid-in capital................................. 953,817 1,230,343 37,380,612
Deficit accumulated during the development stage........... (27,984,572) (30,071,811) (30,071,811)
------------ ------------ ------------
Total stockholders' equity (deficit)............. (27,029,542) (28,840,202) 7,362,088
------------ ------------ ------------
$4,800,696... $ 5,371,634 $ 11,276,634
============ ============ ============
</TABLE>

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

F-3
<PAGE> 64

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, CUMULATIVE
-------------------------------------------- SINCE
1993 1994 1995 INCEPTION
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
License fees...................... $ 1,500,000 $ 1,500,000 $ 4,000,000 $ 7,000,000
Research and development.......... 1,125,000 1,500,000 5,875,000 8,500,000
Interest income................... 66,165 163,315 168,475 525,477
----------- ------------ ----------- ------------
Total revenues............ 2,691,165 3,163,315 10,043,475 16,025,477
----------- ------------ ----------- ------------
Expenses:
Research and development.......... 8,217,912 11,767,005 9,460,522 36,275,207
General and administrative........ 1,679,442 2,518,030 1,938,901 8,265,599
Interest.......................... 542,438 146,322 731,291 1,556,482
----------- ------------ ----------- ------------
Total expenses............ 10,439,792 14,431,357 12,130,714 46,097,288
----------- ------------ ----------- ------------
Net loss.................. $(7,748,627) $(11,268,042) $(2,087,239) $(30,071,811)
=========== ============ =========== ============
Pro forma net loss per Common
Share............................. $ (.44)
===========
Shares used in computing pro forma
net loss per Common Share......... 4,697,001
===========
</TABLE>

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

F-4
<PAGE> 65

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED TOTAL
--------------------- ADDITIONAL DURING THE STOCKHOLDERS'
NUMBER $.01 PAID-IN DEVELOPMENT EQUITY
OF SHARES PAR VALUE CAPITAL STAGE (DEFICIT)
--------- --------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Inception, March 20, 1990.......... -- $ -- $ -- $ -- $ --
Net loss......................... -- -- -- (142,353) (142,353)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1990......... -- -- -- (142,353) (142,353)
Sale of Common Stock............. 102,572 1,026 3,077 -- 4,103
Issuance of warrants............. -- -- 22,000 -- 22,000
Net loss......................... -- -- -- (2,637,206) (2,637,206)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1991......... 102,572 1,026 25,077 (2,779,559) (2,753,456)
Net loss......................... -- -- -- (6,188,344) (6,188,344)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1992......... 102,572 1,026 25,077 (8,967,903) (8,941,800)
Issuance of warrants............. -- -- 476,800 -- 476,800
Exercise of stock options........ 63 1 46 -- 47
Deferred compensation on stock
options....................... -- -- 105,546 -- 105,546
Net loss......................... -- -- -- (7,748,627) (7,748,627)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1993......... 102,635 1,027 607,469 (16,716,530) (16,108,034)
Exercise of stock options........ 17,406 174 1,448 -- 1,622
Restricted stock sold to
Directors..................... 1,250 12 8,738 -- 8,750
Issuance of warrants............. -- -- 165,937 -- 165,937
Deferred compensation on stock
options....................... -- -- 170,225 -- 170,225
Net loss......................... -- -- -- (11,268,042) (11,268,042)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1994......... 121,291 1,213 953,817 (27,984,572) (27,029,542)
Issuance of warrants............. -- -- 99,000 -- 99,000
Exercise of stock options........ 5,303 53 7,301 -- 7,354
Deferred compensation on stock
options....................... -- -- 170,225 -- 170,225
Net loss......................... -- -- -- (2,087,239) (2,087,239)
--------- ------- ----------- ------------ ------------
Balance, December 31, 1995......... 126,594 1,266 1,230,343 (30,071,811) (28,840,202)
Pro forma adjustments (unaudited)
Sale of Series D preferred stock,
on a common equivalent
basis......................... 741,875 7,419 5,897,581 -- 5,905,000
Conversion of notes payable and
accrued interest into Series D
preferred stock, on a common
equivalent basis.............. 131,975 1,320 1,054,496 -- 1,055,816
Conversion of preferred stock
outstanding as of December 31,
1995 into common stock........ 3,896,580 38,965 29,202,509 -- 29,241,474
Issuance of common stock pursuant
to antidilution rights........ 431,724 4,317 (4,317) -- --
--------- ------- ----------- ------------ ------------
Pro forma balance, December 31,
1995 (unaudited)................. 5,328,748 $53,287 $37,380,612 $(30,071,811) $ 7,362,088
========= ======= =========== ============ ============
</TABLE>

