<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended January 1, 2000

                                       or

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 0-24241

                             V.I. TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                          11-3238476
           --------                                          ----------
(State or other jurisdiction of                           (I.R.S. Employer
incorporation or organization)                           Identification No.)

                    155 Duryea Road, Melville, New York 11747
                    -----------------------------------------
               (Address of principal executive offices) (Zip code)

       Registrant's telephone number, including area code: (631) 752-7314

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common stock, $.01 par value
                          ----------------------------
                                (Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

      The aggregate market value of voting common stock held by non-affiliates
of the Registrant, based on the closing price of the common stock on March 21,
2000 as reported on the NASDAQ National Market, was approximately $160,342,000.
Shares of common stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded from this
computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes. The Registrant does not have any non-voting common equity
outstanding.

                                   19,734,396
       (Number of shares of common stock outstanding as of March 21, 2000)

                      DOCUMENTS INCORPORATED BY REFERENCE:

               Portions of the Registrant's 2000 Annual Report to
           Stockholders are incorporated by reference into Part II of
           this Report. Portions of the Registrant's Definitive Proxy
           Statement for the 2000 Annual Meeting of Stockholders (the
          Definitive Proxy Statement), to be filed with the SEC within
           120 days of January 1, 2000, are incorporated by reference
                          into Part III of this Report.
<PAGE>

                                      INDEX

<TABLE>
<S>        <C>          <C>                                                            <C>
PART I
           Item 1.      Business
                         The Company                                                    1
                         Background                                                     2
                         The Blood Components Marker                                    2
                         The Plasma Derivatives Market                                  3
                         Challenges Facing the Blood Products Market                    3
                         Risks of Viral Infection from Blood Transfusions               4
                         Approaches to Safety of the Blood Supply                       4
                         Products and Product Development                               5
                         Red Blood Cell Concentrates                                    6
                         Transfusion Plasma                                             8
                         Plasma Derivatives                                             9
                         Viral Inactivation Technology Platform                         9
                         Strategic Collaborations                                      10
                         Manufacturing and Supply                                      12
                         Sales, Marketing and Distribution                             12
                         Patents, Licenses and Proprietary Rights                      13
                         Competition                                                   15
                         Government Regulation                                         14
                         Health Care Reimbursement                                     16
                         Research and Development                                      17
                         Environment Regulation; Use of Hazardous Substances           17
                         Customers                                                     17
                         Employees                                                     17

           Item 2.      Properties                                                     17

           Item 3.      Legal Proceedings                                              18

           Item 4.      Submission of Matters to a Vote of Security Holders            18

           Item 5.      Market for Registrant's Common Equity and Related
                        Stockholder Matters                                            19

           Item 6.      Selected Financial Data                                        20

           Item 7       Management's Discussion and Analysis of Financial
                        Condition and Results of Operations                            22

           Item 7A.     Quantitative and Qualitative Disclosures About Market
                        Risk                                                           30

           Item 8.      Financial Statements and Supplementary Data                    30

           Item 9.      Changes and Disagreements with Accountants on
                        Accounting and Financial Disclosure                            30

PART III
           Item 10.     Directors and Executive Officers of the Registrant             31

           Item 11.     Executive Compensation                                         31

           Item 12.     Security Ownership of Certain Beneficial Owners and
                        Management                                                     31

           Item 13.     Certain Relationships and Related Transactions                 31

Part IV
           Item 14.     Exhibits, Financial Statement Schedules, and Reports
                        on Form 8-K                                                    32

           Signatures                                                                  35
</TABLE>
<PAGE>

                                    PART I

Item 1. BUSINESS

The Company

      V.I. Technologies, Inc. ("the Company" and "Vitex(TM)", a trademark and
tradename of V.I. Technologies, Inc.) is a leading developer of a broad
portfolio of blood products and systems which use its proprietary pathogen
inactivation technologies. VITEX was incorporated in Delaware in December 1992.
The Company's technologies are intended to address the risks of viral, bacterial
and other pathogen contamination in blood products, including plasma, plasma
derivatives, red blood cells and platelets. Viral inactivation processes have
the potential to eliminate viruses that are enveloped by lipid membranes such as
hepatitis B virus ("HBV"), hepatitis C virus ("HCV") and HIV, the virus that
causes AIDS, and non-enveloped viruses such as hepatitis A virus ("HAV") and
parvovirus and other known and unknown pathogens.

      The Company's mission is to achieve the global availability of the safest
blood products using its proprietary pathogen viral inactivation systems. To
achieve this objective, VITEX intends to:

      (1)   exploit its leading portfolio of pathogen inactivation technologies;

      (2)   develop, through partnerships, the worldwide infrastructure to
            manufacture and distribute the safest blood products; and

      (3)   internally fund its research and development program through sales
            of its existing commercial products, thereby leveraging the
            manufacturing infrastructure already in place.

The Company has several important pathogen inactivated blood product candidates
under development. These include:

o  Red Blood Cell Concentrate (RBCC) System - The Company's INACTINE(TM)
   technology was approved by the FDA to commence clinical trials as a viral
   inactivation system for RBCC's, the most frequently transfused blood product.
   The INACTINE technology was acquired by VITEX through its merger with Pentose
   Pharmaceuticals, Inc. in November 1999. In pre-clinical studies, INACTINE
   have demonstrated a broad spectrum of viral inactivation, including both
   enveloped and non-enveloped viruses, while having no effect on the
   therapeutic properties of the RBCC. The Company has entered into two
   strategic collaborations to accelerate the development and commercialization
   of INACTINE treated-RBCC: a marketing and distribution agreement with Pall
   Corporation, and a contract development and manufacturing agreement with
   Haemonetics Corporation.

o  Universal PLAS+SD - Universal PLAS+SD is the next generation of PLAS+SD,
   the Company's virally inactivated transfusion plasma. Universal PLAS+SD
   provides the advantages of PLAS+SD; the first pharmaceutical grade virally
   inactivated blood product approved by the FDA, with an additional safety
   enhancement. "Universal" PLAS+SD, as its name implies, is expected to be
   safely transfused to any patient without the need to march donor and
   recipient blood type. Universal PLAS+SD has the added benefit of simplifying
   blood bank logistics and reducing the community and hospital blood bank
   inventory costs. Universal plasma is the first product to use the Company's
   affinity chromatography technology. VITEX received approval in the first
   quarter of 2000 to initiate a Phase III pivotal clinical trial. VITEX already
   has in place a distribution agreement for PLAS+SD with the American National
   Red Cross (Red Cross), an organization responsible for distributing 45% of
   the U.S. blood supply. Under that agreement, the Red Cross has a right of
   first offer to distribute the product when it is approved by the FDA.

o  Universal PLAS+SD II - Universal PLAS+SD II is intended to improve upon
   Universal PLAS+SD by adding additional methods of viral inactivation to
   inactivate both enveloped and non-enveloped viruses. The Company intends to
   file an IND in late 2000 or early 2001 to initiate a clinical trial for this
   product.

o  Platelet Concentrates - The Company has a development program in the
   pre-clinical stage to commercialize INACTINE-treated platelet concentrates.
   This product would deliver the broad spectrum of viral inactivation while
   preserving the critical therapeutic function of platelets. The Company hopes
   to file an ND to commence a human clinical trial of INACTINE-treated
   platelets in late 2000 or early 2001.

The Company currently manufactures two human therapeutic products:

o  PLAS+(R)SD - The Company has entered into a collaboration agreement with the
   Red Cross whereby the Red Cross is the exclusive distributor of VITEX's
   PLAS+SD in North America. PLAS+SD, the first of VITEX's virally inactivated
   products, received marketing clearance from the FDA on May 6, 1998.
   Commercial scale production and sale of PLAS+SD began in June 1998.


                                        1
<PAGE>

o  VITEX Plasma Fractions - The Company supplies Plasma Fractions primarily to
   Bayer Corporation ("Bayer") under a collaboration arrangement. The Company
   utilizes a combination of fractionation procedures to separate and purify the
   protein components of plasma. The plasma fractions are further processed by
   its customers into virally inactivated plasma derivatives for use in
   FDA-approved therapeutic applications.

      On November 12, 1999, the Company completed the merger with Pentose
Pharmaceuticals, Inc., a Delaware corporation, pursuant to an Agreement and Plan
of Merger and Reorganization dated as of July 28, 1999. The transaction was
valued at $38.8 million. Under the terms of the merger. 6,443,731 shares of
common stock of VITEX were issued in exchange for all of the outstanding Pentose
common and preferred stock resulting in the former shareholders of Pentose
owning approximately 34% of the outstanding common stock of VITEX.

      Pentose's principal business involves the development for
commercialization of novel antiviral products for medical use based on
innovative application, of nucleic acid chemistry. Pentose has developed the
INACTINE technology platform for the inactivation of viral pathogens in blood
components for transfusion plasma derivatives and biopharmaceuticals.

Background

      Whole blood contains important therapeutic components, including red blood
cells, platelets and plasma. Each of these components can be transfused directly
into patients. Plasma may also be fractionated into plasma fractions, which in
turn can be purified into protein products, referred to as plasma derivatives.
The worldwide blood products market is comprised of the blood components market
and the plasma derivatives market, as illustrated by the following diagram:

                                 ---------------
                                   Therapeutic

                                      Blood

                                    Products
                                 ---------------

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

          --------------                                 ---------------
               Blood                                         Plasma
            Components                                     Derivatives
          --------------                                 ---------------

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

-------  -----------  -------------           ----------  ----------  ----------
  Red
 Blood    Platelets    Transfusion              Albumin    Clotting     Immune-
 Cells                   Plasma                             Factors    globulins
-------  -----------  -------------           ----------  ----------  ----------

The Blood Components Market

      Blood Components. Each of the components of blood serves specific
functions. Red blood cells, which transport oxygen and carbon dioxide throughout
the body, are frequently administered to patients who have anemia, trauma,
surgical bleeding or generic disorders and account for the majority of
transfusions. Platelets, which initiate blood clotting and facilitate the repair
of damaged blood vessels, are often used to treat cancer patients following
chemotherapy and patients who lose large volumes of blood as a result of trauma
or during surgery. Plasma is the liquid part of the blood that contains a large
number of proteins, several of which have important therapeutic applications,
including mediating and controlling blood clotting, providing immune protection,
and treating several rare and life-threatening diseases such as thrombotic
thrombocytopenic purpura ("TTP"). White blood cells, an additional component of
blood, are comprised of many different types of cells that form part of the
body's immune system and are active in wound repair. White blood cells are
rarely transfused because of the potential for an adverse immune response by the
recipient.


                                       2
<PAGE>

      Collection and Processing. The processors in the blood components market
collect and process whole blood from donors at either mobile or fixed collection
sites. Approximately 35 million whole blood donations occur in North America,
Western Europe and Japan annually. In the United States, approximately 45% of
donated blood is collected by the Red Cross, another 45% is collected by
independent community blood centers and the remaining 10% is collected by
hospitals. Whole blood is usually separated by blood banks into red blood cells,
platelets and plasma to optimize transfusion therapy and to efficiently allocate
the limited available blood supply. These blood components are then distributed
by blood collection centers to hospitals for storage and subsequent transfusion.
Red blood cells and platelets each have a very short shelf life, of 42 and 5
days, respectively. Plasma can be frozen and stored for up to one year in the
form of fresh frozen plasma ("FFP") after being collected.

      Transfusions. The Company projects that approximately 30% to 40% of all
people in the United States will receive a transfusion at some point in their
lives. Transfusions containing one or more blood components are often required
to treat diseases or disorders and to replace blood loss resulting from trauma
or during surgery. In the United States, over 12 million units of red blood
cells are transfused annually, while annual platelet and plasma transfusions
account for approximately 8.0 million units and 2.8 million units, respectively.
The average unit price paid by hospitals for red blood cells, platelets and
plasma is estimated to be approximately $85, $50 and $50, respectively, and
varies depending on geographic and other factors.

The Plasma Derivatives Market

      Plasma Derivatives. Plasma contains a large number of proteins, several of
which are well characterized and have FDA-approved therapeutic applications.
These proteins are separated and purified into plasma derivatives through a
combination of fractionation procedures and modern chromatographic techniques.

      Collection and Processing. Approximately 80% of plasma used for
fractionation in North America is collected from paid donors by plasmapheresis -
the removal of blood plasma from the body by the withdrawal of blood, its
separation into plasma and blood cells and the reintroduction of the blood cells
into the body. After plasma is collected from donors, it is frozen and shipped
to large processing facilities where fractionators purity, virally inactivate,
sterile till and package protein products. Plasma derivatives are then sold to
hospitals where they are administered to patients. Four plasma fractionators,
Bayer. Aventis Behring, Alpha Therapeutics, and Baxter Corporation, currently
account for almost 50% of the worldwide plasma derivatives market. These plasma
fractionators are currently operating at or near manufacturing capacity. The
large capital costs involved in establishing fractionation capacity and the
regulatory approvals necessary to manufacture and sell fractionated products may
tend to restrict the entry of new participants into the market.

      Applications. Plasma derivatives have widespread therapeutic applications.
Albumin is frequently used as a volume expander to treat high volume blood loss,
which occurs during surgical procedures. Factor VIII and Factor IX concentrates
are routinely administered to patients with hemophilia. Immunoglobulins,
including formulations for intravenous administration, have been embraced for
the prevention and treatment of viral infections in immuno-compromised patients
and in treating certain autoimmune disorders. The market for plasma derivatives
delivered to hospitals in 1998 was approximately $1.5 billion in the United
States and over $5.0 billion worldwide.

Challenges Facing the Blood Products Market

      The use of plasma and plasma derivatives has increased dramatically in the
United States over the past two decades. In its July 1998 issue, the periodical
"Transfusion" reported that fresh frozen plasma usage increased by over 16%
between 1992 and 1994. While plasma and its derivatives represent a valuable and
lifesaving resource, these products have transmitted infectious agents to
recipients, most notably HIV, HBV and HCV. The viral safety of transfused blood
products relies on the dual safeguards of careful donor screening and rigorous
viral testing of donations.

      Safety of the Blood Supply. Despite the many benefits that blood products
provide, and recent improvements in testing and processing of blood, concerns
remain over the presence of viruses, bacteria and parasites in donated blood.
Viruses such as HBV, HCV, HIV, cytomegalovirus ("CMV") and human T-cell
lymphotropic virus ("HTLV") can present life-threatening risks. In addition,
bacteria and many other agents can transmit disease during transfusion,
including the bacteria which can cause sepsis or other systemic infections which
can result in serious illness or even death. The parasites that cause malaria
and Chagas' disease may also be transmitted by transfusions.

      The risk of transmission of any of these pathogens from an infected donor
is compounded by a number of factors, including: dividing a unit of infected
blood into its components which may expose several patients to the pathogen;
deriving therapeutic quantities of blood components from typically two so eight
donor units, any one of which may contain pathogens; and administering


                                       3
<PAGE>

frequent transfusions to certain patient populations, such as patients with
cancer, suppressed immune systems, congenital anemia and kidney and liver
disorders, resulting in a heightened risk of infection due to multiple
transfusions. The following table Illustrates the current risks of exposure to
the major, identified pathogenic viruses in transfused blood.

Risks of Viral Infection from Blood Transfusions

                                        Average                   Multiple
                                Single Transfusion (1)        Transfusions (2)
                                  (Avg: 8-10 donors)            (100 donors)
        Virus

        HBV                            1:12,600                    1:630
        HCV                            1:20,600                    1:1,030
        HIV                            1:98,600                    1:4,930
        HTLV (I&II)                    1:128,200                   1:6,410
        Aggregate Risk                 1:6,800                     1:340

(1) Such as patients who have had surgery or trauma. (Note-University of
    Maryland data presented at Cambridge Healthtech Institute's Sixth Annual
    Blood Product Safety Conference in February 2000 had the average number of
    units of red cells at 6.5).

(2) Such as patients who have cancer, liver disease and sickle cell anemia.

      Emerging and unidentified pathogens also present a threat to the blood
supply, illustrated by the recent history of HIV contamination. It is estimated
that HIV was present in the blood supply for at least seven years before it was
identified as the causative agent of AIDS and at least eight years before a test
was commercially available to detect the presence of HIV antibodies in donated
blood. During those years, many transfusion recipients were infected with HIV,
including approximately 70% of patients with severe hemophilia. In addition,
approximately 4 million Americans are infected with HCV. Eighty-five percent of
those infected develop chronic liver disease and approximately 10-20% develop
cirrhosis of the liver. Of these 4 million people, more than one million have
received potentially HCV infected blood or blood products. Moreover, most tests
to detect viruses are antibody tests, which detect an immune response to the
virus, rather than the virus itself. As a result, these tests fail to detect
viruses when performed during the "infectivity window" early in the course of an
infection before antibodies appear in detectable quantities.

      Product Consistency. Unlike pharmaceutical products, blood components vary
in their consistency, creating uncertainty as to proper dosing. This occurs as a
result of the variability of component concentrations among donors; the
impracticality of selecting donors with the optimal blood component profile; and
the imprecision in the processes for collecting and separating red blood cells,
platelets and plasma. Large plasma fractionators achieve high consistency by
processing plasma from multiple donors in a single batch and through processing
under controlled conditions.

      Blood Product Shortages. Maintaining adequate supplies of safe blood
products is an increasing challenge for blood systems around the world. In
general most blood centers rely on non-remunerated or "volunteer" donors to
donate blood components for transfusion. Multiple factors are thought by experts
to contribute to these imbalances between supply and demand. Changing
demographics and a more mobile society with fewer direct and lasting ties to
their community are factors that may limit supply. More rigorous screening and
more stringent donor selection criteria exclude formerly eligible donors. On the
other hand, demand for blood products is increasing as the population ages and
sophisticated surgeries become routine in many communities. Blood centers are
rethinking donor-recruiting strategies. In the U.S. the FDA plans to publish a
guidance document in mid-2000 with recommendations for ensuring adequate
supplies of blood products. Pathogen inactivation systems offer the potential to
expand the number of safe, eligible donors by adding an additional layer of
safety to screening systems currently in place.

Approaches to the Safety of the Blood Supply

      There are several approaches to improving blood safety currently available
and under development, including the following:

      Screening. The screening of blood and blood components for known pathogens
is universally accepted. However, there are many reasons why screening cannot
ensure a safe blood supply, including the following:

      o     failure of tests during the infectivity window;

      o     limitations of test sensitivity where tests cannot detect a small
            quantity of virus or antibody;


                                       4
<PAGE>

      o     limitations of test specificity where tests fail to detect certain
            viral variants;

      o     the presence of new viruses that have not been identified and for
            which no test exists;

      o     the presence of identified viruses for which no test is available;
            and

      o     human errors and accidents. For example, recent data presented at an
            U.S. Health and Human Services meeting in January 2000 estimated the
            risk of a patient receiving the wrong blood type at 1 in 37,000.