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

F-5
<PAGE> 66

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS

<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, CUMULATIVE
---------------------------------------------- SINCE
1993 1994 1995 INCEPTION
----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(7,748,627) $(11,268,042) $(2,087,239) $ (30,071,811)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 324,760 526,419 846,608 1,876,767
Noncash interest expense on convertible notes payable
to stockholders................................... -- -- 449,894 449,894
Noncash expenses related to options and warrants..... 582,346 212,112 269,225 1,085,683
Changes in current assets and liabilities:
Accounts receivable............................... -- -- (250,000) (250,000)
Deposits and prepaid expenses..................... (431,513) 193,907 53,751 (343,303)
Accounts payable.................................. 31,972 228,618 (165,625) 187,225
Accrued expenses.................................. (293,013) 826,344 (351,292) 967,430
Deferred revenue.................................. 375,000 -- 1,375,000 1,750,000
----------- ------------ ----------- ------------
Net cash provided by (used in) operating
activities.................................... (7,159,075) (9,280,642) 140,322 (24,348,115)
----------- ------------ ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................... (324,522) (1,452,811) (96,290) (3,082,253)
Disposal of property and equipment, net................ -- 28,040 -- 28,040
----------- ------------ ----------- ------------
Net cash used in investing activities........... (324,522) (1,424,771) (96,290) (3,054,213)
----------- ------------ ----------- ------------
Cash flows from financing activities:
Proceeds from convertible notes payable to
stockholders......................................... 3,000,000 4,400,000 1,000,000 9,400,000
Payments of obligations under capital leases........... (211,276) (269,477) (545,963) (1,128,502)
Proceeds from sale/leaseback of equipment.............. -- 564,541 -- 771,968
Proceeds from equipment leases......................... 165,188 728,889 -- 1,422,240
Net proceeds from sale of redeemable convertible
preferred stock...................................... 9,111,155 742,926 -- 19,771,996
Proceeds from sale of Common Stock..................... 47 1,671 7,354 13,175
----------- ------------ ----------- ------------
Net cash provided by financing activities....... 12,065,114 6,168,550 461,391 30,250,877
----------- ------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents..... 4,581,517 (4,536,863) 505,423 2,848,549
Cash and cash equivalents, beginning of period........... 2,298,472 6,879,989 2,343,126 --
----------- ------------ ----------- ------------
Cash and cash equivalents, end of period................. $ 6,879,989 $ 2,343,126 $ 2,848,549 $ 2,848,549
=========== ============ =========== ============
Supplemental disclosure of noncash transactions:
Increase in equipment under capital leases............. $ (165,187) $ (1,309,392) $ -- $ (2,210,170)
=========== ============ =========== ============
Conversion of convertible notes payable to stockholders
and accrued interest into redeemable convertible
preferred
stock................................................ $ 3,000,000 $ -- $ 4,849,894 $ 8,849,894
=========== ============ =========== ============
Issuance of warrants................................... $ 476,800 $ 165,937 $ 99,000 $ 741,737
=========== ============ =========== ============
Leasehold improvements acquired through issuance of
redeemable convertible preferred stock............... $ -- $ -- $ 619,584 $ 619,584
=========== ============ =========== ============
Supplemental disclosure of cash flow information:
Interest paid during the period........................ $ 202,069 $ 146,322 $ 261,397 $ 1,214,929
=========== ============ =========== ============
</TABLE>

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

F-6
<PAGE> 67

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS

BioTransplant Incorporated (the "Company") was incorporated on March 20,
1990. The Company is developing proprietary anti-rejection pharmaceuticals and
organ transplantation systems which represent a comprehensive approach to
inducing the long-term specific transplantation tolerance in humans.

The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development and raising capital. The
Company is subject to a number of risks similar to those of other development
stage companies, including dependence on key individuals, competition from
substitute products and larger companies, the development of commercially usable
products, obtaining regulatory approval for products under development, the
development and marketing of commercial products, and the need to obtain
adequate additional financing necessary to fund the development of its products.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the application
of certain accounting policies described below and elsewhere in the notes to
consolidated financial statements.

(a) Pro Forma Presentation

The unaudited pro forma consolidated balance sheet as of December 31, 1995
reflects (i) the sale subsequent to December 31, 1995 of 2,967,500 shares of
Series D redeemable convertible preferred stock and the receipt of $5,905,000 in
net proceeds therefrom, (ii) the issuance of 527,909 shares of Series D
redeemable convertible preferred stock upon the conversion of outstanding notes
payable and $55,816 of accrued interest thereon, and (iii) the automatic
conversion of all outstanding shares of redeemable convertible preferred stock
into 5,202,154 shares of Common Stock upon the closing of the Company's proposed
initial public offering (including 431,724 additional shares of Common Stock to
be issued to Sandoz pursuant to antidilution rights).

(b) Pro Forma Net Loss per Common Share

Pro forma net loss per Common Share is based on the pro forma weighted
average number of Common Shares outstanding during the period, assuming the
automatic conversion of all outstanding shares of Series A, B, D and E
redeemable convertible preferred stock into 3,896,580 shares of Common Stock.
Pursuant to the requirements of the Securities and Exchange Commission, Common
Stock and preferred stock issued during the 12 months immediately preceding the
initial public offering, plus shares of Common Stock that became issuable during
the same period pursuant to the grant of common stock options and warrants, have
been included in the calculation of pro forma weighted average number of Common
Shares outstanding for the entire period using the treasury stock method.
Historical net loss per share has not been presented as such information is not
considered to be relevant or meaningful.

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary; all material intercompany accounts
and transactions have been eliminated in consolidation.

(d) Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates market
value, and have maturities of less than three months from the date of purchase.

F-7
<PAGE> 68

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(e) Depreciation and Amortization

The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of equipment under capital lease and
leasehold improvements is computed using the straight-line method over the
shorter of the estimated useful life of the asset or the lease term.

(f) Use of Estimates in the Preparation of Financial Statements

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 and
disclosure of contingent 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.

(g) Revenue Recognition

Substantially all of the Company's license and research and development
revenues are derived from two collaborative research arrangements (see Note 9).
Annual research and development payments are recognized on a straight-line basis
over the period of the contract, which approximates when work is performed and
costs are incurred. License fee revenue represents technology transfer fees
received for rights to certain technology of the Company. License fees are
recognized as revenue as earned. Deferred revenue represents amounts received in
advance for research and development. Research and development expenses in the
accompanying consolidated statements of operations include funded and unfunded
expenses.

(3) CAPITAL LEASES

The Company has capital lease commitments related to certain property and
equipment. In conjunction with these leases, the Company has issued warrants to
purchase Common and Preferred Stock (see Note 9).

Future minimum payments under these capital lease agreements as of December
31, 1995 are as follows:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year Ending December 31,
1996............................................................... $ 569,647
1997............................................................... 485,818
1998............................................................... 186,694
1999............................................................... 10,755
----------
Total minimum payments........................................ 1,252,914
Less -- Amount representing interest.................................... 187,207
----------
Present value of minimum lease payments 1,065,707
Less Current obligation under capital leases............................ 450,768
----------
$ 614,939
==========
</TABLE>

Equipment under capital leases collateralize these lease obligations.

(4) CONVERTIBLE NOTES PAYABLE TO STOCKHOLDERS

In September 1993, the Company borrowed $3,000,000 from certain preferred
stockholders, under two convertible promissory notes bearing interest at 9% per
annum. The notes were converted into Series D redeemable convertible preferred
stock at $2.00 per share in November 1993. In connection with the

F-8
<PAGE> 69

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

promissory notes, the Company issued warrants to purchase 74,999 shares of
Common Stock at an exercise price of $.04 per share as discussed in Note 8(c).
The Company recorded $447,000 of interest expense in 1993, which represents the
estimated fair value of the warrants.

In October 1994, the Company borrowed $4,400,000 from certain preferred
stockholders under convertible promissory notes bearing interest at 10% per
annum. The notes and accrued interest thereon were converted into Series D
redeemable convertible preferred stock at $2.00 per share in October 1995. In
connection with the issuance of these notes, the Company issued warrants to
purchase 109,999 shares of Common Stock at an exercise price of $4.00 per share.

In August 1995, the Company borrowed $1,000,000 from certain preferred
stockholders under convertible promissory notes bearing interest at the prime
rate, as defined, plus 1% per annum. In connection with the issuance of these
notes, the Company issued warrants to purchase 24,999 shares of Common Stock at
an exercise price of $.04 per share. The Company recorded $99,000 of interest
expense in 1995, which represents the estimated fair value of the warrants. The
notes and accrued interest thereon were converted into 527,909 shares of Series
D redeemable convertible preferred stock at $2.00 per share in February 1996.

(5) ACCRUED EXPENSES

Accrued expenses consist of the following at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
---------- --------
<S> <C> <C>
Consulting and contract research............................ $ 509,442 $402,812
Clinical trials and related costs........................... 426,750 83,850
Other....................................................... 382,530 480,768
---------- --------
$1,318,722 $967,430
========== ========
</TABLE>

(6) STOCKHOLDERS' EQUITY (DEFICIT)

(a) Reverse Stock Split

On May 6, 1996, the Company consummated a one-for-four reverse stock split
of its Common Stock. All share and per share amounts of Common Stock for all
periods presented have been retroactively adjusted to reflect the reverse stock
split. The Company is authorized to issue 25,000,000 shares of Common Stock,
$.01 par value, and 2,000,000 shares of undesignated preferred stock, $.01 par
value.