      Donation Strategies. Autologous (self) donation avoids the risk of
receiving contaminated donor blood, but is impractical for most patients.
Quarantining of blood seeks to address the problems associated with the
infectivity window by storing a donor's blood for three to six months after
which time the donor must return for additional testing. However, quarantining
depends on the donor's timely return for additional testing, cannot be applied
to red blood cells or platelets because of their limited shelf life and is
subject to limitations associated with blood screening.

        Blood Substitutes or Temporary Oxygen Carriers. Several companies are
developing synthetic blood substitutes. However, blood substitutes may be less
effective in certain indications than the blood components they are intended to
replace, and may be missing important blood factors, including those utilized
for blood cloning, immune surveillance and wound healing.

      Viral Inactivation. Viral inactivation has been used successfully for
plasma derivatives worldwide since the mid-1980's and for the treatment of
transfusion plasma in Europe since the early 1990's. Viral inactivation has the
potential to inactivate both known and unknown viruses. Viral inactivation for
cellular blood components, such as red blood cells and platelets, is still under
development.

Products and Product Development

      The Company has developed and is further developing a comprehensive
portfolio of blood products and systems using its proprietary viral inactivation
technologies. In addition to SD technology, which inactivates lipid-enveloped
viruses in protein solutions, the Company is developing several other viral
inactivation technologies. These include INACTINE compounds to inactivate both
enveloped and non-enveloped viruses in red blood cell concentrates, platelets,
and plasma. INACTINE technology was acquired In 1999 through the Company's
merger with Pentose. Other technologies under development include an irradiation
technology that uses short wavelength ultraviolet light ("UVC") to inactivate
both enveloped and non-enveloped viruses in protein solutions and affinity
chromatography technology in which ligands are used to develop specific bonds to
targeted proteins for the removal of viruses and other pathogens. The following
table identifies VITEX's principal product candidates and product development
programs:


                                       5
<PAGE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                    Viral
                     VITEX      Inactivation        Therapeutic                            Development
   Market           Product      Technology         Indication          Collaborator         Status
-----------------------------------------------------------------------------------------------------------
 <S>              <C>             <C>               <C>                 <C>              <C>
 Red Blood Cell   VITEX RBCC      INACTINE          Treatment for       Pall             Phase I clinical
 Concentrates                                       anemia and                           trials underway
                                                    genetic
                                                    disorders
-----------------------------------------------------------------------------------------------------------
 Transfusion      PLAS+SD         SD                Controlling         Red Cross        PLA and ELA
 Plasma                                             bleeding                             approved by FDA
                                                                                         on May 6, 1998.
                                                                                         Commercialization
                                                                                         commenced in June
                                                                                         1998

                  Universal       SD; Affinity      Controlling         Red Cross (2)    Phase III clinical
                  PLAS+SD         Chromatography    bleeding with                        trials to commence
                                                    no need for                          Q1/Q2 2000; BLA
                                                    blood typing                         filing anticipated Q4
                                                                                         2000

                  Universal       SD; Affinity      Controlling         Red Cross (2)    Pre-clinical; IND
                  PLAS+SD II      Chromatography    bleeding, with                       filing anticipated
                                  UVC; INACTINE     no need for                          late 2000. early
                                                    blood typing;                        2001
                                                    inactivation of
                                                    lipid and non-
                                                    lipid enveloped
                                                    viruses.
-----------------------------------------------------------------------------------------------------------
 Platelets        VITEX           INACTINE          Controlling         Pall             Research and
                  Platelets                         bleeding                             development
-----------------------------------------------------------------------------------------------------------
 Plasma           VITEX Plasma    SD (1);           Expanding           Bayer            Commercialization
 Derivatives      fractions       INACTINE          blood volume,                        commenced
                                                    treating                             November 1995
                                                    infections and
                                                    diseases
-----------------------------------------------------------------------------------------------------------
</TABLE>

(1) SD technology is used by VITEX's customers under non-exclusive licenses from
    the New York Blood Center (the "NYBC") to virally inactivate certain plasma
    derivatives manufactured from fractions supplied to them by VITEX.

(2) The Red Cross has a right of first offer to distribute this product.

Red Blood Cell Concentrates

      The Company intends to commercialize viral inactivation for red cells. The
viral inactivation compound used with red cells is the INACTINE technology that
the Company acquired upon completion of the merger with Pentose in November of
1999. in pre-clinical studies the INACTINE technology has been shown to
inactivate all classes of virus known to contaminate blood-derived products
while preserving such products' key therapeutic properties. The INACTINE
technology was cleared by the FDA in September of 1999 to enter a Phase I
clinical trial.

      Red Blood Cell Market It is estimated that there are over 35 million red
cell units transfused annually in the United States, Western Europe and Japan.
The current market for red blood cell concentrates is estimated to exceed $3.0
billion. The Company also estimates that the potential market for the viral
inactivation of red blood cells exceeds $2 billion annually. In the United
States alone red blood cell concentrate transfusions exceed 12 million annually
with an estimated market value exceeding $1 billion. The red blood cell
concentrate market is served by the Red Cross and by more than 100 independent
blood centers in the United States. By


                                       6

<PAGE>

contrast in most Western European countries and Japan there is a single
organization responsible for the collection and distribution of red blood cell
concentrates.

      The majority of blood product transfusions involve red blood cells. Red
blood cells deliver oxygen and remove carbon dioxide from tissues. Red blood
cells are used in the care of patients with trauma, anemia and certain genetic
disorders.

      Importance of Red Blood Cell Viral Inactivation. When asked about the
importance of red cells, blood bankers are often quoted as saying "red cells
drive the system." The blood banker is referring to the fundamental importance
of the red blood cell in the collection, manufacturing and distribution of blood
products. As the most frequently transfused blood product, every unit of whole
blood collected must yield a unit of red cells. When people refer to "blood
shortages" they are invariably referring to demand and supply imbalances for red
blood cells. Blood bankers therefore develop donor recruiting, manufacturing and
distribution strategies with the primary objective of maintaining adequate
supplies of red cells. The other two blood products, platelets and transfusion
plasma, are important but, nonetheless, viewed as byproducts of the process to
collect red blood cells.

      The Company believes that developing and commercializing a red blood cell
viral inactivation technology such as INACTINES is critical to establishing a
leadership position in blood product viral inactivation. The Company further
believes that having the first product approval for a red blood cell viral
inactivation system will create a significant competitive advantage for the
Company. Red blood cell viral inactivation, to paraphrase the blood banker, will
"drive the system for viral inactivation" of all blood products for the
following reasons:

      o     a red blood cell viral inactivation technology will create a
            powerful incentive for blood bankers to make the investment in
            modifying their manufacturing systems for viral inactivation;

      o     a red blood cell system will create stronger public pressure to
            rapidly adopt these technologies to improve the safety of the blood
            supply;

      o     a red blood cell system could lead to regulatory mandates for
            virally inactivated red cells in certain countries;

      o     a red blood cell system could help alleviate shortages by allowing
            some donors currently ineligible to donate based on FDA guidelines
            to once again safely donate due to the added layer of safety
            provided by the viral inactivation treatment; and

      o     a red blood cell system would establish viral inactivation as a
            standard of care for not only red cells but for platelets and
            transfusion plasma as well.

      INACTINE Technology. INACTINE products are low molecular weight compounds
that selectively bind and irreversibly modify nucleic acids, including both DNA
and RNA. They inactivate viruses while sparing proteins and cells that have
critical therapeutic value. INACTINE compounds have been demonstrated in
pre-clinical studies to inactivate a broad spectrum of viruses, both enveloped
and non-enveloped viruses. INACTINEs have also been shown in pre-clinical
studies to have bactericidal properties against certain bacteria known to infect
red blood cell concentrates. INACTINEs can be cost effectively manufactured and
integrated into a delivery system that can effectively work with virtually any
red blood cell bag and collection system.

      Regulatory Status. An IND was submitted to the FDA in August 1999 for
INACTINE-treated red blood cells. The Phase I clinical trial was initiated in
November 1999. The Company expects the clinical trial to be completed in midyear
of 2000. The Company further expects to receive approval before the end of 2000
to advance to the next stage of clinical trials. Based on preliminary
discussions with the FDA prior to submitting the ND and the results of the Phase
I trial, the Company believes that approval might be for a combined Phase II/III
or pivotal trial for the INACTINE-treated red cells. The Company plans to
initiate formal discussions with the FDA on the next phase of the clinical trial
in the second quarter of 2000.

      Commercialization. VITEX has made significant progress in developing the
technology and infrastructure to successfully manufacture and distribute a red
blood cell inactivation system worldwide. In February of 1998, the Company
entered into a collaboration agreement with Pall Corporation ("Pall") for the
development and distribution of red blood cell viral inactivation systems. Pall
is the leading provider of white cell removal filters for use with red blood
cells and platelets worldwide. White cell removal, also referred to as
leukoreduction, is becoming a standard of care fur safe blood products
worldwide. Pall possesses the manufacturing and distribution infrastructure
worldwide of a company with over $1 billion in annual sales.


                                       7
<PAGE>

      In January of 2000, the Company signed a collaboration agreement with
Haemonetics Corporation. Haemonetics is a leader in the field of automated blood
collection systems worldwide. Under this agreement, Haemonetics will act as a
contract developer and manufacturer of the removal system used in the INACTINE
treatment of the red blood cells. After completion of the viral inactivation
step, Haemonetics technology will be used to remove any residual INACTINE in an
automated fashion from the red blood cell concentrate prior to preparation for
storage and eventual transfusion in the patient. Over the next 12-18 months, the
Company will be working to put in place additional collaborations to ensure the
successful regulatory approval and distribution in all major blood systems
around the world.

Transfusion Plasma

      PLAS+SD. The Company successfully commercialized and gained approval from
the FDA for the first virally inactivated blood component in the U.S., PLAS+SD,
which serves as a virally inactivated substitute to FFP. This was approved for
marketing by the FDA on May 6, 1998. While virally inactivated plasma fractions
have been commercially available since 1985, PLAS+SD is the only virally
inactivated blood component, as opposed to virally inactivated plasma fraction,
marketed in the United States. PLAS+SD is transfusion plasma treated with the SD
viral inactivation process to virtually eliminate the transmission of HIV, HBV,
HCV and other lipid-enveloped viruses, which present the most significant viral
risks from blood transfusions. Its labeled uses are the same as those for FFP
and include the treatment of certain coagulation factor deficits and thrombotic
thrombocytopenic purpura, a disease characterized in part by a low platelet
count. VITEX holds an exclusive license in North America and a non-exclusive
license in the rest of the world, excluding Europe, from the NYBC to apply the
proprietary SD process to the viral inactivation of plasma. The SD viral
inactivation process used for PLAS+SD achieves rapid and complete viral killing
of lipid-enveloped viruses transmitted by transfusion, while preserving the
normal functional performance characteristics expected from FFP. Since PLAS+SD
is a pooled product, it offers the advantages of relatively uniform composition
from lot to lot (FFP is much more variable in its coagulation factor content)
and the obvious advantages of pharmaceutical grade manufacturing techniques.

      Under an agreement with the Red Cross, the Red Cross acts as the exclusive
distributor of PLAS+SD in North America, provided that the Red Cross purchases
from VITEX certain stated minimum quantities of PLAS+SD. See "Strategic
Collaborations - American National Red Cross" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Overview."

      Transfusion Plasma Market. FFP is the component of blood used primarily in
the treatment of certain coagulation factor deficits. FFP is a source of all
blood clotting factors except platelets and is used to control bleeding in
patients who require clotting factors, such as patients undergoing surgical
transplant or other extensive medical procedures and patients with chronic liver
disease or certain genetic clotting factor deficiencies. The production of FFP
in 1995 is estimated to have been 2.8 million units in North America, 2.7
million units in Western Europe and 5.2 million units in Japan. The average
unit-selling price for FFP in North America is currently estimated by VITEX to
be $50-$55. The FFP market is currently served by the Red Cross and by more than
100 independent blood centers in the United States.

      Regulatory Status. The Company received marketing approval for PLAS+SD
from the FDA on May 6, 1998, and began commercialization of the product in June
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." On June 16, 1999, VITEX received approval to market
PLAS+SD in Canada. The SD viral inactivation process does not inactivate
non-enveloped viruses. Two such non-enveloped viruses that have been reported to
be transmitted by blood products include HAV and human parvovirus B-19. During
April 1999, in connection with PLAS+SD Phase IV safety studies, VITEX observed
several seroconversions to parvovirus B-19 in healthy volunteers who received
PLAS+SD from production lots which were round to contain high concentrations of
the virus. Although there was no evidence of clinical disease typical of
parvovirus B-19 associated with these seroconversions, on April 16, 1999, VITEX
initiated a voluntary recall of lots of PLAS+SD that were found to contain
heightened levels of parvovirus B-19 DNA. See "Risk Factors that May Affect
Future Market" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview." PLAS+SD is screened for HAV. In addition,
VITEX has developed a process to screen untreated plasma for parvovirus B-19
prior to commencing the manufacturing process. This screening uses an
experimental, highly sensitive Polymerase Chain Reaction ("PCR") test in order
to ensure that this virus is below specified laboratory levels. VITEX has
completed formal validation of this screening technique and applied to the FDA
for a parvovirus B-19 label claim with approval expected in 2000.

      Universal PLAS+SD. Universal PLAS+SD is a product under development by
VITEX which, in addition to having the same characteristics and benefits as
PLAS+SD, would eliminate the need for matching donor and recipient blood types.
Universal PLAS+SD is prepared using patented technology, exclusively licensed
from the NYBC, and developed and refined by the Company which binds and removes
specific antibodies present in donor plasma that would otherwise cause an immune
response in the recipient. VITEX has established the feasibility of this
approach and has completed pre-clinical studies. The Company is commencing
pivotal clinical trials in the first quarter of 2000.


                                       8
<PAGE>

      Universal PLAS+SD II. Universal PLAS+SD II is also under development and
will add additional methods of viral inactivation to Universal PLAS+SD. The
Company is evaluating alternative technologies for use in this product,
including UVC and INACTINE compounds, which are intended to inactivate known
non-enveloped viruses and may offer added protection against other non-enveloped
viruses that might contaminate the blood supply in the future. The Company is
completing feasibility studies and plans to file for approval to initiate human
clinical trials after FDA approval in late 2000 or in the first quarter of 2001.

Plasma Derivatives

      VITEX Plasma Fractions. The Company is currently producing and selling
commercial quantities of its Plasma Fractions, principally to Bayer, one of the
four major providers of plasma derivatives worldwide. Bayer purifies and
produces virally inactivated fractions using SD technology and packages these
plasma fractions as final plasma derivatives products. VITEX's strategy has been
to be a supplier to, rather than a competitor of, these plasma fractionators.
VITEX's Processing Agreement with Bayer is structured as a multi-year
"take-or-pay" supply agreement.

      Plasma Derivatives Market. The principal products derived from plasma are
albumin, Factor VIII and Factor IX and Immunoglobulins. The market for plasma
derivatives was estimated to be approximately $1.5 billion in the United Slates
and over $5.0 billion worldwide in 1998. The Company believes that worldwide
demand for plasma derivatives is increasing at a rate of 10-20% annually, due
primarily to an aging population requiring more medical care, the discovery of
new clinical applications for existing products derived from plasma, and the
development of new products. While the demand for plasma derivatives is
increasing, each of the four major fractionators, Bayer, Aventis Behring, Alpha
Therapeutics and Baxter, have been unable to provide adequate supplies to meet
the increasing demand. In some cases this has been due to regulatory actions by
the FDA limiting production and in other cases due to the complexity and expense
of adding new capacity. Because of the substantial capital expenditures and time
associated with the construction, validation and licensing of fractionation
facilities, the Company believes that demand for its fractionation capacity will
remain high for the foreseeable future. The Company has expanded intermediate
processing capacity twice in the last two years increasing capacity by 35% in
total over that period. The Company is currently exploring strategies to cost
effectively further expand capacity.

      The Company has a development and contract manufacturing agreement for
fibrin sealant with Tyco/U.S. Surgical Corporation. Fibrin sealants are used in
surgical procedures to augment or replace sutures or staples for wound closure.
The product consists of two proteins, fibrinogen and thrombin purified from
human plasma.

      The markets for fibrin sealant are relatively crowded with many
significant competitors. In general the products are not significantly
differentiated in terms of price and performance and compete with a variety of
technologies that hope to address some portion of the wound closure market. The
VITEX/Tyco product is currently in Phase III clinical trials. The Company is not
devoting a significant amount of resources to commercializing this product and
does not expect the product to have a material effect on sales and earnings.

Viral Inactivation Technology Platform

      The Company's products and product development candidates are based on a
portfolio of technologies, which are designed to be used either individually or
in combination. The Company continues to make substantial investments in
research and development to enhance the value of its technology platform and has
filed several patent applications as a result of these activities. The
technologies being developed by VITEX are described below:

      INACTINE Technology. INACTINE technology has been shown to inactivate all
classes of virus known to contaminate blood-derived products while preserving
such product's key therapeutic properties. The technology is being applied to
red blood cell concentrates and platelets and may also prove effective in viral
inactivation of transfusion plasma and of products manufactured from plasma such
as immunoglobulins and coagulation factors.

      INACTINEs are low molecular weight compounds that selectively bind and
irreversibly modify nucleic acids, including both DNA and RNA. Thus, they
inactivate viruses while sparing proteins and cells that have critical
therapeutic value. INACTINE compounds have been demonstrated in pre-clinical
studies to inactivate a broad spectrum of viruses, including both enveloped and
non-enveloped viruses.

      The Solvent/Detergent ("SD") Technology. Most pathogenic viruses found in
blood, including HBV, HCV and HIV are protected by a lipid shell or envelope.
The SD process involves the addition of a chemical solvent (a di- or trialkyl
phosphate) and a detergent, which serves to enhance the contact between solvent
and virus, into pools of plasma or plasma fractions, which dissolves


                                       9
<PAGE>

the lipid shell of the virus, after which the virus can no longer bind to and
infect cells. The process is completed by removing the SD reagents, typically by
extraction with vegetable oil and hydrophobic chromatography, and sterile
filtering to remove bacteria, parasites, blood leukocytes and leukocyte debris.
In September 1998, the FDA's Blood Products Advisory Committee recommended
leukoreduction of blood components. At a second meeting in December of 1999, the
FDA indicated that within 6 months the agency would publish a recommendation on
a timeline for mandatory leukoreduction of all blood components. That timeline
could be from one to three years.

      The SD process was first applied to plasma derivatives in 1985 for use in
patients with hemophilia. This process has become the most widely used method
for the inactivation of lipid enveloped viruses around the world and currently
is used, under license from the NYBC, by more than 50 plasma fractionators.
Since 1985, it is estimated that more than 15 million doses of SD-treated
Factors VIII and DC, and a total of over 35 million doses of all SD-treated
products, have been administered without a single reported case of HBV, HCV or
HIV transmission. Experience has demonstrated that plasma for transfusion, when
treated with the SD process, retains blood protein structure and function with
minimal loss of essential protein components and can be implemented
cost-effectively.