(b) Common Stock

As of December 31, 1995, the Company has reserved the following shares of
Common Stock for issuance:

<TABLE>
<S> <C>
Conversion of redeemable convertible preferred stock..................... 3,896,587
1991 Stock Option Plan................................................... 402,224
1994 Directors' Equity Plan.............................................. 13,750
Outstanding warrants..................................................... 377,135
---------
4,689,696
=========
</TABLE>

F-9
<PAGE> 70

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) REDEEMABLE CONVERTIBLE PREFERRED STOCK

As of December 31, 1995, the Company's Board of Directors authorized
15,615,112 shares of $.01 par value redeemable convertible preferred stock.

In 1995, the Company issued 309,792 shares of $.01 par value Series D
redeemable convertible preferred stock to its landlord in exchange for certain
leasehold improvements. The leasehold improvements were recorded at $619,584,
which approximated the fair market value of the stock at the date of issuance
and the cost of the leasehold improvements.

Redeemable convertible preferred stock activity since inception is as
follows:

<TABLE>
<CAPTION>
SERIES A SERIES B SERIES D SERIES E
---------------------- ---------------------- ------------------------ --------------------
NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING NUMBER CARRYING
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE
--------- ---------- --------- ---------- ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of Series A, net of
issuance costs of $51,973.... 3,300,000 $3,248,027 -- $ -- -- $ -- -- $ --
--------- ---------- ------- --------- --------- ---------- ------- -------
Balance, December 31, 1991.... 3,300,000 3,248,027 -- -- -- -- -- --
Sale of Series A............. 700,000 700,000 -- -- -- -- -- --
Conversion of notes payable
into Series A.............. 1,000,000 1,000,000 -- -- -- -- -- --
Sale of Series A, net of
issuance costs of
$18,612.................... 1,000,000 981,388 -- -- -- -- -- --
Sale of Series B, net of
issuance costs of
$11,500.................... -- -- 401,606 4,988,500 -- -- -- --
--------- ---------- ------- --------- --------- ---------- ------- -------
Balance, December 31, 1992.... 6,000,000 5,929,415 401,606 4,988,500 -- -- -- --
Sale of Series D, net of
issuance costs of
$188,846................... -- -- -- -- 6,150,000 12,111,155 -- --
--------- ---------- ------- --------- --------- ---------- ------- -------
Balance, December 31, 1993.... 6,000,000 5,929,415 401,606 4,988,500 6,150,000 12,111,155 -- --
Sale of Series E, net of
issuance costs of
$67,074.................... -- -- -- -- -- -- 300,000 742,926
--------- ---------- ------- --------- --------- ---------- ------- -------
Balance, December 31, 1994.... 6,000,000 5,929,415 401,606 4,988,500 6,150,000 12,111,155 300,000 742,926
Conversion of notes payable
and accrued interest into
Series D................... -- -- -- -- 2,424,947 4,849,894 -- --
Issuance of Series D for
leasehold improvements..... -- -- -- -- 309,792 619,584 -- --
--------- ---------- ------- --------- --------- ---------- ------- -------
Balance, December 31, 1995.... 6,000,000 5,929,415 401,606 4,988,500 8,884,739 17,580,633 300,000 742,926
Pro forma adjustments
(unaudited)
Sale of Series D, net of
issuance costs of
$30,000.................... -- -- -- -- 2,967,500 5,905,000 -- --
Conversion of notes payable
and accrued interest into
Series D................... -- -- -- -- 527,909 1,055,816 -- --
Conversion of redeemable
convertible preferred stock
into common stock.......... (6,000,000) (5,929,415) (401,606) (4,988,500) (12,380,148) (24,541,449) (300,000) (742,926)
---------- ---------- -------- ---------- ----------- ----------- -------- --------
Pro forma balance, December
31, 1995 (unaudited)....... -- $ -- -- $ -- -- $ -- -- $ --
========== ========== ======== ========== =========== =========== ======== ========
</TABLE>

The rights, preferences and privileges of the preferred stock are listed
below:

Conversion

Shares of Preferred Stock are convertible into Common Stock at the rate of
1/4 share for each share of Preferred Stock, adjustable for certain dilutive
events. Conversion is at the option of the preferred stockholder. The Company
will be required to issue an additional 431,724 shares of Common Stock to Sandoz
upon its initial public offering as a result of antidilution rights. The
conversion into Common Stock is automatic upon the consummation of an initial
public offering resulting in gross proceeds to the Company of at least

F-10
<PAGE> 71

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$15,000,000 and at a price per share that a Pricing Committee of the Board of
Directors has determined to be in the best interests of the Company and its
stockholders.

Redemption

In the event of a merger or sale of the Company, or other disposition of
all or substantially all of its assets, the Company is required to redeem all
outstanding shares of Preferred Stock at its redemption price, as defined
herein. In addition, at the request of holders of 66 2/3% of the Preferred Stock
at any date subsequent to December 31, 1996, the Company must redeem up to an
aggregate of 25% of preferred shares then outstanding and an additional 25% on
each of the three anniversaries thereafter. The per share redemption price is
$1.00 for Series A, $12.45 for Series B, $2.00 for Series D and $2.70 for Series
E, plus any declared but unpaid dividends.

Liquidation Preference

The holders of the Preferred Stock have preference in the event of a
liquidation or dissolution of the Company equal to the redemption process
discussed above plus declared but unpaid dividends. If the assets of the Company
are insufficient to pay the full preferential amounts to the preferred
stockholders, the assets shall be distributed ratably among such holders in
proportion to their aggregate liquidation preference amounts.

Voting Rights and Dividends

The holders of the Preferred Stock shall be entitled to vote on all matters
and shall be entitled to the number of votes equal to the number of shares of
Common Stock into which each share is convertible. The holders of the Preferred
Stock shall be entitled to receive, when and as declared by the Board of
Directors, any dividend declared or paid on any shares of Preferred Stock.

Right of First Refusal

The Company's Series A, B and D and preferred stockholders have the right
of first refusal to purchase any new securities offered by the Company. The
right of first refusal terminates upon the closing of an initial public offering
resulting in gross proceeds to the Company of at least $15,000,000.

(8) OPTIONS AND WARRANTS

(a) 1991 Stock Option Plan

The Company has adopted the 1991 Stock Option Plan (the "Plan") under which
it may grant incentive stock options, nonqualified stock options and stock
appreciation rights. The Company has reserved 425,000 shares of Common Stock for
issuance under the Plan. On March 1, 1996, the Company's Board of Directors
voted to increase the shares reserved under the Plan to 750,000, subject to
shareholder approval. These options vest ratably over a four- to five-year
period.

F-11
<PAGE> 72

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the option activity under the Plan:

<TABLE>
<CAPTION>
NUMBER
OF OPTIONS PRICE PER SHARE
---------- ---------------
<S> <C> <C>
Outstanding, December 31, 1993................................... 249,901 $ .04 - $ 3.00
Granted........................................................ 99,378 4.40 - 15.20
Exercised...................................................... (17,406) .04 - 3.00
Canceled....................................................... (52,859) .04 - 3.00
-------- --------------
Outstanding, December 31, 1994................................... 279,014 .04 - 15.20
Granted........................................................ 193,987 4.00
Exercised...................................................... (5,303) .60 - 3.00
Canceled....................................................... (150,373) .92 - 15.20
-------- --------------
Outstanding, December 31, 1995................................... 317,325 $ .04 - $ 4.00
======== ==============
Exercisable, December 31, 1995................................... 126,934 $ .04 - $ 4.00
======== ==============
</TABLE>

Subsequent to December 31, 1995, the Company granted options to purchase
56,782 shares of Common Stock with exercise prices ranging from $4.20 to $6.00
per share.

During 1993 and 1994, the Company granted stock options with exercise
prices below the estimated fair value of the Common Stock as determined for
financial reporting purposes. Compensation expense is being recognized over the
vesting period of the options. The Company recognized compensation expense of
$105,546, $170,225 and $170,225 during 1993, 1994 and 1995, respectively,
relating to these option grants.

The Company has the right of first refusal or right of first offer on the
sale or transfer of any shares of Common Stock issued upon exercise of an option
granted under the Plan. This right, however, terminates upon the closing of an
initial public offering of Common Stock.

(b) 1994 Directors' Equity Plan

In August 1994, the stockholders approved the 1994 Directors' Equity Plan
(the "Directors' Plan"), which automatically grants an option to each eligible
outside director of the Company for the purchase of 3,125 shares of Common Stock
at the then fair market value. In addition, each eligible outside director will
receive an award to purchase 625 shares of restricted Common Stock at $.04 per
share. In 1994, the Company recorded compensation expense of $8,700 relating to
restricted common stock issued to Directors. At December 31, 1995, 938
restricted common shares were unvested. The Company has reserved 15,000 shares
of Common Stock for issuance under the Plan. These options vest ratably over a
four-year period.