      Ultraviolet C Light ("UVC") Technology. VITEX's proprietary short
wavelength ultraviolet light irradiation technology has been shown to inactivate
both enveloped and non-enveloped viruses in protein solutions. Viral
inactivation occurs because viral nucleic acids are modified directly when they
absorb ultraviolet light energy. Specificity results from differential
absorption of UVC by nucleic acids and proteins and the much larger target size
presented by nucleic acids.

      The Company's research and development effort includes the development of
an irradiator which controls UVC intensity and provides a fluid path for the
plasma or plasma derivative being treated.

      Affinity Chromatography Technology. Affinity chromatography is a
separation technique for isolating proteins from complex mixtures such as
plasma. The method exploits the unique interaction of one molecule with a
second, complementary binding molecule ("ligand"). The ligand is coupled to an
insoluble material called a matrix and poured into a column. The complex
mixture, such as plasma, is poured through the column and the targeted molecule
binds to the immobilized ligand. The purified mixture pours out of the column.
This chromatographic method leaves coagulation factors and other therapeutic
proteins unchanged. This technology is used to produce the VITEX universal
plasma in which proteins that determine blood type are removed from the plasma.
VITEX research efforts are targeting prion and virus removal as two potential
applications of this technology.

Strategic Collaborations

      The Company believes that it can efficiently accelerate the
commercialization of its products by collaborating with sales, marketing,
distribution and technology partners. The Company has entered into
collaborations with Bayer, the Red Cross, and Pall, for development, licensing
and marketing of VITEX's products and systems. The Company may seek to establish
additional collaborations with partners. The terms of VITEX's strategic
collaborations are described below:

      Bayer Corporation. In February 1995, the Company entered into an Agreement
for Custom Processing (the "Processing Agreement") with Bayer, one of the
largest processors of blood plasma, to supply VITEX Plasma Fractions to Bayer.
This Processing Agreement was amended several times, most recently in January
2000 to, among other things, extend the term through 2003 and increase the
volume of plasma fractionated under this agreement through 2003. During the
period from January 4, 2000 through the remainder of the term in December 2003,
the contract provides for revenues to the Company of approximately $22 million
per annum, subject to VITEX meeting certain performance obligations. The Company
received $18.5 million in revenue from Bayer during the year ended January 1,
2000. Under the agreement, Bayer is obligated to provide VITEX with a specified
quantity of plasma annually during the term of the agreement and VITEX is
obligated to return plasma fractions to Bayer within certain specified periods.
The agreement is structured as a take-or-pay arrangement under which Bayer is
obligated to pay the Company a fixed fee per liter of fractionated plasma
whether or not Bayer fulfills its obligation to supply plasma to VITEX. Certain
of the plasma fractions supplied to Bayer are virally inactivated by Bayer using
the SD technology licensed to Bayer by the NYBC. In the event that VITEX does
not provide fractions as required under the agreement, or upon the occurrence of
other events of default, Bayer has certain rights to take over and operate the
fractionation portion of VITEX's production facility. As security for the
performance of the Company's obligations under the Bayer agreement, VITEX
granted Bayer a mortgage on VITEX's manufacturing facility, which Bayer has
subordinated to a subsequent mortgage granted by VITEX to The Chase Manhattan
Bank, and a security interest in substantially all of the personal property of
VITEX that is necessary or useful to the processing and fractionation of Bayer
supplied plasma. The Company may terminate the agreement upon written notice of
a material breach of the agreement and failure to cure by Bayer. Bayer may
terminate the agreement in certain circumstances including a material breach of
the agreement and failure to cure by VITEX and an event of default under VITEX's
credit agreement with its institutional lender.


                                       10
<PAGE>

      American National Red Cross. In December 1997. The Company entered into a
supply, manufacturing and distribution agreement with the Red Cross (the "Red
Cross Distribution Agreement") over a term of 57 months, for the Red Cross to
become the exclusive distributor of the Company's PLAS+SD in North America. A
key objective of that agreement was to use PLAS+SD as a catalyst to firmly
establish viral inactivation of blood components as an emerging standard of
care. The Red Cross is the largest collector, manufacturer and distributor of
blood components in the U.S. and has 38 regional centers around the country
distributing more than 45% of the U.S. blood supply. The American Red Cross has
made a significant commitment to viral inactivation technologies and the Company
hopes to use the PLAS+SD agreement to establish the American Red Cross as a long
term customer of all VITEX viral inactivation technologies. Under the agreement,
the Red Cross, which is the largest supplier of transfusion plasma to hospitals
in the United States, providing about 45% of the transfusion plasma used
annually, is required to purchase stated minimum quantities of PLAS+SD. The
Company may either terminate the agreement in its entirety or convert the
exclusive rights of the Red Cross to non-exclusive rights if the stated minimum
purchase requirements are not met. In addition, the Distribution Agreement
requires the Red Cross to achieve certain end-user sales levels. Failure to
achieve these end-user sales levels could result in the termination of the
Distribution Agreement by either the Red Cross or the Company. Although the
current sales by the Red Cross are below the levels required under the Agreement
with VITEX, the parties intend to continue operating under the Distribution
Agreement.

      Once the Red Cross places its annual purchase order with VITEX, it is
obligated to supply VITEX with a sufficient quantity of plasma to enable the
Company to fulfill the order. The Red Cross must pay for the amount of PLAS+SD
specified in the purchase order even if it is unable to supply sufficient
quantities of plasma. The Red Cross must purchase all of its virally inactivated
plasma from the Company unless an FDA approved product has been independently
shown to be safer than PLAS+SD. The Company, in turn, is obligated to offer any
excess capacity that it has to produce PLAS+SD above the stated minimum purchase
requirements to the Red Cross before selling PLAS+SD to any other party.
Partially in response to slower than expected market acceptance, effective
October 1, 1998, the Red Cross Agreement was amended to, among other things,
reduce the Red Cross's minimum annual purchase order commitment, provide higher
pricing during periods of lower volume purchases, and commit increased marketing
spending by both VITEX and the Red Cross. Under the amended agreement, the Red
Cross is required to pay to the Company a fixed price per unit of PLAS+SD, plus
a royalty which is initially fixed. Beyond a specified volume, the royalty
becomes variable, based on equal sharing of the amount by which the average
selling price of the Red Cross exceeds a stated amount. Anticipated revenue
under the amended agreement is approximately $50 million during the two-year
period ending September 30, 2000. VITEX recorded revenue of $23.2 million during
fiscal 1999 under the original and amended agreements. Also, the Company accrued
a charge of $4.5 million against revenue in the third quarter of fiscal 1999
representing the estimated cost of a sales incentive program designed to support
the Red Cross plan to convert its system to PLAS+SD and to reduce the Red Cross
inventory levels. The Company has granted to the Red Cross a right of first
offer to acquire exclusive distribution rights to any subsequent generation of
virally inactivated transfusion plasma products that are developed during the
term of the agreement. The Company and the Red Cross have each committed to
spend minimum amounts for marketing PLAS+SD during the two-year period ending
September 30, 2000. VITEX's spending commitment is expected to be satisfied, to
a large extent, by the cost of its sales force. Additionally, a joint marketing
committee will coordinate all marketing activities for PLAS+SD. The exclusive
distribution agreement between VITEX and the Red Cross provides that the Red
Cross will use its best efforts to ensure availability of VITEX's virally
inactivated transfusion plasma products to all potential customers, including
Red Cross blood centers and non-Red Cross blood centers. See "Legal Proceedings"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      Under a previous collaboration agreement, the Red Cross had made a total
of $3.0 million non-interest bearing, unsecured advances to VITEX's predecessor
to be used to fund improvements to the manufacturing facility. The loan
repayment schedule as modified, requires repayment of 30% of the loan balance on
the third anniversary date of the approval of the PLAS+SD PLA and 15% of the
balance on each of the following two years, with the balance of the loan payable
on the sixth anniversary of the PLAS+SD PLA. Each of VITEX and the Red Cross has
the right to terminate the agreement upon written notice in certain
circumstances, including a material breach of the agreement which is not cured
by the other party.

      Pall Corporation. In February 1998, VITEX and Pall entered into a series
of agreements (the "Pall Agreements") providing for, among other things, a
collaboration on the development and marketing of systems employing VITEX's
viral inactivation technologies for red blood cell and platelet concentrates.
Pall is a leading manufacturer and supplier of filtration products, including
those relating to the collection, preservation, processing, manipulation,
storage and treatment of blood and blood components. Under the Pall Agreements.
Pall receives exclusive worldwide distribution rights to any system
incorporating any VITEX viral inactivation technology for red blood cells and
platelets. The parties have also agreed to share research, development, clinical
and regulatory responsibilities and will equally share profits and joint
expenses from operations after each party is reimbursed for its cost of goods.
The agreement called for up to $26 million in equity investments tied to
financing and development milestones. The first milestone occurred with the
execution of the agreement in which Pall acquired 477,042 shares of the
Company's common stock for $4.0 million, or $8.39 per share. The second
milestone was the successful completion of the VITEX initial public offering in
June of 1998. At that time, Pall acquired $5 million of VITEX's common stock in
a private placement, which closed contemporaneously with, and at the same price,


                                       11
<PAGE>

terms, and conditions as VITEX's initial public offering. The Company reached
the third milestone on December 6, 1999 and, accordingly, Pall invested $3
million for approximately 539,000 shares of the Company's common stock. Pursuant
to the Pall Agreements, certain existing stockholders of VITEX have agreed to
vote their shares to elect to the Board of Directors of VITEX a nominee
designated by Pall. Certain of the Pall Agreements may be terminated in certain
circumstances including an event of default by either party. In connection with
the transition of Dr. Bernard Horowitz's status from employee to consultant of
VITEX, Pall has the right to terminate the Pall Agreements within a one-year
period ending in October 2000.

Manufacturing and Supply

      The Company currently produces all of its Plasma Fractions and PLAS+SD in
its 92,000 square foot facility. In May 1998, the FDA approved VITEX's PLA for
the manufacture of PLAS+SD at VITEX's manufacturing facility. The existing
manufacturing facility has sufficient capacity to meet the current minimum
purchase requirements for PLAS+SD under its agreement with the Red Cross. VITEX
is currently utilizing all of its existing fractionating plasma capacity. Due to
an industry-wide shortage of fractionation capacity, the Company expanded its
fractionation capacity by 15% in the third quarter of 1999. The Company is
collaborating with Pall in the development of red blood cell concentrate viral
inactivation systems and is evaluating various alternatives including
contracting with third parties for the manufacture of systems to support the red
blood viral inactivation commercialization efforts.

      VITEX's manufacturing processes are subject to extensive regulation by the
FDA, including the FDA's current Good Manufacturing Practice ("cGMP")
requirements. Failure to comply with such requirements would materially impair
VITEX's ability to maintain commercial-scale production of its plasma fractions
and PLAS+SD or achieve and maintain commercial-scale production of any future
products. If VITEX is unable to achieve full scale production capability for any
product, acceptance by the market of such product would be impaired and any such
impairment in market acceptance could have a material adverse effect on the
Company's business, financial condition and results of operations.

      The Company purchases certain key components for the manufacture of its
products from a limited number of outside suppliers and intends to continue
purchasing components from outside suppliers for its future products. VITEX
currently obtains from a single supplier the customized bags for the packaging
of its PLAS+SD product. However, VITEX has entered into an agreement with an
additional supplier fur the provision of such bags. Establishing or utilizing
additional or replacement suppliers for any such components, if required, may
not be accomplished quickly and could involve significant additional costs. Any
failure by VITEX to obtain any component used to manufacture its products from
alternative suppliers, if required, could limit VITEX's ability to manufacture
its products and could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the inclusion of
components manufactured by others could require the Company to seek approvals
from government regulatory authorities, which could result in delays in product
delivery. There can be no assurance that VITEX would receive any such regulatory
approvals. Any such delay would have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows.

Sales, Marketing and Distribution

      As referred to in "Strategic Collaborations," VITEX has entered into
agreements with Bayer, the Red Cross and Pall, for the development, licensing
and marketing of VITEX's products and systems. In 1999, VITEX established its
own national sales force to support the efforts of the Red Cross by increasing
product awareness and accelerating market penetration. The Company may seek to
establish additional collaborations in other areas of strategic focus.

      In December 1997, and as subsequently amended effective October 1998, the
Company contracted with the Red Cross for the Red Cross to become the exclusive
distributor of the Company's PLAS+SD in North America. VITEX and the Red Cross
have each committed to spend certain minimums for marketing PLAS+SD in 2000.
Additionally, a joint marketing committee will coordinate all marketing
activities for PLAS+SD. Under the terms of the Pall Agreements, Pall agreed to,
among other things, collaborate on the development and marketing of systems
employing VITEX's viral inactivation technologies fur RBCC and platelets. Under
the Pall Agreements, among other things, Pall receives exclusive worldwide
distribution rights to any systems incorporating any VITEX viral inactivation
technology.

      The Company believes that marker acceptance of its products and systems
will depend, in part, on its ability to provide acceptable evidence of the
safety, efficacy and cost-effectiveness of its products and systems, as well as
the ability of blood centers and hospitals to obtain adequate reimbursement for
such products. The Company believes that market acceptance of its products and
systems will also depend upon the extent to which physicians, patients and
health care payers perceive that the benefits of using its products and systems
justify the additional costs and processing requirements. There can be no
assurance that VITEX's products and systems will gain any significant degree of
market acceptance among blood centers, physicians, patients and health care
payers, even if clinical trials demonstrate safety, efficacy, necessary
regulatory approvals and health care reimbursement approvals are obtained.


                                       12
<PAGE>

There can be no assurance that the Company's strategic collaborators will market
its products successfully or that any third-party collaboration will be on terms
favorable to VITEX. If a collaborator with VITEX does not market a product
successfully, the Company's business would be materially adversely affected.
There can be no assurance that the Company's collaborators will be successful in
gaining market acceptance for any products that the Company may develop and a
failure to do so would result in a material adverse affect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Patents, Licenses and Proprietary Rights

      The Company's success depends in part on its ability to maintain licensed
patent rights, obtain patents, protect trade secrets, operate without infringing
upon the proprietary rights of others and prevent others from infringing on the
proprietary rights of the Company. The Company's policy is to seek to protect
its proprietary position by, among other methods, filing United States and
foreign patent applications related to its proprietary technology, inventions
and improvements that are important to the development of its business. The
Company believes that the protection of its proprietary technologies may create
competitive barriers to entry into the viral inactivation market. The Company
intends to continue to pursue its patent filing strategy and to vigorously
defend its intellectual property position against infringement

      In connection with its spin-off from the NYBC, the Company became the
licensee of a substantial portfolio of patents and patent applications held by
the NYBC. The Company is a nonexclusive worldwide licensee under 12 issued
United States patents which expire at various times from 2000 to 2009, 28 issued
foreign counterpart patents and three pending foreign counterpart patent
applications held by the NYBC for use of the SD process in treating plasma
derivatives. The Company is a nonexclusive worldwide licensee under two issued
United States patents which expire in 2010 and 2014, four pending United States
patent applications, five issued foreign counterpart patents and 19 pending
foreign counterpart patent applications held by the NYBC for use of UVC
technology in treating plasma derivatives. VITEX is the exclusive licensee for
the U.S., Canada and Mexico and a non-exclusive licensee outside of the United
States, Canada, Mexico and Europe under 16 issued United States patents which
expire at various times from 2000 to 2014, four pending United States patent
applications. 19 issued foreign counterpart patents and 14 pending foreign
counterpart patent applications held by the NYBC for use of the SD process and
UVC technology in treating transfusion plasma products. VITEX is the exclusive
worldwide licensee under 10 issued United States patents which expire in 2010
and 2014, five pending United States patent applications, five issued foreign
counterpart patents and 28 pending foreign counterpart patent applications held
by the NYBC for use of UVC technology in treating fibrin sealant, fibrinogen and
thrombin products and for the manufacture and use of fibrin sealant, fibrinogen
and thrombin and the nonexclusive worldwide licensee under 12 issued United
States parents which expire at various times from 2000 to 2009, 28 issued
foreign counterpart patents and three pending foreign counterpart patent
applications held by the NYBC for use of the S/D process in treating fibrin
sealant, fibrinogen and thrombin products. The rights referred to above are
granted to VITEX by five license agreements between VITEX and the NYBC. The NYBC
has the right to terminate any of these licenses if VITEX breaches the
respective license and fails to cure such breach, fails to produce and market
the relevant products within specified time frames or fails to conform to
government regulations in the production of the relevant products. Effective
February 16, 2000, the Company terminated the Exclusive License Agreement (#5)
for Virally Inactivated Cellular Products. For exclusive licenses, the NYBC has
the right to terminate the license if certain minimum payments and/or minimum
royalties are not paid by VITEX. If any of the licenses between VITEX and the
NYBC related to the SD process were terminated it could have an adverse effect
upon VITEX's business, results of operations and financial condition. During the
year ended January I, 2000 VITEX incurred royalty and milestone related expenses
amounting to $1.7 million for use of technology licensed by the NYBC.

      The Company has filed several patents pertaining to affinity
chromatography technology. During 1998, the Company filed a patent application
directed at methods of prion detection. During the year ended January 1, 2000, a
patent application was filed directed to methods for the removal of
isoagglutinins from plasma to render the plasma suitable for infusion to
recipients regardless of their blood type. A patent was filed directed at new
methods for the screening of combinatorial libraries. This application also
disclosed structures that could be used for the removal of pathogens.

      In connection with its acquisition of Pentose Pharmaceuticals, Inc., the
Company acquired a substantial portfolio of patents and patent applications
directed to methods for the inactivation of viruses by INACTINEs, and to related
virus-inactivating reagents. This portfolio consists of one issued U.S. patent,
which expires in 2016, one allowed U.S. patent application, 15 pending U.S.
patent applications, one issued foreign counterpart patent, and 27 pending
foreign patent applications.

      Proprietary rights relating to the Company's planned and potential
products will be protected from unauthorized use by third parties only to the
extent that they are covered by valid and enforceable patents or are effectively
maintained as trade secrets. There can be no assurance that any patents owned
by, or licensed to, the Company will afford protection against competitors or
that any pending patent applications now or hereafter filed by, or licensed, to
the Company will result in patents being issued. In addition, the


                                       13
<PAGE>

laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent, as do the laws of the United States. The
patent positions of biopharmaceutical companies involve complex legal and
factual questions and, therefore, their enforceability cannot be predicted with
certainty. There can be no assurance that any of the Company's owned or licensed
patents or patent applications, if issued, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company against competitors with
similar technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. Because patent applications in the United States are maintained
in secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it or its licensors were the first to make the inventions
covered by each of its issued, licensed or pending patent applications or that
it or its licensors were the first to file for protection of inventions set
forth in such patent applications. There can be no assurance that the Company's
planned or potential products will not be covered by third-party patents or
other intellectual property rights, in which case continued development and
marketing of such products would require a license under such patents or other
intellectual property rights. There can be no assurance that such required
licenses will be available to the Company on acceptable terms, if at all. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents or could find that
the development, manufacture or sale of products requiring such licenses is
foreclosed.