The following table summarizes the option activity under the Directors'
Plan:

<TABLE>
<CAPTION>
NUMBER PRICE PER
OF OPTIONS SHARE
---------- ---------
<S> <C> <C>
Outstanding, December 31, 1993......................................... -- $ --
Granted.............................................................. 6,250 15.20
Exercised............................................................ -- --
Canceled............................................................. -- --
------ ------
Outstanding, December 31, 1994......................................... 6,250 15.20
Granted.............................................................. 6,250 4.00
Exercised............................................................ -- --
Canceled............................................................. (6,250) 15.20
------ ------
Outstanding, December 31, 1995......................................... 6,250 $ 4.00
====== ======
Exercisable, December 31, 1995......................................... 787 $ 4.00
====== ======
</TABLE>

F-12
<PAGE> 73

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has the following warrants outstanding for the purchase of
Common Stock:

<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE
OF WARRANTS PER SHARE
----------- --------------
<S> <C> <C>
Outstanding, December 31, 1992.................................. 24,999 $ .04
Granted....................................................... 80,449 .04 - 49.80
------- ------------
Outstanding, December 31, 1993.................................. 105,448 .04 - 49.80
Granted....................................................... 239,497 3.00 - 10.80
------- -------------
Outstanding, December 31, 1994.................................. 344,945 .04 - 49.80
Granted....................................................... 24,999 .04
------- -------------
Outstanding, December 31, 1995.................................. 369,944 $.04 - $49.80
======= =============
Exercisable, December 31, 1995.................................. 345,064 $.04 - $49.80
======= =============
</TABLE>

The warrants expire during the years 1999 to 2005.

In June 1993, the Company issued warrants for the purchase of 452 shares of
Common Stock at $49.80 per share in connection with an equipment lease
agreement. The warrants are currently exercisable and expire on May 12, 2000.

In June 1993, the Company issued warrants for the purchase of 4,998 shares
of Common Stock at $.04 per share in connection with a financing agreement with
stockholders. The warrants are all currently exercisable and expire on June 16,
2003. The Company recorded interest expense of $29,800 during 1993, which
represents the estimated fair value of the warrants.

In September 1993, the Company issued warrants for the purchase of 74,999
shares of Common Stock at $.04 per share in connection with the issuance of
convertible notes payable to stockholders. The warrants are currently
exercisable and expire on September 24, 2003. The Company recorded interest
expense of $447,000 during 1993, which represents the estimated fair value of
the warrants.

In January 1994, the Company issued warrants for the purchase of 13,500
shares of Common Stock at $10.80 per share in connection with the sale of Series
E redeemable convertible preferred stock. The warrants are currently exercisable
and expire on January 15, 1999.

In March 1994, the Company issued warrants to purchase 41,483 shares of
Common Stock at $3.00 per share in connection with the facility lease discussed
in Note 12. The warrants vest over a five-year period, commencing in March 1994.
The Company recorded $165,937 of deferred rent, which represents the estimated
fair value of the warrants. This amount will be amortized as rent expense over
the life of the lease.

In September 1994, the Company granted warrants to purchase 59,998 shares
of Common Stock at an exercise price of $4.00 per share in connection with a
financing commitment letter. These warrants are currently exercisable and expire
on August 14, 2004.

In October 1994, the Company granted warrants to purchase 109,999 shares of
Common Stock at an exercise price of $4.00 per share. These warrants were issued
in connection with convertible notes payable to stockholders. These warrants are
currently exercisable and expire on October 31, 2004.

In November 1994, the Company issued warrants to purchase 14,517 shares of
Common Stock at $10.80 per share. These warrants were issued in connection with
an equipment lease agreement. The warrants are currently exercisable and expire
on November 18, 2001.

F-13
<PAGE> 74

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1995, the Company issued warrants to purchase 24,999 shares of
common stock at $.04 per share. The warrants were issued in connection with the
issuance of convertible notes payable to stockholders. The Company recorded
interest expense of $99,000 during 1995, which represents the estimated fair
value of the warrants. These warrants are currently exercisable and expire on
August 18, 2005.

(9) COLLABORATIVE RESEARCH AGREEMENTS

(a) Sandoz Pharma Ltd.

In April 1993, as amended and restated in September 1995, the Company
entered into a five-year collaboration agreement with Sandoz Pharma Ltd.
("Sandoz") to develop and commercialize certain xenotransplantation technology
(the "Sandoz Agreement"). Pursuant to the Sandoz Agreement, the Company will
receive research funding of $20.0 million, of which $10.0 million had been
received as of December 31, 1995, and license fees of $10.0 million, of which
$5.0 million had been received as of December 31, 1995, in connection with the
research by the Company of xenotransplantation products. In addition, in 1992,
Sandoz purchased $5.0 million of the Company's Series B Convertible Preferred
Stock, which will convert into 532,125 shares of Common Stock upon consummation
of the Company's initial public offering. Pursuant to the terms of the Sandoz
Agreement, Sandoz is obliged to fund the development costs associated with
certain xenotransplantation products developed by the Company subject to
reimbursement of a portion thereof by the Company, if the Company elects to
co-promote such products. The Company has the right to co-promote solely in
North America and to receive an agreed upon share of profits, if any, derived
from North American sales. The Company is entitled to receive royalties on the
sale of xenotransplantation products by Sandoz outside of North America and, to
the extent that the Company elects not to co-promote in North America, on sales
in North America as well.