      The Company may rely, in certain circumstances, on trade secrets to
protect its technology. However, trade secrets are difficult to protect. The
Company seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.

Competition

      The Company's products and products under development will compete with
current approaches to enhance blood safety, as well as with future products
under development by others, including medical technology, biotechnology,
pharmaceutical and hospital supply companies, national and regional blood
centers, governmental organizations and agencies, academic institutions and
other agencies. The industries in which the Company competes are characterized
by rapid and significant technological changes. Accordingly, the Company's
success will depend in part on its ability to respond quickly to medical and
technological changes through the development and introduction of new products.
Many companies and organizations that may be competitors or potential
competitors of VITEX have substantially greater financial and other resources
than the Company and may have greater experience in conducting pre-clinical
studies and clinical trials and obtaining regulatory approvals. In addition,
other technologies or products may be developed that have an entirely different
approach or means of accomplishing the intended purposes of the Company's
products, or that might render the Company's technology and products obsolete.
Furthermore, there can be no assurance that the Company's competitors will not
obtain patent protection or other intellectual property rights that would limit
the Company's ability so use its technology or commercialize products that may
be developed.

      VITEX Plasma Fractions face competition from other large plasma
fractionators. Additional competition in the market for plasma derivatives may
come from producers of recombinant blood products.

      Competition with PLAS+SD and the Company's products under development may
come from alternative approaches to the problem of improving the safety of blood
and blood products and from alternative viral inactivation technologies. The
alternative approaches to achieving safer blood component products include donor
retesting, apheresis blood collection systems, the use of blood substitutes,
blood salvage systems, blood cell stimulants, leukocyte filters and reduction
systems and improved blood testing. All of these approaches are currently
available, and each has gained some degree of market acceptance.

      In the area of viral inactivation of blood and blood components, several
companies are developing technologies which are, or in the future may be, the
basis for products that will directly compete with or reduce the market
opportunity for PLAS+SD and the Company's viral inactivation products which are
under development. Because the Company's SD process involves pooling plasma,
there may be an increased risk of transmission of pathogens not inactivated by
the process, as compared with processes, such as treatment with psoralens
developed by the Cerus Corporation, which do not require pooling. The Company
believes that the primary competitive factors in the market for viral
inactivation systems will include the breadth and effectiveness of viral
inactivation processes, compatibility of processes with cells and proteins, ease
of use, the scope and enforceability of patent or other proprietary rights,
product price, product supply and marketing and sales capability. In addition,
the length of time required for products to be developed and to receive
regulatory and, in some cases, reimbursement approval is an important
competitive factor. The Company believes it competes favorably with respect so
these factors, although there can be no assurance that it will be able to
continue to do so. Any failure by the Company to compete effectively with these
alternative products and technologies would have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flows.


                                       14
<PAGE>

Government Regulation

      VITEX and its products are comprehensively regulated by the FDA and, in
some instances, by state and local governments, and by foreign regulatory
authorities. The FDA regulates drugs, medical devices and biologics under the
Federal Food, Drug and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. These laws and implementing
regulations govern, among other things, the development, testing, manufacturing,
record keeping, storage, labeling, advertising, promotion and pre-market
approval of such products.

      The PLA for the Company's Plasma Fractions was approved initially by the
FDA in 1970 and amended from time to time thereafter. The first of VITEX's
virally inactivated products, PLAS+SD, received marketing approval by the FDA on
May 6, 1998. VITEX believes that its RBCC system incorporating INACTINE
technology will be regulated as a medical device. However, despite the Company's
expectations of how a given product will be regulated, it is possible that the
FDA will decide to regulate any one or more of VITEX's products as biologics, as
medical devices, as "combination products," including drugs or biologics and one
or more medical devices, or as drugs or biologics with one or more medical
devices requiring separate approval or clearance. Whether the FDA regulates the
Company's products as biologics or as one or more of the other alternatives, it
is likely that the FDA's Center for Biologics Evaluation and Review will be
principally responsible for regulating VITEX's products. Before a new drug may
be marketed in the United States, the FDA must approve an NDA for the product
Before a biologic may be marketed in the United States, the FDA must approve a
BLA covering both the product and the facility. Prior to the FDA Modernization
Act of 1997, the FDA had to approve a PLA for the product and an establishment
license application ("ELA") for the facility at which the product is
manufactured. Before a medical device may be marketed in the United States, the
FDA must agree that the medical device is substantially equivalent to another
device that was on the market prior to 1976 pursuant to a 510(k) notice or
approve a pre-market application ("PMA") for the product. Before a combination
product may be marketed in the United States, it must have an approved NDA, BLA
(or PLA/ELA) or PMA, depending on which statutory authority the FDA elects to
use.

      Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a drug, a biologic, a medical device or a combination
product. The steps required before a drug, biologic or medical device may be
approved for marketing in the United States pursuant to an NDA, BLA or PMA,
respectively, generally include:

   o  pre-clinical laboratory and animal tests;

   o  submission to the FDA of an investigational new drug exemption ("IND"),
      for drugs or biologics, or an investigational device exemption ("IDE"),
      for medical devices, for human clinical trials, which must become
      effective before such trials may begin.

   o  appropriate tests in humans to show the product's safety;

   o  adequate and well-controlled human clinical trials to establish the
      product's efficacy for its intended indications;

   o  submission to the FDA of an NDA, BLA or PMA, as appropriate; and

   o  FDA review of the NDA, BLA or PMA in order to determine, among other
      things, whether the product is safe and effective for its intended uses.

      In addition, the FDA inspects the facilities at which the product is
manufactured and will not approve the product unless the facilities and the
process used to manufacture the product comply with cGMP requirements.

      VITEX believes that, in deciding whether a viral inactivation system is
safe and effective, the FDA is likely to take into account whether it adversely
affects the therapeutic efficacy of treated blood components as compared to the
therapeutic efficacy of blood components not treated with the system, and that
the FDA will evaluate the system's safety and other risks against the benefits
of using the system in a blood supply that has become safer in recent years.

      There can be no assurance that the clinical study design employed by VITEX
to demonstrate safety and efficacy will ultimately be acceptable to the FDA.
Moreover, even if the FDA considers the study design so be acceptable in
principle, there can be no assurance that the FDA will find the data submitted
sufficient to demonstrate safety and efficacy.

      Even if regulatory approval or clearance is granted, the FDA could
significantly limit the indicated use for which a product could be marketed. The
testing and review process requires substantial time, effort and financial
resources, and is generally lengthy, expensive and uncertain. The approval
process may be affected by a number of factors, including the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Additional animal studies or clinical trials may be requested during the
FDA review period and may delay marketing approval. After FDA approval for the
initial indications, further clinical trials may be necessary to obtain approval
for the use of the product for additional indications. The FDA may also require
post-marketing


                                       15
<PAGE>

testing which can involve significant expense. Later discovery of previously
unknown problems with a product may result in labeling changes and other
restrictions on the product, including withdrawal of the product from the
market. "See Management Discussion and Analysis of Financial Condition and
Results of Operations-Overview." In addition, the policies of the FDA may
change, and additional regulations may be promulgated which could prevent or
delay regulatory approval of the Company's planned products. There can be no
assurance that any approval or clearance will be granted on a timely basis, if
at all. Any failure to obtain or delay in obtaining such approvals or
clearances, and any significant limitation on the approved indications for any
product, could have a material adverse effect on the Company's business,
financial condition and results of operations.

      A drug, biologic or medical device, its manufacturer, and the holder of
the NDA, BLA (or PLA/ELA), PMA or 510(k) for a product are subject to
comprehensive regulatory oversight, both before and after approval or clearance
is obtained. Violations of regulatory requirements at any stage, including
during the preclinical and clinical trial process, during the review process or
after the product is approved for marketing, could result in various adverse
consequences, including the FDA's requiring that a clinical trial be delayed or
suspended, the FDA's delay in approving or refusing to approve a product,
withdrawal of an approved product from the market and the imposition of criminal
penalties. For example, the holder of an NDA, BLA (or PLA/ELA), PMA or 510(k) is
required to report certain adverse reactions to the FDA, and must comply with
certain requirements concerning advertising and promoting the product. Also, the
FDA periodically inspects manufacturing facilities to assess compliance with
cGMP, and the product must continue to be manufactured in compliance with cGMP
regulations after approval. Accordingly, manufacturers must continue to expend
time, monies and efforts on regulatory compliance, including cGMP compliance. In
addition, new government requirements may be established that could delay or
prevent regulatory approval or clearance of the Company's product candidates
under development or otherwise alter the applicable law or regulations. There
can be no assurance that the FDA will determine that the facilities and
manufacturing procedures of the Company or any other third-party manufacturer of
the Company's planned products will conform to cGMP requirements. On April 16,
1999, VITEX initiated a voluntary recall of certain lots of PLAS+SD.

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

      The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials,
biological specimens and wastes. As the production volumes of PLAS+SD increase,
the Company may be required to obtain a permit amendment from regulatory
authorities to increase the associated volume of permitted discharge. Although
VITEX has submitted an application to obtain this permit amendment and is
actively pursuing it, there can be no assurance that such permit amendment will
be obtained in a timely manner, if at all. There can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental and health and safety regulations in the future. The Company's
research and development involves the controlled use of hazardous materials,
including certain hazardous chemicals, viruses and radioactive materials.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standard prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company.

Health Care Reimbursement

      The Company's ability to successfully commercialize its products is
dependent in part on the extent to which appropriate levels of reimbursement for
the Company's products and related treatments are obtained from government
authorities, private health insurers, third party payers, and other
organizations such as managed care organizations ("MCOs"). Failure by doctors,
hospitals and other users of the Company's products or systems to obtain
appropriate levels of reimbursement could adversely affect the Company's ability
to sell its products and systems. There are widespread public and private
efforts to control health care costs, and it is unlikely that these efforts will
be abandoned in the near future. Third-party payers are increasingly challenging
the pricing of medical products and services. The trend toward managed care
health in the U.S., the growth of MCOs and legislative proposals to reform
health care and government insurance programs could significantly influence the
purchase of medical products and services, resulting in lower prices and reduced
demand for the Company's products. Such cost containment measures and health
care reform could affect the Company's ability to sell its products, which the
Company expects will cost more than corresponding blood products that are not
virally inactivated, and may have a material adverse effect on the Company.
Significant uncertainty exists about the reimbursement


                                       16
<PAGE>

status of newly approved medical products and services, including the Company's
PLAS+SD product. There can be no assurance that reimbursement in the United
States or foreign countries will be available for any of the Company's products,
that any reimbursement granted will be maintained or that limits on
reimbursement available from third-party payers will not reduce the demand for,
or negatively affect the price of, the Company's products. The unavailability or
inadequacy of third-party reimbursement for the Company's products would have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.

Research and Development

      The Company believes that continued and timely development of new products
and enhancements to existing products are necessary to maintain its competitive
position. To this end, the Company relies on a combination of its own internal
expertise and strategic alliances with its collaborators and other companies to
enhance its research and development efforts. In addition to new product
candidates generated by internal research and development activities, the
Company actively monitors external research and development programs, such as
those previously undertaken by Pentose relating to INACTINE, in search of
complementary and advanced technology for potential acquisition or license
arrangement. Research and development expense, which includes technology license
fees paid to third parties, amounted to $7.0 million, $7.5 million, and $5.9
million for the years ended January 1, 2000, January 2, 1999 and December 31,
1997, respectively. Such amounts are net of collaborator reimbursement in the
amount of $1.8 million. $2.3 million and $1.2 million for the years ended
January 1, 2000, January 2, 1999 and December 31, 1997, respectively.

      The field of transfusion medicine and therapeutic use of blood products is
characterized by rapid technological change. Product development involves a high
degree of risk, and there can be no assurance that VITEX's product development
efforts will result in any commercial success.

Environmental Regulation; Use of Hazardous Substances

      The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials,
biological specimens, and wastes. The Company has made, and will continue to
make, the necessary expenditures for environmental compliance and protection.
Expenditures for compliance with environmental laws have not had, and are not
expected to have, a material effect on the Company's financial position, results
of operations or cash flows. The Company's research and development activities
involve the controlled use of hazardous materials. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards proscribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and such liability could exceed the resources of the Company.

Customers

      The Company's revenues are derived from the sale of plasma fractions,
principally to Bayer, and transfusion plasma to the Red Cross. During the year
ended January 1, 2000, revenue from sales to Bayer and the Red Cross each
amounted to 49% of total revenues. In the prior fiscal year ended January 2,
1999, revenues from sales to Bayer and the Red Cross comprised 43% and 48%,
respectively.

Employees

      As of January 1, 2000, the Company had 285 employees, of whom 41 were
engaged in research and development, 207 were engaged in manufacturing, 14 were
engaged in sales and marketing and 23 were engaged in other activities. VITEX's
competitive position in the blood products industry depends, in part, on its
continued ability to recruit and retain qualified scientists, managerial and
technical employees who are in considerable demand. There can be no assurance
that VITEX will be able to continue to attract and retain qualified personnel in
sufficient numbers to meet its needs. None of VITEX's employees is represented
by a labor union and VITEX has never experienced a work stoppage, slowdown, or
strike. VITEX considers its employee relations to be good.

Item 2. Properties

      The Company's primary executive offices and manufacturing facility are
contained within a 92,000 square foot VITEX-owned building in Melville, New
York. The Company has made, and is continuing to make, improvements to this
facility to accommodate the Company's Plasma Fractions and PLAS+SD production
requirements. VITEX currently leases 12,000 square feet of space in New York
City and 5,400 square feet of space in Cambridge, Massachusetts to accommodate
its research and development


                                       17
<PAGE>

activities. These activities will be consolidated in a new, leased 37,000 square
foot facility in Watertown, MA currently under renovation which will be ready
for occupancy in the second quarter of 2000.

      VITEX believes that its current facilities, combined with anticipated
additions and improvements currently under construction, are adequate for all
present and foreseeable future uses.

Item 3. Legal Proceedings

      The Company is a parry to certain legal proceedings, which are discussed
below. While it is impossible to predict accurately or to determine the eventual
outcome of these matters, the Company believes that the outcome of these
proceedings will not have a material adverse effect upon its business, financial
condition or results of operations.

      The Company is aware that in the course of ongoing litigation between the
NYBC and a third party, the third party has asserted claims against NYBC based
on breach of a contract that was executed in 1988 by those parties and rights
under which were assigned to the Company in 1995. The third party has claimed
that it is entitled to payments from the NYBC based on improvements in albumin
throughput yields attributable to certain filtration technology licensed to the
NYBC by the third party. The Company understands that the NYBC believes it has
meritorious defenses against this third party's claims and, in any event, as
part of the assignment of NYBC's rights under the disputed contract by the NYBC
to the Company, the Company assumed no responsibility for pre-existing contract
liabilities. However, there can be no assurance that the third party will not
assert claims against the Company under that contract which are similar in
nature to the claims being asserted against the NYBC. No such claims have been
asserted to date. The Company believes that it would have meritorious defenses
against any such claims.

      On March 23, 1998, VITEX received a Civil Investigative Demand ("CID")
from the Antitrust Division of the U.S. Department of Justice (the "Justice
Department") as part of the Justice Department's investigation into possible
antitrust violations in the sale, marketing and distribution of blood products.
A CID is a formal request for information and a customary initial step of any
Justice Department investigation. The Justice Department is permitted to issue a
CID to anyone whom the Justice Department believes may have information relevant
to an investigation. Therefore, the receipt of a CID does not mean that the
recipient is the target of an investigation, nor does it presuppose that there
is a probable cause to believe that a violation of the antitrust laws has
occurred or that any formal complaint ultimately will be filed. During fiscal
year 1999, the Company was notified through its attorneys that the Justice
Department has concluded its investigation with no action and the file was
officially closed.

      On August 27, 1998, the Appellate Division of the Supreme Court of New
York awarded VITEX a summary judgment against its insurance carrier, reversing a
lower court decision which denied the Company's previous claim for recovery of
costs incurred in 1996 as a result of a plasma processing loss. VITEX had
recorded a charge in 1996 to recognize reimbursement due to Bayer Corporation
for the plasma loss ($4.1 million) and to write off processing costs ($1.0
million). The Company filed a claim with the insurer to recover these and
related costs. On October 27, 1998, the insurance carrier filed a motion to
appeal the decision of the Appellate Court. Such appeal was subsequently
rejected. The insurance carrier took its appeal to the New York Court of Appeals
which declined to hear the matter. The case was returned to the New York Supreme
Court for assessment of damages. In December 1999, a negotiated settlement was
reached with the insurance carrier under which the Company received a cash
payment of 3.5 million.

Items 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

      On November 5, 1999, the Company held a special meeting. At the meeting,
the following matters were approved by the Company's stockholders:

      (1)   The approval and adoption of an Agreement and Plan of Merger and
            Reorganization, dated as of July 28, 1999, by and among VITEX,
            Pentose, and certain stockholders of Pentose, and the merger,
            including the issuance of up to 6,416,874 shares of VITEX common
            stock, or such greater number as was required in the event
            securities convertible into common stock of VITEX exercised prior to
            the closing of the merger. 9,227,138 shares of common stock were
            voted for approval and adoption, 105,888 shares were
            withheld/abstained and there were no broker non-votes.

      (2)   Adoption of a 1999 Supplemental Stock Option Plan. 9,447,241 shares
            of common stock were voted for the approval adoption, 485,830
            shares were withheld/abstained and there were no broker non-votes.

      (3)   The amendment of VITEX's Certificate of Incorporation to increase
            the number of authorized shares of common stock. 9,778,711 shares of
            common stock were voted for approval and adoption, 154,360
            shares were withheld/abstained and there were no broker non-votes.


                                       18
<PAGE>

                                     PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      (a) The Company's common stock trades on The NASDAQ Stock Market under the
symbol "VITX." The following table sets forth the reported high and low sale
prices of the Company's common stock for each fiscal quarter during the period
from June 11, 1998, the date of the Company's IPO, through January 1, 2000.
These prices do not include retail mark-up, mark-down or commissions and may not
represent actual transactions.

                                                       High            Low
                                                      -------        -------
June 11, 1998 - July 4, 1998                          $12-1/8        $10-1/2

July 5, 1998 - October 3, 1998                         17-5/8        4-17/32

October 4, 1998 - January 2, 1999                      11-5/8          3-1/8

January 3, 1999 - April 3, 1999                        12-1/8          7-1/4

April 4, 1999 - July 3, 1999                                9          4-3/8

July 4, 1999 - October 2, 1999                          6-7/8          3-6/8

October 3, 1999 - January 1, 2000                      7-1/16              4

      As of January 1,2000, the Company had approximately 47 shareholders of
record.

      The Company has not paid any dividends on its common stock to date. The
Company intends to retain future earnings for use in the development of its
business and does not anticipate paying dividends in the foreseeable future. The
payment of any dividends will be at the discretion of the Company's Board of
Directors and will depend on, among other things, future earnings, business
outlook, capital requirements, contractual restrictions, and the general health
of the Company. The ability of the Company to pay dividends is currently
restricted by covenants contained in its credit agreement with its bank.

      In December 1999, the Company sold 538,821 shares of common stock to Pall
in exchange for $3,000,000. This transaction was exempt from registration under
Regulation D, promulgated under the Securities Act of 1933.


                                       19
<PAGE>

Item 6. SELECTED FINANCIAL DATA (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                           1999 (1)(6)     1998(1)(3)(4)      1997 (1)      1996(1)(2)     1995(1)
                                                           -----------     -------------      --------      ----------     -------
<S>                                                           <C>               <C>           <C>            <C>               <C>
Statement of Operations Data:
   Revenues:
       Product sales                                          $ 42,423          $ 33,755      $ 15,843       $ 14,899          438
       Less: ANRC Incentive Program                             (4,500)               --            --             --           --
       Licensing fee                                                --                --            --          3,000           --
                                                              --------          --------      --------       --------     --------
       Net revenues                                             37,923            33,755        15,843         17,899          438
   Costs and expenses:
       Cost of sales                                            24,742            23,860        16,326         10,588        7,024
       Research and development, net (5)                         6,966             7,507         5,912          4,367        2,777
       Selling, general and administrative                       9,372             6,951         4,353          2,478        1,330
       Charges relaxed to merger - R&D restructuring             2,208                --            --             --           --
                                 - In-Process R&D               32,998                --            --             --           --
       Charge related to product recall                          2,583                --            --             --           --
       Charge related to plasma loss                                --                --            --          4,100           --
       Charge related to research collaboration                     --             2,202            --             --           --
                                                              --------          --------      --------       --------     --------

         Total costs and expenses                               78,869            40,520        26,591         21,533       11,131
                                                              --------          --------      --------       --------     --------

   Loss from operations                                        (40,946)           (6,765)      (10,748)        (3,634)     (10,693)
   Settlement of insurance claim                                 3,500                --            --             --           --
   Interest income (expense), net                                   47              (279)         (952)          (491)        (146)
   Discount on customer advance, net                                70               644            --             --           --
                                                              --------          --------      --------       --------     --------
         Total other income (expense), net                       3,617               365          (952)          (491)        (146)
                                                              --------          --------      --------       --------     --------

   Net loss                                                   ($37,329)         ($ 6,400)     ($11,700)       ($4,125)    ($10,839)
                                                              ========          ========      ========       ========     ========

   Basic and diluted net loss per share                       ($  2.78)         ($  0.61)     ($  1.62)       ($ 0.84)    ($  3.64)

     Weighted average common shares used in
       computing basic and diluted net loss per share           13,405            10,454         7,241          4,897        2,982

<CAPTION>
                                                                  1999           1998(3)          1997           1996         1995
                                                                  ----           -------          ----           ----         ----
<S>                                                           <C>               <C>           <C>            <C>          <C>
Balance Sheet Data:
   Cash and cash equivalents                                  $ 26,886          $ 35,264      $  5,250       $  4,752     $  3,310
   Working capital (deficit)                                    20,674            33,102        (2,775)        (4,314)      (1,594)
   Total assets                                                 78,098            75,225        38,167         37,626       23,242
   Long-term obligations, less current portion                   7,700            11,055        15,318         12,681        8,488
   Stockholders' equity                                         55,385            53,635        11,678          8,905        8,632
</TABLE>

      (1)   For presentation purposes, years ended January 1, 2000, January 2,
            1999, December 31, 1997, December 31, 1996 and December 31, 1995 are
            presented as fiscal years 1999, 1998, 1997, 1996 and 1995,
            respectively.

      (2)   During 1996, the Company entered into an exclusive distribution
            agreement with U.S. Surgical regarding VITEX Fibrin Sealant for a
            period of 15 years. The Company was paid a non-refundable fee of $3
            million for such exclusivity (see Note 12 to the financial
            statements). The Company also agreed to pay damages of $4.1 million
            to compensate Bayer for its loss of plasma caused by an equipment
            malfunction which occurred while the Company was processing plasma
            for Bayer (see Note 12 to the financial statements).

      (3)   For fiscal year 1998, the Company completed an IPO of 3,325,000
            shares of the Company's common stock at a price of $12.00 per share,
            raising net proceeds of $35.9 million (see Note 9 to financial
            statements). In conjunction with the collaboration agreement between
            the Company and Pall, Pall acquired $9 million of the Company's
            common stock in two private placements, the second of which closed
            contemporaneously with, and at the same price terms and conditions
            as the IPO. The Company recorded a charge to operations of $2.2
            million representing the difference between the purchase price paid
            by Pall and the estimated fair value of the common stock on the date
            of purchase (see Note 12 to the financial statements).

      (4)   In May 1998, the Company received FDA approval of PLAS+SD and
            commenced product sale to the Red Cross in June 1998 (see Note 12 to
            the financial statements).


                                       20
<PAGE>

      (5)   Research and development is net of collaborator reimbursement in the
            amounts of $1.8 million, $2.3 million and $1.2 million for fiscal
            years 1999, 1991, 1997 and 1996, respectively. Included in such
            collaborator reimbursement is amounts received from related parties
            in the amounts of $0.8 million, $0.1 million and $0.7 million for
            the years ended January 2, 1999 and December 31, 1997 and 1996. Cost
            of sales includes royalties and materials used in the production of
            PLAS+SD which were paid or owed to related parties in the amounts of
            $1.7 million, $2.3 million, $0.8 million and $0.8 million for fiscal
            years 1999, 1998, 1997 and 1996, respectively.

      (6)   During 1999, the Company recorded $4.5 million incentive sales
            credit for fiscal year 1999 (see Note 12 to the financial
            statements). The Company negotiated a settlement with the insurance
            carrier related to the 1996 plasma loss under which the Company
            received a cash payment of $3.5 million. In connection with the
            merger with Pentose, the Company recorded a $33 million write off of
            in-process research and development (see Note 3 to the financial
            statements). Additionally, in anticipation of the merger, the
            Company recorded a research and development charge for $2.3 million
            for severance and other integrational related expense. The Company
            recorded a one-time charge of $2.6 million for the voluntary recall
            of lots of PLAS+SD (see Note 13 to the financial statements).


                                       21
<PAGE>

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

Overview

      V.I. Technologies, Inc. ("VITEX" and "the Company") is a leading developer
of a broad portfolio of blood products and systems which use its proprietary
pathogen inactivation technologies. The Company's technologies are intended to
address the risks of viral, bacterial and other pathogen contamination in blood
products, including plasma, plasma derivatives, red blood cells and platelets.
Viral inactivation processes have the potential to eliminate viruses that are
enveloped by lipid membranes such as hepatitis B virus ("HBV"), hepatitis C
virus ("HCV") and HIV, the virus that causes AIDS, and non-enveloped viruses
such as hepatitis A virus ("HAV") and parvovirus and other known and unknown
pathogens.

      The Company's mission is to achieve the global availability of the safest
blood products using its proprietary pathogen viral inactivation systems. To
achieve this objective, VITEX intends to:

      (1)   exploit its leading portfolio of pathogen inactivation technologies;
      (2)   develop, through partnerships, the worldwide infrastructure to
            manufacture and distribute the safest blood products; and
      (3)   internally fund its research and development program through sales
            of its existing commercial products, thereby leveraging the
            manufacturing infrastructure already in place.

The Company has several important pathogen inactivated blood product candidates
under development. These include:

o     Red Blood Cell Concentrate (RBCC) Systems. The Company's INACTINE
      technology was approved by the FDA to commence clinical trials as a viral
      inactivation system for RBCC's, the most frequently transfused blood
      product. The INACTINE technology was acquired by VITEX through its merger
      with Pentose in November 1999. In pre-clinical studies, INACTINE have
      demonstrated a broad spectrum of viral inactivation, including both
      enveloped and non-enveloped viruses, while having no effect on the
      therapeutic properties of the RBCC. The Company has entered into two
      strategic collaborations to accelerate the development and
      commercialization of INACTINE treated-RBCC: a marketing and distribution
      agreement with Pall, and a contract development and manufacturing
      agreement with Haemonetics Corporation.

o     Universal PLAS+SD - Universal PLAS+SD is the next generation of PLAS+SD,
      the Company's virally inactivated transfusion plasma. Universal PLAS+SD
      provides the advantages of PLAS+SD; the first pharmaceutical grade virally
      inactivated blood product approved by the FDA, with an additional safety
      enhancement. "Universal" PLAS+SD as its name implies is expected to be
      safely transfused to any patient without the need to match donor and
      recipient blood type. Universal PLAS+SD has the added benefit of
      simplifying blood bank logistics and reducing the community and hospital
      blood bank inventory costs. Universal plasma is the first product to use
      the Company's affinity chromatography technology. VITEX received approval
      in the first quarter of 2000 to initiate a Phase III pivotal clinical
      trial. VITEX already has in place a distribution agreement for PLAS+SD
      with the American National Red Cross (Red Cross), an organization
      responsible for distributing 45% of the U.S. blood supply. Under that
      agreement, the Red Cross has a right of first offer to distribute the
      product when it is approved by the FDA.

o     Universal PLAS+SD II - Universal PLAS+SD II is intended to improve upon
      Universal PLAS+SD by adding additional methods of viral inactivation to
      inactivate both enveloped and non-enveloped viruses. The Company intends
      to file an IND in late 2000 or early 2001 to initiate a clinical trial for
      this product.

o     Platelet Concentrates - The Company has a development program in the
      pre-clinical stage to commercialize INACTINE-treated platelet
      concentrates. This product would deliver the broad spectrum of viral
      inactivation while preserving the critical therapeutic function of
      platelets. The Company hopes to file an IND to commence a human clinical
      trial of INACTINE-treated platelets in late 2000 or early 2001.

The Company currently manufactures two human therapeutic products:

o     PLAS+SD - The Company has entered into a collaboration agreement with the
      Red Cross whereby the Red Cross is the exclusive distributor of VITEX's
      PLAS+SD in North America. PLAS+SD, the first of VITEX's virally
      inactivated products, received marketing clearance from the FDA on May 6,
      1998. Commercial scale production and sale of PLAS+SD began in June 1998.

o     VITEX Plasma Fractions. The Company supplies Plasma Fractions primarily to
      Bayer Corporation ("Bayer") under a collaboration arrangement. The Company
      utilizes a combination of fractionation procedures to separate and purify
      the protein


                                       22
<PAGE>

      components of plasma. The plasma fractions are further processed by its
      customers into virally inactivated plasma derivatives for use in
      FDA-approved therapeutic applications.

      On November 12, 1999, the Company completed the merger with Pentose, a
Delaware Corporation, pursuant to an Agreement and Plan of Merger and
Reorganization dated as of July 28, 1999. The transaction was valued at $38.8
million. Under the terms of the merger, 6,443,731 shares of common stock of
VITEX were issued in exchange for all of the outstanding Pentose common and
preferred stock resulting in the former shareholders of Pentose owning
approximately 34% of the outstanding common stock of VITEX.

      Pentose's principal business involves the development for
commercialization of novel antiviral products for medical use based on
innovative applications of nucleic acid chemistry. Pentose has developed the
INACTINE technology platform for the inactivation of viral pathogens in blood
components for transfusion plasma derivatives and biopharmaceuticals.

Results of Operations

Fiscal Year 1999 as Compared to Fiscal Year 1998

Revenue

      Revenues increased 26%, or $8.6 million, to $42.4 million for fiscal year
1999 compared to $33.8 million for fiscal year 1998. The increase was primarily
due to expanded capacity of 15% for fractionation, which was completed in the
fourth quarter of 1999 and a 28% increase in volume of PLAS+SD which reflects a
full year of operations for fiscal 1999. PLAS+SD was licensed for sale by the
FDA in May 1998. The Company anticipates revenues generated from fractionation
will grow in fiscal year 2000 as the expanded capacity is used during the entire
annual period.

      During 1999, the Red Cross announced a plan to accelerate to a full
conversion of fresh frozen plasma to PLAS+SD, the Company's virally inactivated
transfusion plasma, over the course of the next year. Additionally, the Red
Cross announced a significant reduction in pricing for this product and a
standard, national pricing policy. To support this major initiative by the Red
Cross and to reduce Red Cross inventory levels, the Company offered certain
incentives which principally consists of a program under which the Red Cross can
earn a rebate for units of PLAS+SD shipped by Red Cross to end customers
subsequent to October 1, 1999. Based on Red Cross' projected sales during the
one-year period of the incentive plan, the Company has estimated and recorded a
charge of $4.5 million for the projected costs of the incentives. After taking
into account the $4.5 million sales incentive, the Company's net revenues
increased 12% or $4.2 million to $37.9 million for fiscal year 1999 compared to
$33.8 million for fiscal year 1998.

Cost of Sales

      Cost of sales was $24.7 million or 58% of revenues for fiscal year 1999
compared to $23.9 million or 71% of revenues for fiscal year 1998. This provided
gross margins of 42% and 29% for fiscal years 1999 and 1998, respectively. The
improvement to gross margin of 45% or $7.8 million reflects the expansion in
fractionation capacity and a full year of production of PLAS+SD as previously
discussed.

      Fiscal 1999 gross margins were adversely affected by the implementation of
Polymerase Chain Reaction (PCR) testing for parvovirus B-19. In response to the
product recall discussed below, the Company adopted PCR testing on all
production lots from the second quarter of the year. The approximate cost of
this testing in fiscal 1999 was $1.6 million. The Company is commissioning an
in-house PCR laboratory built at a cost of $1.5 million which should
significantly decrease the testing cost in the future.

Research and Development

      Research and development costs decreased $0.5 million for fiscal year 1999
to $7.0 million, compared to $7.5 million for fiscal year 1998. The decrease in
research and development costs was attributable to the timing of the
restructuring of the research and development area in July 1999 and the Pentose
merger in November 1999. In July 1999, in connection with the merger with
Pentose, the Company reduced the scale of its research and development operation
and its spending levels as described below. The Pentose merger was completed in
November 1999, resulting in a 4-month period of reduced spending. The Company
anticipates research and development spending to increase significantly during
fiscal year 2000 as INACTINES progress through clinical trials and the Company
continues the development of other viral inactivation technologies.


                                       23
<PAGE>

Selling General and Administrative Expenses

      Selling, general and administrative expenses increased $2.4 million for
fiscal year 1999 compared to $9.4 million, compared to $7.0 million for fiscal
year 1998. The increase is principally due to the Company's commitment to
develop a national sales force starting in December 1998 to support the Red
Cross in promoting product awareness and accelerating market penetration of
PLAS+SD. The Company anticipates a similar level of spending in fiscal year
2000.

Charges Related to Pentose Merger

      The Company recorded restructuring costs of approximately $2.2 million for
expenses related to the integration of its research and development activities
with those of Pentose. These costs covered a reduction in staffing levels and
the elimination of duplicate facilities.

      The Pentose merger was accounted for as a purchase transaction valued at
$38.8 million and, accordingly, assets and liabilities were recorded at their
fair values. In-process research and development acquired in the transaction in
the approximate amount of $33 million was recorded as a charge against
operations.

Charge Related to Product Recall

      In fiscal year 1999, the Company executed a voluntary recall of lots of
PLAS+SD that were found to contain heightened levels of parvovirus B-19. A
charge in the amount of $2.6 million was recorded to cover the write-off of
inventory lots, production testing, other direct recall expenses and a reserve
for an equitable sharing of recall costs incurred by the Company's exclusive
distribution of PLAS+SD, the Red Cross. As mentioned above, PCR testing for
parvovirus B-19 was subsequently adopted in production to ensure that the
presence of this virus is below specified laboratory levels. The Company has
completed formal validation of the testing technique and has applied to the FDA
for a parvovirus B-19 label claim with approval expected in 2000.

Settlement of Insurance Claim

      The Company successfully resolved a dispute with its insurer, Vigilant
Insurance Company, over a 1996 claim that resulted from a malfunction in the
Company's manufacturing equipment. In December 1999, a negotiated settlement was
reached with the insurance carrier under which the Company received a cash
payment of $3.5 million.

Net Interest Expense / Income

      The Company earned net interest income of $0.1 million for fiscal year
1999 compared to net interest income of $0.3 million for fiscal year 1998. The
change reflects a reduction of interest earned as a result of reduced cash
balances. In addition, the Company recorded a non-cash gain of $0.6 million
relating to the discounting of the $3 million non-interest bearing advance from
the Red Cross.

Fiscal Year 1998 as Compared to Fiscal Year 1997

Revenue

      Revenue increased $18 million for fiscal year 1998, to $33.8 million
compared to $15.8 million during fiscal 1998. The increase was primarily due to
sales of PLAS+SD which received marketing clearance from the FDA on May 6, 1998.
Commercial scale production and sale of PLAS+SD began in June 1998. Also
contributing to the increase in revenue was an increase in sales of plasma
fractions as a result of higher processing volume, partially offset by a
decrease in unit pricing in accordance with the Company's processing agreement
with Bayer.

Cost of Sales

      Cost of sales increased $7.6 million for fiscal year 1998 to $23.9
million, compared to $16.3 million during fiscal 1997. The increase was
primarily due to processing and start-up costs related to the production of
PLAS+SD.

      Product gross margin was approximately 29.3% for fiscal year 1998. This
was a significant improvement from fiscal 1997, which did not contain revenue
from the sale of PLAS+SD. As a result of manufacturing cost reductions, product
yield improvements and higher pricing negotiated under the amended collaboration
agreement with the Red Cross, product gross margin was approximately 40.8%
during the fourth quarter of fiscal 1998.


                                       24
<PAGE>

Research and Development

      Research and development costs increased $1.6 million for fiscal year 1998
to $7.5 million, compared to $5.9 million during fiscal 1997. The increase in
research and development costs was primarily due to the expanded activities in
the Company's red blood cell program, advanced stage development spending for
its fibrin sealant program and additional new product research activities.
Research and development costs are recorded net of collaborator reimbursement
which amounted to $2.3 and $1.2 million for fiscal years 1998 and 1997,
respectively.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses increased $2.6 million for
fiscal year 1998 to $7 million, compared to $4.4 million during fiscal 1997. The
increase was principally due to administrative costs associated with the hiring
of new personnel, including the national sales force which was hired in December
1998, marketing costs associated with PLAS+SD, legal expenses associated with
collaborator agreements and a response to a Civil Investigative Demand from the
U.S. Department of Justice. The Company and the Red Cross each committed to
spend certain minimum amounts for marketing PLAS+SD during the two-year period
ending September 30,2000. The Company's spending commitment was satisfied by the
costs of its sales force.

Charge Related to Research Collaboration

      For fiscal year 1998, the Company recorded a charge of $2.2 million in
connection with its research collaboration with Pall. The charge occurred in
connection with an equity investment in the Company made by Pall under the
collaboration agreement and reflects the difference between the amount paid for
the shares issued to Pall and the fair market value of the common stock at that
date.

Net Interest Expense

      For fiscal years 1998 and 1997, the Company incurred net interest expense
of $0.3 million and $1.0 million, respectively, reflecting the levels of debt
outstanding during such periods, offset by interest earned on cash balances,
including the proceeds from the Company's initial public offering. During the
quarter ended January 2, 1999, the Company recorded a non-cash gain of $0.6
million relating to the discounting of the $3 million non-interest-bearing
advance from the Red Cross. The advance was discounted upon finalization of the
repayment terms contained in the amended Red Cross agreement.