As of December 31, 1995, the Company had deferred revenue of $1,750,000
pursuant to the agreement which represents annual research and development
payments received prior to revenue recognition.

(b) MedImmune, Inc.

In October 1995, the Company and MedImmune formed a collaborative agreement
for the development and commercialization of products to treat and prevent organ
transplant rejection. The collaboration is based upon the development of
products derived from BTI-322, MEDI-500 and future generations of products
derived from these two molecules. Pursuant to the collaboration, the Company
granted MedImmune an exclusive worldwide license to develop and commercialize
BTI-322 and any products based on BTI-322, other than the use of BTI-322 in kits
or systems for xenotransplantation or allotransplantation. MedImmune paid
BioTransplant a $2.0 million license fee at the time of formation of the
collaboration, and agreed to fund and assume responsibility for clinical testing
and commercialization of any resulting products. MedImmune has agreed to provide
research support and make milestone payments which could total up to an
additional $14.0 million, up to $12.0 million of which is repayable from
royalties on BTI-322 or MEDI-500, as well as to pay royalties on any sales of
BTI-322, MEDI-500 and future generations of products, if any. MedImmune is
entitled to a credit against royalty payments for certain milestone payments
that it makes.

(10) RESEARCH AND LICENSE AGREEMENTS

The Company has entered into several research and license agreements with a
hospital whereby the Company obtained the rights to the hospital's research
pertaining to the transplantation of organs and tissues and other related
technologies. The Company also obtained an exclusive license to commercially
develop, manufacture, use and distribute worldwide any products developed
pursuant to the agreements in exchange for research funding and royalties on any
future sales. These agreements have initial terms of one to ten years; however,
either party may terminate the agreements at various times, as defined, with
written notice. The Company has agreed to reimburse the hospital for the cost of
leasing up to $1,050,000 of research equipment over a five-year lease period. At
the end of the lease, the hospital has the option to purchase the equipment for

F-14
<PAGE> 75

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

a nominal amount. As of December 31, 1995, the hospital has leased equipment
with an approximate cost of $859,000. The Company is currently expensing
approximately $17,000 per month for this leased equipment; however, this amount
may increase until the hospital has leased the maximum amount allowed.

The Company has entered into research and license agreements with four
universities whereby the Company funded research and development. The Company
also obtained exclusive, worldwide licenses for certain patents, patent rights
and research information and rights to develop, manufacture, use and sell any
product developed pursuant to the licensed technology in exchange for royalties
on any future sales, as defined.

During 1991, the Company entered into a research and supply agreement with
a breeding laboratory and was granted exclusive, worldwide licenses for the
acquisition and sale of specified organs or animals utilized in the licensed
technology. Pursuant to this agreement, the Company has agreed to pay specified
royalties on future net product sales, as defined in the agreement.

During 1992, the Company entered into a license agreement and was granted
worldwide rights and licenses for several patents relating to certain
technology. The Company paid approximately $160,000 under the agreement in 1993.
An additional $155,000 will be paid upon the receipt of certain research
materials. The Company will also pay royalties on any product sales derived from
the technology.

Commitments as of December 31, 1995, pursuant to these research and license
agreements, subject to cancellation clauses, are as follows:

<TABLE>
<CAPTION>
HOSPITAL CONSULTANTS OTHER TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Year Ending December 31,
1996...................................... $1,926,202 $298,239 $165,000 $2,389,441
1997...................................... 775,584 -- -- 775,584
1998...................................... 625,000 -- -- 625,000
1999...................................... 625,000 -- -- 625,000
2000...................................... 625,000 -- -- 625,000
---------- --------- --------- ----------
$4,576,786 $298,239 $165,000 $5,040,025
========== ========= ========= ==========
</TABLE>

(11) INCOME TAXES

The Company accounts for income taxes in accordance with Statements of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. At
December 31, 1995, the Company had net operating loss carryforwards for income
tax purposes of approximately $27,005,000. The Company also has available tax
credit carryforwards of $992,000 at December 31, 1995 to reduce future federal
income taxes, if any. The net operating loss carryforwards and tax credit
carryforwards expire commencing in the year 2006, and are subject to review and
possible adjustment by the Internal Revenue Service. Net operating loss
carryforwards may be limited in the event of certain changes in the ownership
interests of significant stockholders.