Liquidity and Capital Resources

      The Company has historically financed its operations through sales of
common stock, issuance of long-term debt and capital lease financing
arrangements. In addition, the Company generates cash from the sale of VITEX
Plasma Fractions which are sold primarily to Bayer and PLAS+SD which is sold to
the Red Cross. The Company also receives research and development funding under
a collaboration agreement with Pall.

      On June 15, 1998, the Company completed an initial public offering ("IPO")
of 3,000,000 shares of the Company's common stock, raising net proceeds of
approximately $32.2 million. On July 10, 1998, the underwriters of the Company's
IPO partially exercised their over-allotment option for an additional 325,000
shares, raising net proceeds of $3.6 million. In conjunction with the
collaboration agreement between the Company and Pall, Pall purchased $9 million
of the Company's common stock in two private placements which occurred during
1998. The first placement, which occurred in February 1998, amounted to $4
million, and the second amounted to $5 million and closed contemporaneously
with, and at the same price, terms and conditions as the IPO.

      On November 12, 1999, the Company completed the merger with Pentose, a
Delaware corporation, pursuant to an Agreement and Plan of Merger and
Reorganization dated as of July 28, 1999. The transaction was valued at $38.8
million. Under the terms of the merger, 6,443,731 shares of common stock of
VITEX were issued in exchange for all of the outstanding Pentose common and
preferred stock. Following the exchange, former shareholders of Pentose owned
approximately 34% of the outstanding common stock of VITEX. A total of
approximately 500,000 shares of the Company's common stock are issuable to
option-holders and warrant-holders of Pentose upon exercise of options and
warrants assumed in the merger.


                                       25
<PAGE>

      On December 6, 1999, the Company reached a performance milestone under its
collaboration agreement with Pall Corporation. As required under the agreement,
Pall invested $3 million for approximately 539,000 shares of the Company's
common stock priced at market.

      At fiscal year end 1999, the Company had working capital of $20.7 million,
including cash and cash equivalents of $26.9 million, in comparison with working
capital of $33.1 million for fiscal year end 1998. The decrease in cash balances
of $8.4 million was primarily due to the Company's investment in property, plant
and equipment and repayment of long-term debt and capital lease obligations,
offset partially by cash generated from operations and the proceeds from
issuance of common stock to Pall. The primary objectives for the Company's
investment of cash balances are safety of principal and liquidity. Available
cash balances are invested in money market funds with portfolios of investment
grade corporate and U.S. government securities.

      In order to maintain its exclusive marketing and distribution rights for
PLAS+SD, the Red Cross is required to purchase stated minimum quantities
amounting to approximately $50 million during the two-year period ending
September 30, 2000. The Company and the Red Cross have each committed to spend
minimum amounts for marketing PLAS+SD during the two-year period ending
September 30, 2000. The Company's spending commitment is largely satisfied by
the cost of its sales force established in December 1998 to support the Red
Cross in promoting product awareness and accelerating market penetration.

      Under its collaboration with Pall, the Company and Pall have agreed to
equally share research, development, clinical and regulatory costs. Profits will
be shared equally after each party is reimbursed for its cost of goods. The
agreements provide that Pall will purchase up to $17.0 million of VITEX common
stock in installments tied to the achievement of specified development
milestones. As mentioned above, the third milestone was reached in December 1999
and Pall's remaining commitment stands at $14 million. These equity investments
are made at the prevailing market price.

      Under the Company's license agreements with the NYBC, the Company is
required to pay aggregate minimum royalties of $1.5 million in 1999, $2.2
million in 2000, $2.4 million in 2001 and $2.8 million in each year thereafter
in order to maintain its exclusive licenses. The Company is also required to
make specified payments to the NYBC to maintain its exclusive licenses if the
Company does not meet certain research and development milestones.

      In December 1997, the Company entered into a credit agreement with a bank
providing for a term loan in the principal amount of $10.8 million. The proceeds
under this term loan were used to repay the outstanding balance of existing term
loans aggregating $10.5 million. This loan bears interest at the Company's
option at LIBOR plus 2.75% to 1.75%, or the base rate of the bank, as defined,
plus margins of up to 0.5% as determined based on defined earnings ratios. For
fiscal year ended 1999, the Company was using one-month LIBOR (6.5%) plus 2.75%.
Under this loan, interest is payable monthly and the principal balance is
payable in 16 equal consecutive quarterly installments of $0.7 million
commencing March 31, 1998 and continuing until maturity on December 31, 2001.
The credit agreement contains default provisions, including financial covenants
which provide restrictions on capital investments, the payment of cash dividends
and, among other things, requires the Company to maintain minimum cash balances
of $2.0 million and leverage and coverage ratios as defined. The Company is in
compliance with or has received waivers for such covenants.

      Under the Company's capital and operating leases, annual minimum rental
payments and related interest expense over the next five years is $10.1 million.

      Prior to 1995, the Red Cross made to the Company's predecessor a total of
$3.0 million of non-interest bearing, unsecured advances to be used to fund
improvements to the manufacturing facility. The repayment schedule has been
modified to reflect repayment of 30% of the loan balance on the third
anniversary date of the approval of the PLAS+SD PLA and 15% of the balance on
each of the following two years, with the balance of the loan payable on the
sixth anniversary of the PLAS+SD PLA.

      For fiscal year 1999, the Company had net operating loss carry forwards
for federal and state income tax reporting purposes of approximately $36.6
million and has available research and development credit carry forwards for
federal income tax reporting purposes of approximately $1.3 million, which are
available to offset future taxable income, if any. These carry forwards will
expire beginning in 2010. The Company's ability to use such net operating loss
and research and development credit carry forwards is limited by change in
control provisions under Section 382 of the Internal Revenue Code (see Note 11
to financial statements).

      Although the Company's cash requirements will fluctuate based on the
timing and extent of the above factors, management believes that cash generated
from operations, together with the liquidity provided by existing cash balances,
will be sufficient to meet the Company's working capital requirements through
fiscal year 2000.


                                       26
<PAGE>

Risk Factors that May Affect Future Results

Dependence on New Products and Systems in Development Stage

      The success of VITEX's business is dependent on the development and
commercialization of its virally inactivated products and viral inactivation
systems, including products based on INACTINE technology. On May 6, 1998, the
Company received FDA approval to market its pooled virally inactivated
transfusion plasma product, PLAS+SD. The Company's other virally inactivated
blood products are under development and have not been approved by the FDA for
marketing in the United States or by regulatory authorities in other countries.
There can be no assurance that these products and systems will be successfully
developed and, if developed, that they will generate revenues and profits.
Successful commercialization of the Company's products and systems under
development depends, in significant part, on the Company's ability to: (i)
complete their development in a timely fashion; (ii) obtain and maintain patents
or other proprietary protections; (iii) obtain required regulatory approvals;
(iv) implement efficient, commercial-scale manufacturing processes; (v) gain
early entry into relevant markets; (vi) obtain reimbursement for sales of its
products; (vii) establish sales, marketing, distribution and development
collaborations; and (viii) demonstrate the competitiveness of the Company's
products and systems.

Market Acceptance

      Successful market acceptance of the Company's products and systems will
largely depend on the Company's ability to demonstrate their safety, efficacy
and cost-effectiveness. The Company will need to convince patients, doctors,
health care providers, blood centers and other participants in the blood
products market to pay for the incremental cost of the Company's virally
inactivated plasma and, if successfully developed and approved for marketing,
the Company's other virally inactivated blood products, as compared to widely
used, lower priced, corresponding blood products that have not been virally
inactivated. Although end customer sales of PLAS+SD by the Red Cross have risen
since the product was introduced, end-user market penetration has increased at a
slower rate than anticipated.

Government Regulation

      All of the Company's products are subject to extensive regulations by the
federal government, principally the FDA, and state, local and non-U.S.
governments. Such regulations govern, among other things, the development,
testing, manufacturing, labeling, storage, pre-market clearance or approval,
advertising, promotion, sale and distribution of such products. The process of
obtaining regulatory approvals is generally lengthy, expensive and uncertain.
Satisfaction of pre-market approval or other regulatory requirements of the FDA,
or similar requirements of non-U.S. regulatory agencies, typically takes several
years, depending upon the type, complexity, novelty and intended purpose of the
product.

      The regulatory process includes pre-clinical studies and clinical trials
of each product to establish its safety and efficacy, and may include post-
marketing studies requiring expenditure of substantial resources. The results
from pre-clinical studies and early clinical trials conducted by the Company may
not be predictive of results obtained in later clinical trials, and there can be
no assurance that clinical trials conducted by the Company will demonstrate
sufficient safety and efficacy to obtain the requisite marketing approvals. The
rate of completion of the Company's clinical trials may be delayed by many
factors, including slower than anticipated patient enrollment or adverse events
occurring during the clinical trials. Data obtained from pre-clinical and
clinical activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. In addition, delays or rejections
may be encountered based upon many factors, including changes in regulatory
policy during the period of product development. The Company's clinical
development plan for its cellular products assumes that only data from in vitro
studies, not from clinical trials, will be required to demonstrate efficacy in
inactivating viruses and that clinical trials for these products will instead
focus on demonstrating therapeutic efficacy, safety and tolerability of blood
components treated with the system. Although the Company has had discussions
with the FDA concerning the Company's proposed clinical plan for these products,
there can be no assurance that this plan of demonstrating safety and efficacy
will ultimately be acceptable to the FDA or that the FDA will continue to
believe that this clinical plan is appropriate. No assurance can be given that
any of the Company's development programs will be successfully completed or that
any further investigational new drug (IND) or investigational device exemption
(IDE) applications will become effective, that clinical trials will commence as
planned, that required United States or non-U.S. regulatory approvals will be
obtained on a timely basis, if at all, or that any products for which approval
is obtained will be commercially successful. As a result of FDA reviews or
complications that may arise in any phase of the clinical trial program, there
can be no assurance that the proposed schedules for IND, IDE and clinical
protocol submissions to the FDA, initiations of studies and completions of
clinical trials can be maintained.


                                       27
<PAGE>

Risk of Reliance on Manufacturing Facility and Equipment

      The Company operates a single manufacturing facility. Any catastrophic
event that interrupts production at this facility would have a material adverse
effect on the Company's business, financial condition and results of operations.
In August 1996, the Company experienced a malfunction in its fractionation
equipment that resulted in the Company incurring expenses of $5.1 million,
consisting of $4.1 million in replacement costs of Bayer's plasma and $1.0
million of unrecoverable processing costs. There can be no assurance that the
Company's fractionation equipment will not malfunction in the future, resulting
in additional unanticipated costs. In addition, to achieve the level of
production of PLAS+SD required under the Company's agreement with the Red Cross,
the Company will have to operate its single, highly customized filling machine
for extended periods without interruption. Any significant damage to, or
malfunction of, this filling machine that cannot be repaired would require the
Company to replace the machine. The construction of a replacement machine could
take as long as 18 months. While the Company has casualty insurance which it
believes to be consistent with industry standards, any extended interruption in
the production of plasma fractions or PLAS+SD would have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flows.

Reliance on Strategic Collaborators and Distribution Agreements

      The Company is dependent on strategic collaborators for sales, marketing
and distribution support and for the development of certain products and product
candidates. The Company has entered into: (i) an agreement with Bayer to process
plasma fractions from plasma supplied by Bayer; (ii) an agreement with the Red
Cross for the distribution of the Company's virally inactivated plasma; (iii) an
agreement with Pall for the development, sale, marketing and distribution of any
system incorporating the Company's viral inactivation technology for red blood
cell concentrates; and (iv) an agreement with Cangene Corporation to assess and
develop the use of INACTINE compounds in conjunction with existing viral
inactivation steps used in the manufacture of Cangene's hyperimmune products.
Although the Company established its own national sales force in December of
1998 to support the efforts of its partners, the success of the Company depends,
to a large extent, upon its ability to develop and deliver products to Bayer,
the Red Cross, Pall and, potentially other strategic collaborators. The
Company's collaborators may be unable to satisfy minimum purchase requirements
or achieve projected sales levels under the Company's collaborative agreements
which could result in the termination of such agreements, causing a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company may need to seek new collaborators or
alliances to sell and distribute future products or to establish its own direct
commercialization capabilities. Securing new corporate collaborators is a
time-consuming process, and there is no guarantee that the negotiations with new
collaborators will yield positive results. There can be no assurance that if the
Company finds additional corporate collaborators to assist in the
commercialization of existing or new product candidates, the terms of the
arrangements will be favorable to the Company. In addition, there can be no
assurance that the Company's strategic collaborators will not decide to
distribute other products that compete directly with the Company's products or
new products developed by competitors that may prove to be more effective,
cost-efficient alternatives to the Company's products. Each of the Company's
collaborative agreements requires the Company to meet certain research and
development and commercialization milestones. In the case of each of these
agreements, failure of the Company to achieve one or more of these milestones on
a timely basis, could have a material adverse effect on the Company's receipt of
funding and revenues under the agreement and the continuation of the agreement.
The failure to maintain existing strategic alliances for whatever reason and to
secure new alliances would delay the commercialization of existing and future
products.

Risk of Product Recalls

      Subsequent to the end of the first quarter of 1999, in connection with
PLAS+SD Phase IV safety studies, the Company observed several seroconversions to
parvovirus B-19 in healthy volunteers who received the product from two
production lots which were found to contain high concentrations of the virus.
Although there was no evidence of clinical disease typical of parvovirus B-19
associated with these seroconversions, on April 16, 1999, the Company initiated
a voluntary recall of thirty-seven lots of PLAS+SD which were found to contain
moderate to high levels of parvovirus B-19 DNA. The recall was completed on May
12, 1999. The Company recorded one-time costs of $2.6 million associated with
the recent recall of PLAS+SD. In addition, approximately $2.0 million in minimum
shipments of PLAS+SD under VITEX's contract with the Red Cross were not made in
the quarter due to production delays caused by the recall. There can be no
assurance that the Company will not face future product recalls which could have
a material adverse effect on the Company's business.

Competing Technologies and Rapid Technological Change

      The fields of transfusion medicine and therapeutic use of blood products
are characterized by rapid technological change. Accordingly, the Company's
success will depend, in part, on its ability to respond quickly to such change
through the development and introduction of new products and systems. Product
and system development involves a high degree of risk, and there can be no
assurance that the Company's product and system development efforts will result
in any commercial successes.


                                       28
<PAGE>

      Technological developments by others may result in the Company's products
becoming obsolete or non-competitive before the Company is able to generate any
significant revenue.

      The Company expects that all of its products and systems will encounter
significant competition. Any such product or system, once approved for
marketing, would compete with current approaches to blood safety, including
screening, donor retesting and autologous (i.e., self) donations, as well as
with future products and systems developed by medical technology,
biopharmaceutical and hospital supply companies, national and regional blood
centers, or certain governmental organizations and agencies. Many companies and
organizations that may be competitors or potential competitors have
substantially greater financial and other resources than the Company and may
have more experience in conducting pre-clinical studies and clinical trials and
other regulatory approval procedures.

Product Liability

      The Company's operations will expose it to the risk of product liability
claims. There can be no assurance that the Company will not experience losses
due to any such claims. The Company maintains product liability insurance
coverage, but there can be no assurance that the Company's product liability
insurance will continue to be available to the Company on a cost-effective basis
and that such insurance will be adequate to cover any or all potential claims.
In the event that a claim is brought against the Company, liability for damages
beyond the extent of coverage under the insurance policy combined with the
expense of litigating such claim could have a material adverse effect upon the
Company's business, financial condition and results of operations.

Uncertainty of Proprietary Technologies and Patents

      The Company's success depends, in part, on its ability to develop
proprietary products and technologies, to obtain and maintain patents, to
protect its trade secrets, to operate without infringing upon the proprietary
rights of others and to prevent others from infringing on the proprietary rights
of the Company. The Company has exclusive licenses to patents and patent
applications covering critical components of its viral inactivation
technologies. There can be no assurance that any patents owned by or licensed to
the Company will afford protection against competitors or that any pending
patent applications now or hereafter filed by or licensed to the Company will
result in patents being issued. In addition, the laws of certain non-U.S.
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States. Medical technology patents involve
complex legal and factual questions and, therefore, their enforceability cannot
be predicted with certainty. There can be no assurance that any of the Company's
patents or patent applications, if issued, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company against competitors with
similar technology. Furthermore, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's ability to use its technology or
commercialize products that may be developed. There can be no assurance that the
Company's planned or potential products will not be covered by third-party
patents or other intellectual property rights, in which case continued
development and marketing of such products would require a license under such
patents or other intellectual property rights. There can be no assurance that
such required licenses will be available to the Company on acceptable terms, if
at all. Litigation may be necessary to defend against or assert such claims of
infringement; to enforce patents issued to the Company, to protect trade secrets
or know-how owned by the Company or to determine the scope and validity of the
proprietary rights of others. Litigation or interference proceedings could
result in substantial costs and diversion of management focus.

Uncertainty Relating to Third-Party Reimbursement; Cost Containment

      Successful commercialization of the Company's products is, in part,
dependent on the reimbursement policies of third-party payers for the costs of
the Company's products. Failure by doctors, hospitals and other users of the
Company's products or systems to obtain reimbursement from managed care
organizations (MCOs), private health insurers, government authorities and other
medical cost reimbursement channels could adversely affect the Company's ability
to sell its products and systems.

Control by Existing Stockholders

      The directors and executive officers and their respective affiliates
control a majority of the outstanding common stock of the Company. Accordingly,
these stockholders will be able to exercise significant influence over all
matters requiring stockholder approval, including the election of Directors and
approval of significant corporate transactions. Such concentration of ownership
may also have the effect of delaying, preventing or deterring a change in
control of the Company.


                                       29
<PAGE>

Stock Price Volatility

      The Company's stock price, like that of other companies in its industry,
is subject to significant volatility. The stock price may be affected by, among
other things, clinical trial results and other product development related
announcements by the Company or its competitors, regulatory matters,
announcements in the scientific and research community, intellectual property
and legal matters, changes in reimbursement policies or medical practices or
broader industry and market trends unrelated to the Company's performance. In
addition, if revenues or earnings in any period fail to meet the investment
community's expectations, there could be an immediate adverse impact on the
Company's stock price.

Forward Looking Statements

      Certain of the matters and subject areas discussed in this report include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the
"Exchange Act"). All statements other than statements of historical information
provided herein are forward-looking statements and may contain information about
financial results, economic conditions, trends and known uncertainties. These
forward-looking statements are subject to risks and uncertainties, including,
without limitation, quarterly fluctuations in operating results, the timely
availability of new products, market acceptance of the Company's products, and
the impacts of competitive products and pricing and other factors set forth
above under the heading, "Risk Factors that May Affect Future Results." These
risks and uncertainties could cause actual results to differ materially from
those reflected in the forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis, judgment, belief or expectation only as of the date
hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.

New Accounting Pronouncements

      On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaboration with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB 101A, which amends
the implementation date for SAB 101, requires registrants with a fiscal year
that begins between December 16, 1999 and March 15, 2000 to adopt the accounting
guidance contained therein by no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is currently
assessing the financial impact of complying with SAB No. 101 and has not yet
determined whether applying the accounting guidance of SAB No. 101 will have a
material effect on its financial position or results of operations.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company's earnings and cash flows are subject to fluctuations due to
changes in interest rates primarily from its investment of available cash
balances in money market funds with portfolios of investment grade corporate and
U.S. government securities and, secondarily, its long-term debt arrangements.
Under its current policies, the Company does not use interest rate derivative
instruments to manage exposure to interest rate changes.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

      The following independent auditors' report and financial statements of the
Company set forth in the Company's 2000 Annual Report to Stockholders are
incorporated herein by reference and are filed herewith.

      o     Report of Independent Auditors, filed herewith as Exhibit 13.1
      o     Balance Sheets as of January 1, 2000 and January 2, 1999
      o     Statements of Operations for the years ended January 1, 2000,
            January 2, 1999 and December 31, 1997
      o     Statements of Stockholders' Equity for the years ended January
            1, 2000, January 2, 1999 and December 31, 1997
      o     Statements of Cash Flows for the years ended January 1, 2000,
            January 2, 1999 and December 31, 1997
      o     Notes to Financial Statements

      Selected unaudited Quarterly Financial Data is set forth in Note 18 of the
Notes to Financial Statements referred to above and incorporated herein by
reference.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

      None.


                                       30
<PAGE>

                                    PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

      Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Proposal 1-Election of Directors," "Additional Information"
and "Section 16(a) Beneficial Ownership Reporting Compliance."

Item 11. EXECUTIVE COMPENSATION.

      Incorporated by reference from the portions of the Definitive Proxy
Statement entitled "Executive Compensation" and "Additional
Information-Compensation of Directors."

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

      Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Security Ownership by Management and Principal
Stockholders."

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      Incorporated by reference from the portion of the Definitive Proxy
Statement entitled "Certain Relationships and Related transactions.


                                       31
<PAGE>

                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K.

(a)   Financial Statements

The following Financial Statements as set forth under Item 8 of this Report on
Form 10-K are incorporated herein by reference:

      Report of Independent Auditors

      Balance Sheets as of January 1, 2000 and January 2, 1999

      Statements of Operations for the years ended January 1, 2000, January
      2, 2000 and December 31, 1997

      Statements of Stockholders' Equity for the years ended January 1, 2000,
      January 2, 1999, and December 31, 1997

      Statements of Cash Flows for the years ended January 1, 2000, January 2,
      1999, and December 31, 1997

      Notes to Financial Statements

Other information and financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is included
in the financial statements or notes thereto.

(b)   Reports on Form 8-K

The Company filed an 8-K on November 24, 1999, as amended on January 10, 2000,
reporting the acquisition of Pentose Pharmaceuticals, Inc. on November 12, 1999.

(c)   Exhibits

      The following exhibits are required to be filed with this Report by Item
14 and are incorporated by reference to the source cited in the Exhibit Index
below or are filed herewith.

Exhibit
Number                           Description
-------

2.1      Agreement and Plan of Merger dated as of July 28, 1999 among the
         Company, Pentose and certain stockholders of Pentose. Filed as Annex A
         to the Joint Proxy Statement/Prospectus contained in the Registration
         Statement on Form S-4 (No. 333-87443) and incorporated herein by
         reference.

2.2      Amendment dated as of November 8, 1989 to Agreement and Plan of Merger
         dated as of July 28, 1999 among VITEX, Pentose and certain stockholders
         of Pentose. Filed as Exhibit 2.1 to the Registration Statement on Form
         S-4, as amended (No. 333-87443) and incorporated herein by reference.

3.1      Restated Certificate of Incorporation of the Company. Filed as Exhibit
         3.8 to the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

3.2      Amended and Restated By-laws of Company. Filed as Exhibit 3.10 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

4.1      Specimen of Common Stock Certificate. Filed as Exhibit 4.1 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

4.2      Stock Warrant between the Company and Bear, Stearns & Co. Inc., dated
         April 29, 1997. Filed as Exhibit 4.2 to the Registrant's Registration
         Statement on Form S-1, as amended (Registration Statement No.
         333-46933) and incorporated herein by reference.

4.3      Warrant to Purchase Common Stock between the Company and the Trustees
         of Columbia University in the City of New York, dated June 21, 1996.
         Filed as Exhibit 4.3 to the Registrant's Registration Statement on Form
         S-1, as amended (Registration Statement No. 333-46933) and incorporated
         herein by reference.

4.4      Contingent Stock Subscription Warrant between the Company and CB
         Capital Investors, Inc., dated April 29, 1997. Filed as Exhibit 4.4 to
         the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.1*    1998 Equity Incentive Plan. Filed as Appendix C to the Registrant's
         1999 Definitive Proxy Statement on Form 14A, Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.2*    1998 Director Stock Option Plan. Filed as Exhibit A to the Registrant's
         1999 Definitive Proxy Statement on Form 14A, on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.3*    1998 Employee Stock Purchase Plan. Filed as Exhibit 10.3 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.4*    Non-Exclusive License Agreement (#1) for Solvent Detergent Treated
         Blood Derived Therapeutic Products between the Company and the New York
         Blood Center, Inc., dated September 21, 1995. Filed as Exhibit 10.4 to
         the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.


                                       32
<PAGE>

10.5+    Non-Exclusive License Agreement (#2) for UV Treated Blood Derived
         Therapeutic Products between the Company and the New York Blood Center,
         Inc., dated September 21, 1995. Filed as Exhibit 10.5 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.6+    Exclusive License Agreement (#3) for Virally Inactivated Transfusion
         Plasma Products between the Company and the New York Blood Center,
         Inc., dated September 21, 1995, as amended on December 31, 1996 and
         July 1, 1997. Filed as Exhibit 10.6 to the Registrant's Registration
         Statement on Form S-1, as amended (Registration Statement No.
         333-46933) and incorporated herein by reference.

10.7+    Exclusive License Agreement (#4) for Virally Inactivated Fibrin
         Sealant/Thrombin Products between the Company and the New York Blood
         Center, Inc., dated September 21, 1995, as amended on September 27,
         1996 and January 1, 1998. Filed as Exhibit 10.7 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

l0.8++   Third Amendment to Exclusive License for Virally Inactivated Fibrin
         Sealant/Thrombin Products between the Company and the New York Blood
         Center, dated February 10, 1999. Filed herewith.

10.9+    Exclusive License Agreement (#5) for Virally Inactivated Cellular
         Products between the Company and the New York Blood Center, Inc., dated
         September 21, 1995, as amended on February 16, 1998. Filed as Exhibit
         10.8 to the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

l0.l0    Termination of Exclusive License Agreement for Virally Inactivated
         Cellular Products between the Company and New York Blood Center,
         effective February 1,2000. Filed herewith.

10.11++  First Amendment to Appendix A of the License Agreements between the New
         York Blood Center and the Company, effective January 1, 1999. Filed
         herewith.

10.12    Omnibus Agreement between the Company and the New York Blood Center,
         Inc., dated October 26, 1995. Filed as Exhibit 10.9 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.13    First and Second Amendments, each dated March 31, 1998, to the Omnibus
         Agreement (filed previously as Exhibit 10.12). Filed as Exhibit 10.35
         to the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.14    Third Amendment to the Omnibus Agreement, dated October 6, 1998. Filed
         herewith.

10.15+   Exclusive Distribution Agreement between the Company and United States
         Surgical Corporation, dated September 11, 1996, as amended on October
         3, 1996. Filed as Exhibit 10.10 to the Registrant's Registration
         Statement on Form S-1, as amended (Registration Statement No.
         333-46933) and incorporated herein by reference.

10.16++  Modification Agreement between the Company and Bayer Corporation, dated
         December 22, 1997. Filed as Exhibit 10.12 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.17+   First Amended and Restated Agreement for Custom Processing between the
         Company and Bayer Corporation, dated January 24, 1996. Filed as Exhibit
         10.11 to the Registrant's Registration Statement on Form S-l, as
         amended (Registration Statement No. 333-46933) and incorporated herein
         by reference.

10.18++  Letter Agreement between the Company and Bayer amending the Custom
         Processing Agreement, dated April 21, 1999. Filed herewith.

10.19++  Amended and Restated Supply, Manufacturing, and Distribution
         Collaboration Agreement between the Company and the American National
         Red Cross, dated October 1, 1998. Filed as Exhibit 10.13 to the
         Registrant's 1999 Annual Report on Form 10-K.

10.20++  Amendment to the Amended and Restated Supply, Manufacturing and
         Distribution Collaboration Agreement between the Company and the
         American National Red Cross, dated October 1, 1999. Filed herewith.

10.21+   Joint Development, Marketing and Distribution Agreement between the
         Company and Pall Corporation, dated February 19, 1998. Filed as Exhibit
         10.15 to the Registrant's Registration Statement on Form S-1, as
         amended (Registration Statement No. 333-46933) and incorporated herein
         by reference.

10.22    Amendment No. 1 to the Joint Development, Marketing and Distribution
         Agreement between Pall Corporation and the Company, dated July 19,
         1999. Filed as Exhibit 4.4 to the Registrant's 1999 Quarterly Report on
         Form 10-Q filed August 11, 1999.

10.23+   Stock Purchase Agreement between Pall Corporation and the Company,
         dated February 19, 1998. Filed as Exhibit 10.16 to the Registrant's
         Registration Statement on Form S-l, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.24    Registration Rights Agreement between the Company and the Investors
         named therein, dated February 19, 1998. Filed as Exhibit 10.17 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.25    Facility Lease Agreement between the Company and Suffolk County
         Industrial Development Agency, dated February 15, 1995. Filed as
         Exhibit 10.18 to the Registrant's Registration Statement on Form S-1,
         as amended (Registration Statement No. 333-46933) and incorporated
         herein by reference.

                                       33
<PAGE>

10.26    Lease Agreement between the Company and Bayer Corporation, dated
         February 7, 1995. Filed as Exhibit 10.19 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.27    Sublease Agreement between the Company and Bayer Corporation, dated
         February 7, 1995. Filed as Exhibit 10.20 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.28    Security Agreement between the Company and Bayer Corporation, dated
         December 22, 1997. Filed as Exhibit 10.21 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.29    Lease between the Company and the Trustees of Columbia University in
         the City of New York, dated June 21, 1996. Filed as Exhibit 10.22 to
         the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.30*   Employment Agreement between the Company and Bernard Horowitz, dated
         January 15, 1998. Filed as Exhibit 10.26 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.31    Separation Agreement and General Release between Bernard Horowitz and
         the Company executed September 13, 1999. Filed as Exhibit 10.1 to the
         Registrant's 1999 Annual Report on Form l0-Q and incorporated herein by
         reference.

10.32*   Letter Agreement between the Company and John R. Barr, dated November
         10, 1997. Filed as Exhibit 10.27 to the Registrant's Registration
         Statement on Form S-1, as amended (Registration Statement No.
         333-46933) and incorporated herein by reference.

10.33*   Memorandum from Rick Charpie to the Company's Vice Presidents, dated
         October 28, 1997. Filed as Exhibit 10.28 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.34    Credit Agreement between the Company and The Chase Manhattan Bank,
         dated December 22, 1997. Filed as Exhibit 10.29 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.35    Intercreditor Agreement among the Company, Bayer Corporation and The
         Chase Manhattan Bank, dated December 22, 1997. Filed as Exhibit 10.30
         to the Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.36    Mortgage and Security Agreement among the Company, Suffolk County
         Industrial Development Agency and The Chase Manhattan Bank, dated
         December 22, 1997. Filed as Exhibit 10.31 to the Registrant's
         Registration Statement on Form S-1, as amended (Registration Statement
         No. 333-46933) and incorporated herein by reference.

10.37    Guaranty and Collateral Agreement between the Company and The Chase
         Manhattan Bank, dated December 22,1997. Filed as Exhibit 10.32 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.38    Mortgage, Security Agreement and Fixture Filing among the Company,
         Suffolk County Industrial Development Agency and Bayer Corporation,
         dated February 15, 1995, as amended December 22, 1997. Filed as Exhibit
         10.33 to the Registrant's Registration Statement on Form S-1, as
         amended (Registration Statement No. 333-46933) and incorporated herein
         by reference.

10.39    Form of Indemnification Agreement. Filed as Exhibit 10.34 to the
         Registrant's Registration Statement on Form S-1, as amended
         (Registration Statement No. 333-46933) and incorporated herein by
         reference.

10.40*   1999 Supplemental Stock Option Plan. Filed as Annex C to the Joint
         Proxy Statement/Prospectus contained in the Registration Statement on
         Form S-4 (No. 333-87443) and incorporated herein by reference.

13.1     Independent Auditors' Report. Filed herewith.

23.1     Consent of KPMG LLP. Filed herewith.

27.1     Financial Data Schedule. Filed herewith.

*        Management contracts and compensatory plans or arrangements.

+        Certain confidential material contained in the document was filed
         separately with SEC pursuant to Rule 406 of the Securities Act.

++       Certain confidential material contained in the document was omitted and
         filed separately with the SEC pursuant to Rule 24b-2 of the Securities
         Exchange Act of 1934, as amended.


                                       34
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.

                                           V.I. TECHNOLOGIES, INC.


                                           By: /s/ John R. Barr
                                               ----------------
                                           John R. Barr
                                           President and Chief Executive Officer
                                           March 29, 2000

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature                     Title                               Date


/s/ David Tendler             Chairman of the Board of Directors  March 29, 2000
-----------------
David Tendler


/s/ John R. Barr              President, Chief Executive Officer  March 29, 2000
----------------              and Director (Principal Executive
John R. Barr                  Officer)


/s/ Samuel K. Ackerman, M.D.  Executive Vice President, Research  March 29, 2000
----------------------------  and Development
Samuel K. Ackerman, M.D.


/s/ Thomas T. Higgins         Executive Vice President,           March 29, 2000
---------------------         Operations, Treasurer and Chief
Thomas T. Higgins             Financial Officer (Principal
                              Financial Officer and Principal
                              Accounting Officer)

/s/ Richard A. Charpie        Director                            March 29, 2000
----------------------
Richard A. Charpie


/s/ Jeremy Hayward-Surry      Director                            March 29, 2000
------------------------
Jeremy Hayward-Surry


/s/ Bernard Horowitz, Ph.D.   Director                            March 29, 2000
---------------------------
Bernard Horowitz, Ph.D.


/s/ Irwin Lerner              Director                            March 29, 2000
----------------
Irwin Lerner


/s/ Peter D. Parker           Director                            March 29, 2000
-------------------
Peter D. Parker


/s/ Damion E. Wicker, M.D.    Director                            March 29, 2000
--------------------------
Damion E. Wicker, M.D.



                                       35
<PAGE>

                             V.I. TECHNOLOGIES, INC.
                                 Balance Sheets

<TABLE>
<CAPTION>
                                                               January 1,      January 2,
                                                                  2000             1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents                                   $ 26,885,789    $ 35,264,447
  Trade receivables                                              4,596,482       3,966,758
  Other receivables                                                535,831         593,982
  Due from related parties, net                                         --         313,216
  Inventory                                                      2,744,279       2,512,213
  Prepaid expenses and other current assets                        924,122         987,131
                                                              ------------    ------------
        Total current assets                                    35,686,503      43,637,747

Property, plant and equipment, net                              37,519,977      30,820,902
Intangible assets, net                                           4,251,000              --
Other assets, net                                                  640,574         766,488
                                                              ------------    ------------
                                                              $ 78,098,054    $ 75,225,137
                                                              ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt                              2,687,500    $  2,687,500
  Current portion of capital lease obligations                   1,487,599       1,272,357
  Accounts payable                                               1,007,951       1,701,000
  Accrued expenses                                               9,342,791       4,874,396
  Due to related parties, net                                      486,001              --
                                                              ------------    ------------
       Total current liabilities                                15,011,842      10,535,253

Long-term debt, less current portion                             2,687,500       5,375,000
Capital lease obligations, less current portion                  2,448,246       3,323,874
Advances from customer                                           2,565,149       2,356,349

Stockholders' equity:
  Preferred stock, par value $.01 per share; authorized
    1,000,000 shares; no shares issued and outstanding                  --              --
  Common stock, par value $.01 per share; authorized
    35,000,000 shares; issued and outstanding 19,536,263 at
    January 1, 2000 and 12,359,148 at January 2, 1999              195,363         123,592
  Additional paid-in-capital                                   125,582,714      86,574,660
  Accumulated deficit                                          (70,392,760)    (33,063,591)
                                                              ------------    ------------
       Total stockholders' equity                               55,385,317      53,634,661
                                                              ------------    ------------
                                                              $ 78,098,054    $ 75,225,137
                                                              ============    ============
</TABLE>

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


                                        1
<PAGE>

                             V.I. TECHNOLOGIES, INC.
                            Statements of Operations

<TABLE>
<CAPTION>
                                                       Year ended       Year ended     Year ended
                                                       January 1,       January 2,    December 31,
                                                          2000             1999           1997
                                                      ------------     -----------    ------------
<S>                                                   <C>              <C>            <C>
Revenues:
    Product sales                                      $42,423,296     $33,755,499     $15,843,046
    Less: ARC Incentive Program                         (4,500,000)             --              --
                                                      ------------     -----------    ------------
            Net revenues                                37,923,296      33,755,499      15,843,046

Costs and expenses, including related party amounts
of $1,779,000, $2,302,000 and $784,000 during the
years ended January 1, 2000, January 2, 1999 and
December 31, 1997, respectively:
    Cost of sales                                       24,742,197      23,859,984      16,325,810
    Research and development, net                        6,965,884       7,506,895       5,912,233
    Selling, general and administrative expenses         9,371,803       6,950,983       4,352,731
    Charges related to merger -- R&D restructuring       2,208,419              --              --
                              -- In-Process R&D         32,998,489              --              --
    Charge related to product recall                     2,583,000              --              --
    Charge related to research collaboration                    --       2,202,000              --
                                                      ------------     -----------    ------------
         Total operating costs and expenses             78,869,792      40,519,862      26,590,774

Loss from operations                                   (40,946,496)     (6,764,367)    (10,747,728)
Settlement of insurance claim                            3,500,000              --              --
Interest income                                          1,307,087       1,217,363         366,167
Interest expense                                        (1,259,760)     (1,496,703)     (1,318,084)
Discount on customer advance                                70,000         643,651              --
                                                      ------------     -----------    ------------
         Total other income (expense), net               3,617,327         364,311        (951,917)
                                                      ------------     -----------    ------------

Net loss                                              ($37,329,169)    ($6,400,056)   ($11,699,645)
                                                      ============     ===========    ============

Basic and diluted net loss per share                        ($2.78)         ($0.61)         ($1.62)
                                                      ============     ===========    ============