F-15
<PAGE> 76

BIOTRANSPLANT INCORPORATED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the deferred tax asset as of December 31, 1994 and 1995
are approximately as follows:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Operating loss carryforwards....................................... $10,278,000 $10,802,000
Tax credit carryforwards........................................... 716,000 992,000
Start-up costs..................................................... 654,000 525,000
Other temporary differences........................................ 246,000 449,000
----------- -----------
11,894,000 12,768,000
Less -- Valuation allowance........................................ 11,894,000 12,768,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

Due to the history of operating losses, a valuation allowance has been
provided for the entire deferred tax asset as it is uncertain if the Company
will realize the benefit of the deferred tax asset.

(12) OPERATING LEASE COMMITMENTS

The Company leases its facility under an operating lease that expires in
2004. In addition, the Company is responsible for the real estate taxes and
operating expenses related to this facility. Minimum annual rental payments
under this lease agreement are as follows:

<TABLE>
<S> <C>
1996.................................................. $1,013,464
1997.................................................. 1,013,464
1998.................................................. 1,013,464
1999.................................................. 1,014,714
2000.................................................. 1,018,464
Thereafter............................................ 3,819,240
---------
$8,892,810
=========
</TABLE>

Rental expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $355,000, $596,000 and $1,183,000, respectively.

(13) INVESTMENT IN PRIVATELY HELD CORPORATION

In April 1994, the Company entered into a shareholders' agreement and a
research and license agreement (the "Agreements") with a privately held
corporation. Under the Agreements, the Company paid $1,000,000 for 30% of the
outstanding shares, an exclusive license to certain technology and other
intellectual property and support of certain research in the field of animal
genetic engineering. The Company has an option to purchase additional shares of
stock and to fund additional research. The option is exercisable at any time
prior to July 1996. The Company has recorded the $1,000,000 as research and
development expense during the 12 months ended December 31, 1994. In 1996, the
Company agreed to fund an additional $500,000 for research support and to
maintain its pro rata ownership of the Company.

(14) SUBSEQUENT EVENTS

(a) Sale of Series D preferred stock

During 1996, the Company sold 2,967,500 shares of $.01 par value Series D
redeemable convertible preferred stock for net proceeds of approximately
$5,905,000.

(b) Conversion of Notes Payable to Stockholders

During February 1996, the Company converted the $1,000,000 note payable to
stockholders (see Note 4) and $55,816 of accrued interest into 527,909 shares of
Series D redeemable convertible preferred stock.

F-16
<PAGE> 77
BIOTRANSPLANT'S ALLOMUNE SYSTEM IS DESIGNED TO CREATE DONOR SPECIFIC TOLERANCE

[Photograph of a monkey's abdomen showing three skin grafts on day 13,
labeled "donor (frozen skin)", "3rd party (fresh skin)" and "3rd party (frozen
skin)", respectively.]

The photograph depicts a monkey's abdomen where specific transplant tolerance
is demonstrated.

This monkey, treated with the AlloMune System, has maintained its life
supporting transplanted kidney graft from a fully mismatched donor monkey, in
the absence of chronic immunosuppressive drugs for over 800 days
post-transplant. At approximately one year post-transplant, the donor's frozen
skin as well as frozen and fresh skin from a third party monkey, was grafted
onto the abdomen of the recipient monkey. The photograph showns acceptance of
the original donor skin (left graft) and the rejection of the third party skin
(right grafts) on day 13 post skin grafting. The original donor skin survived
and was healthy until the end of the experimental evaluation, approximately one
year later, without the chronic use of immunosuppressive drugs.

<PAGE> 78

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No dealer, sales person or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Underwriters. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any of the securities offered
hereby by anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date of this
Prospectus.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
The Company................................ 3
Risk Factors............................... 6
Use of Proceeds............................ 14
Dividend Policy............................ 14
Capitalization............................. 15
Dilution................................... 16
Selected Consolidated Financial Data....... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 18
Business................................... 21
Management................................. 40
Certain Transactions....................... 46
Principal Stockholders..................... 48
Description of Capital Stock............... 50
Shares Eligible for Future Sale............ 53
Underwriting............................... 55
Legal Matters.............................. 56
Experts.................................... 56
Additional Information..................... 57
Index to Consolidated Financial
Statements............................... F-1
</TABLE>

Until June 2, 1996 (25 days after the date of the Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================

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2,800,000 SHARES

LOGO

COMMON STOCK

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

May 8, 1996
------------------------

UBS SECURITIES LLC

PACIFIC GROWTH EQUITIES, INC.

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