Weighted average common shares used in computing
    basic and diluted net loss per share                13,405,294      10,453,652       7,240,923
                                                      ============     ===========    ============
</TABLE>

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


                                        2
<PAGE>

                             V.I. TECHNOLOGIES, INC.
                       Statements of Stockholders' Equity
       Years ended January 1, 2000, January 2, 1999 and December 31, 1997

<TABLE>
<CAPTION>
                                                                                           Note
                                                    Common Stock          Additional    Receivable
                                                    ------------            Paid-In        From       Accumulated    Stockholders'
                                                Shares        Amount        Capital     Stockholder      Deficit        Equity
                                             ------------  ------------  ------------  ------------   ------------   ------------

<S>                                            <C>             <C>       <C>               <C>        <C>             <C>
Balance at December 31, 1996                    6,042,307       $60,423   $23,808,827            --   ($14,963,890)    $8,905,360

Issuance of shares of common stock in
  connection with a private placement,
  net of issuance costs of $859,000             1,797,894        17,979    14,073,435            --             --     14,091,414

Compensation expense in connection with
  issuance of stock options                            --            --       381,250            --             --        381,250

Issuance of shares of common stock upon
  exercise of stock options                        12,522           125        34,875      ($35,000)            --             --

Net loss                                               --            --            --            --    (11,699,645)   (11,699,645)
                                             ------------  ------------  ------------  ------------   ------------   ------------
Balance at December 31, 1997                    7,852,723        78,527    38,298,387       (35,000)   (26,663,535)    11,678,379

Issuance of shares of common stock in
  connection with Initial Public
  Offering, including exercise of
  underwriter's over-allotment option,
  net of issuance cost of $1,239,000            3,325,000        33,250    35,835,068            --             --     35,868,318

Issuance of shares of common stock in
  connection with private placement               925,070         9,251     8,990,749            --             --      9,000,000

Charge in connection with research
  collaboration                                        --            --     2,202,000            --             --      2,202,000

Issuance of shares of common stock to New
  York Blood Center in satisfaction of
  obligation                                       35,778           358       299,643            --             --        300,000

Compensation expense in connection with
  acceleration of option vesting                       --            --       289,452            --             --        289,452

Issuance of shares of common stock upon
  exercise of stock options                       220,577         2,206       659,362        35,000             --        696,568

Net loss                                               --            --            --            --     (6,400,056)    (6,400,056)
                                             ------------  ------------  ------------  ------------   ------------   ------------
Balance at January 2, 1999                     12,359,148       123,592    86,574,660            --    (33,063,591)    53,634,661

Issuance of shares of common stock upon
  exercise of stock options                       194,563         1,946       484,879            --             --        486,825

Issuance of common stock to Pall Corp.
  in connection with research collaboration       538,821         5,388     2,994,612            --             --      3,000,000

Issuance of common stock in connection
  with Pentose merger                           6,443,731        64,437    35,528,563            --             --     35,593,000

Net loss                                               --            --            --            --    (37,329,169)   (37,329,169)
                                             ------------  ------------  ------------  ------------   ------------   ------------

Balance at January 1, 2000                     19,536,263      $195,363  $125,582,714            --   ($70,392,760)   $55,385,317
                                             ============  ============  ============  ============   ============   ============
</TABLE>

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


                                        3
<PAGE>

                             V.I. TECHNOLOGIES, INC.
                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                        Year ended      Year ended      Year ended
                                                        January 1,      January 2,     December 31,
                                                           2000            1999           1997
                                                       ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                             ($37,329,169)    ($6,400,056)   ($11,699,645)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
      Depreciation and amortization                       3,088,259       3,408,886       2,985,572
      Compensation expense in connection with
        stock options                                            --         289,452         381,250
      Debt refinancing costs                                     --              --         190,385
      Charge related to research collaboration                   --       2,202,000              --
      Discount an customer advances                         (70,000)       (643,651)             --
      Accretion of interest expense on customer
        advances                                            278,800              --              --
      Charge related to in-process R&D                   32,998,489              --              --

   Changes in operating amounts, excluding the
     effects of the Pentose merger:
      Trade receivables                                    (629,724)     (2,611,185)       (106,446)
      Other receivables                                     304,387         300,965       1,072,766
      Inventory                                            (232,066)     (1,937,256)       (133,470)
      Prepaid expenses and other assets                     352,353        (886,236)        147,855
      Amounts payable and accrued expenses                1,201,314          61,373      (2,910,566)
      Due to related parties, net                           799,217        (680,979)        365,595
                                                       ------------    ------------    ------------

Net cash provided by (used in) operating activities         761,860      (6,896,687)     (9,706,704)
                                                       ------------    ------------    ------------

Cash flows from investing activities:
  Cash resulting from Pentose merger                        548,507              --              --
  Additions to property, plant and equipment             (9,192,459)     (5,005,863)     (3,858,031)
  Other investing activities                                     --              --        (124,589)
                                                       ------------    ------------    ------------

Net cash used in investing activities                    (8,643,952)     (5,005,863)     (3,982,620)
                                                       ------------    ------------    ------------

Cash flows from financing activities:
  Proceeds from issuance of common stock, net of
    issuance costs                                        3,486,825      45,564,890      14,091,414
  Principal repayment of long-term debt                  (2,687,500)     (2,687,500)    (12,500,000)
  Principal repayment of capital lease obligations       (1,295,891)       (960,412)       (627,231)
  Proceeds from issuance of long-term debt                       --              --      10,750,000
  Proceeds from issuance of notes payable                        --              --       1,472,797
  Advances from customer                                         --              --       1,000,000
                                                       ------------    ------------    ------------

Net cash (used in) provided by financing activities        (496,566)     41,916,978      14,186,980
                                                       ------------    ------------    ------------

Net (decrease) increase in cash and cash equivalents     (8,378,658)     30,014,428         497,656

Cash and cash equivalents, beginning of year             35,264,447       5,250,019       4,752,363
                                                       ------------    ------------    ------------

Cash and cash equivalents, end of year                  $26,885,789     $35,264,447     $ 5,250,019
                                                       ============    ============    ============
</TABLE>

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


                                        4
<PAGE>

                             V.I. TECHNOLOGIES, INC.
                          Notes to Financial Statements
             January 1, 2000, January 2, 1999 and December 31, 1997

1. Organization and Business Overview

      V.I. Technologies, Inc. (the "Company" and VITEX(TM), a trade mark
and trade name of V.I. Technologies, Inc.") is a leading developer of a broad
portfolio of blood products and systems which use its proprietary pathogen
inactivation technologies. The Company's technologies are intended to address
the risks of viral, bacterial and other pathogen contamination in blood
products, including plasma, plasma derivatives, red blood cells and platelets.
Viral inactivation processes have the potential to eliminate viruses that are
enveloped by lipid membranes such as hepatitis B virus ("HBV"), hepatitis C
virus ("HCV") and HIV, the virus that causes AIDS, and non-enveloped viruses
such as hepatitis A virus ("HAV") and parvovirus and other known and unknown
pathogens.

Reverse Stock Split

      In anticipation of the Company's initial public offering (IPO) which is
further described in Note 9, effective February 23, 1998, the Board of Directors
authorized and the stockholders approved a 1-for-2.795 reverse split of the
Company's common stock. All share and per share amounts have been restated to
reflect the reverse stock split.

Change of Fiscal Year-End and Presentation

      On August 10, 1998, the Company changed from a calendar year to a 52-53
week fiscal year ending on the Saturday closest to December 31, beginning with
the fiscal year ending January 2, 1999. For presentation purposes, the years
ended January 1, 2000, January 2, 1999 and December 31, 1997 are referred to as
fiscal years 1999, 1998 and 1997, respectively, in the notes to the financial
statements.

2. Summary of Significant Accounting Policies

Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.

Cash and Cash Equivalents

      The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of money market funds invested in portfolios of
investment grade, corporate and U.S. government obligations and are carried at
cost which approximates market value. As of January 1, 2000 and January 2, 1999,
cash equivalents amounted to $21.4 million and $37 million, respectively.

Inventory

      Costs incurred in connection with plasma fractionation processing and the
production of PLAS+SD are included in inventory and expensed upon recognition of
related revenues. Such costs include direct labor and processing overheads. The
processed plasma is supplied and owned by the Company's customers and, as such,
is not included in inventory. Inventory is stated at the lower of cost, as
determined using the average cost method, or net realizable value.

Property Plant and Equipment

      Property, plant and equipment are stated at cost and are being depreciated
on a straight-line basis over the estimated useful lives of the respective
assets, which approximates seven to twenty five years for building and
manufacturing equipment, and three to five years for all other tangible assets.
During the fourth quarter of the fiscal year 1998, the Company extended the
estimated useful life of its manufacturing facility located in Melville, New
York. based on a re-assessment of the building's utility, in conjunction with


                                       5
<PAGE>

ongoing facility renovation and expansion to accommodate additional products and
capacity. The useful life of the building, which the Company had previously been
depreciating over 10 years, was increased to a remaining life of twenty five
years. The effect of this change was to reduce depreciation expense and net loss
for fiscal year 1998 by $0.2 million or $0.02 per share.

Long-lived Assets

      The Company reviews its long-lived assets (property, plant and equipment)
for impairment whenever events of circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected cash
flows, undiscounted and without interest, is less than the carrying amount of
the asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.

Intangible Assets

      Intangible assets principally consist of core technology and work force
acquired in the Pentose merger (see Note 3). Core technology is being amortized
on a straight-line basis over 15 years, and work force is being amortized on a
straight-line basis over 5 years. Periodically, the Company reviews the
recoverability of its intangible assets. The measurement of possible impairment
is based primarily on the ability to recover the balance of the intangible
assets from expected future operating cash flows on an discounted basis.

Revenue Recognition

      Revenue from plasma fractionation processing and the production of PLAS+SD
is normally recognized in the period in which the related services have been
rendered and upon satisfaction of certain quality control requirements. As more
fully discussed in Note 12, the Company's agreement with the Red Cross provides
that the Red Cross is obligated to pay for the amount of PLAS+SD specified in
its annual purchase order even if the Red Cross is unable to supply sufficient
quantities of plasma for processing. Revenue recognized in the accompanying
statements of operations is not subject to repayment or future performance
obligations.

      The Company's plasma fractionation processing revenues are principally
derived from Bayer, while PLAS+SD is sold to the Red Cross for subsequent
distribution to hospitals and other medical facilities. Revenue derived from
sale of products to Bayer and the Red Cross each amounted to approximately 49%
of total revenue, excluding the Red Cross sales incentive (see Note 13), for
fiscal year 1999. At January 1, 2000, amounts owed from Bayer and Red Cross
amounted to 24% and 76%, respectively, of net trade receivables. For fiscal year
1998, revenue derived from sale of products to Bayer and the Red Cross amounted
to approximately 43% and 48%, respectively, of total revenue. At January 2,
1999, amounts owed from Bayer and the Red Cross amounted to 57% and 37%,
respectively, of net trade receivables. For fiscal year 1997, total revenue and
net trade receivables was derived from sale of products to Bayer.

Research and Development

      All research and development costs are charged to operations as incurred.
Research and development is recorded net of reimbursement, which amounted to
$1.8 million, $2.3 million and $1.2 million, for fiscal years 1999, 1998 and
1997 respectively.

Income Taxes

      Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the amounts of
existing assets and liabilities carried on the financial statements and their
respective tax bases and the benefits arising from the realization of operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized.

Net Loss Par Share

      Basic net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding. Diluted net loss per share
is the same as basic net loss per share since the inclusion of potential common
stock equivalents (stock options and warrants) in the computation would be
anti-dilutive.


                                       6
<PAGE>

Fair Values of Financial Instruments

      The fair values of the Company's capital lease obligations are estimated
using discounted cash flow analyses, based upon the Company's estimated
incremental borrowing rate for similar types of securities (see Note 8). For all
other financial instruments, the carrying value approximates fair value due to
the short maturity or variable interest rate applicable to such instrument.

3. Pentose Merger

      On November 12, 1999, the Company completed the merger with Pentose
Pharmaceuticals, Inc., a Delaware corporation ("Pentose"), pursuant to an
Agreement and Plan of Merger and Reorganization dated as of July 28, 1999.
Pentose's principal business involves the development for commercialization of
novel antiviral products for medical use based on innovative applications of
nucleic acid chemistry. Pentose has developed the INACTINE technology platform
for the inactivation of viral pathogens in blood components, for transfusion
plasma derivatives and for biopharmaceuticals. Under the terms of the merger,
6,443,731 shares of common stock of the Company were issued in exchange for all
of the outstanding Pentose common and preferred stock. Following the exchange,
former shareholders of Pentose owned approximately 34% of the outstanding common
stock of VITEX. Each outstanding option and warrant to purchase Pentose common
stock was converted into the right to purchase 0.48937 of a share of Vitex
common stock. A total of approximately 500,000 shares of the Company's common
stock are issuable to option-holders and warrant-holders of Pentose upon
exercise of options and warrants assumed in the merger.

      The merger was accounted for under the purchase method of accounting. The
purchase price representing the fair value of the common stock and other direct
acquisition costs of $38.3 million has been allocated to the assets and
liabilities assumed based on fair values at the date of acquisition. The excess
of the fair value of the net assets acquired over the purchase price represented
negative goodwill of approximately $2.0 million which amount was allocated
proportionately to reduce the value of the noncurrent assets acquired and
in-process R&D which was charged to operations. The purchase price was allocated
as follows:

           Cash                                                       $549,000
           Other current assets and long term deposits                 409,000
           Work force                                                  542,000
           Core technology                                           3,709,000
           In-process R&D                                           32,998,000
           Fixed assets                                                595,000
                                                                   -----------
           Net purchase price                                      $38,802,000
                                                                   ===========

      The Company obtained an independent valuation of the intangible assets
acquired and the in-process research and development charge. The valuation of
core technology and in-process research and development was determined for
products under development, based upon the estimated future revenues to be
earned upon commercialization of the products. The work force valuation was
based upon replacement cost. The value of the purchased in-process research and
development from the acquisition was determined by estimating the projected net
cash flows related to products under development, based upon the future revenues
to be earned upon commercialization of such products. The percentage of the cash
flow allocated to purchased in-process research and development was derived from
the estimated percentage complete for each of the projects. These cash flows
were discounted back to their net present value. The resulting projected net
cash flows from such projects reflects management's estimates of revenues and
operating profits related to such projects.

      The Company's unaudited pro forma results for fiscal years 1999 and 1998
assuming the merger occurred on January 1, 1998 are as follows:

                                                       1999               1998
                                                       ----               ----
          Net revenues                          $37,923,000        $33,756,000
          Net loss                              ($7,375,000)       ($9,202,000)
          Basic and diluted loss per share           ($O.39)            ($0.54)
          Weighted average shares                18,946,000         16,891,000


                                       7
<PAGE>

      These unaudited pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that actually would have resulted had the merger been in effect January 1, 1998,
or the future results of operations.

      In July 1999, in anticipation of the merger with Pentose, the Company
recorded a research and development charge of $2.3 million for severance and
other integrational related expenses, including the elimination of duplicate
facilities and excess capacity, operational realignment and related workforce
reductions of the Company's employees and facilities. As a result of the merger,
22 employees were severed. The charge was reduced to $2.2 million at January 1,
2000 to reflect a decrease in estimates. Details of the restructuring charge are
as follows:

                                       Accrued, net  Disbursed   January 1, 2000
                                       ------------  ----------  ---------------

Employee severance and
 related costs                          $1,554,000   $1,106,000     $448,000
Facility related costs                     493,000      193,000      300,000
Other                                      161,000      161,000           --
                                        ----------   ----------     --------
                                        $2,208,000   $1,460,000     $748,000
                                        ==========   ==========     ========

Inventory

Inventory consists of the following components:

                                                               1999         1998
                                                               ----         ----

      Work-in-process                                    $  799,000   $1,382,000
      Resin                                                 891,000           --
      Supplies                                            1,054,000    1,130,000
                                                          ---------    ---------
                                                         $2,744,000   $2,512,000
                                                         ==========   ==========

Property, Plant and Equipment

Property, plant and equipment consists of the following components:

                                                          1999            1998
                                                          ----            ----
      Land                                            $638,000        $638,000
      Building and related improvements             25,926,000      22,135,000
      Manufacturing and laboratory equipment        19,432,000      13,911,000
      Office furniture and equipment                 2,068,000       1,242,000
      Construction in progress                       2,283,000       2,769,000
                                                  ------------    ------------
                                                    50,347,000      40,695,000
      Accumulated depreciation and amortization    (12,827,000)     (9,874,000)
                                                  ------------    ------------
                                                   $37,520,000     $30,821,000
                                                  ============    ============

      The cost of manufacturing and laboratory equipment held under capital
leases (see Note 8) amounted to $6.8 million and $6.2 million at fiscal year
ends 1999 and 1998, respectively, and accumulated depreciation relating to such
equipment amounted to $1.1 million and $.6 million in the respective fiscal
years. Depreciation expense for this equipment amounted to $0.4 million, $0.4
million and $0.2 million, respectively, for fiscal years 1999, 1998 and 1997.
Total depreciation and amortization expense of property, plant and equipment
amounted to $3.1 million, $3.2 million and $2.7 million, respectively, for
fiscal years 1999, 1998 and 1997. The Company capitalized interest of $0.4
million in fiscal 1997. No amounts were capitalized in fiscal 1998 or 1999.

                                       8
<PAGE>

6. Accrued Expenses

Accrued expenses consist of the following components:

                                                               1999         1998
                                                               ----         ----
Accrued transportation fees                                $416,000     $544,000
Refunds due to customer                                          --      444,000
Accrued Red Cross sales incentive program (see Note 13)   3,498,000           --
Accrued marketing                                           506,000      195,000
Accrued employee compensation                             2,198,000    1,681,000
Accrued operating taxes                                     934,000      726,000
Accrued R&D restructuring costs                             748,000           --
Other                                                     1,043,000    1,284,000
                                                         ----------   ----------
                                                         $9,343,000   $4,874,000
                                                         ==========   ==========

7. Long-Term Debt

      On December 22, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with a bank providing for a term loan in the principal
amount of $10.8 million (the "New Term Loan"). The proceeds under the New Term
Loan were used to repay the outstanding balance of existing term loans
aggregating $10.5 million previously provided by other banks, and related
expenses associated with executing the New Term Loan. The New Term Loan bears
interest at the Company's option at either LIBOR plus 2.75% to 1.75% or the base
rate of the bank, as defined, plus margins of up to 0.5%, as determined based on
defined earnings ratios. As of January 1, 2000, the Company was using one-month
LIBOR (6.5%) plus 2.75%. Under the New Term Loan, interest is payable monthly
and the principal balance is payable in sixteen equal consecutive quarterly
installments of $0.6 million commencing March 31, 1998 and continuing until
maturity on December 31, 2001. Amounts outstanding under the Term Loan were $5.4
million at January 1, 2000 and $8.1 million at January 2, 1999. The Credit
Agreement contains default provisions, including financial covenants which
provide restrictions on capital investments and the payment of cash dividends
and, among other things, requires the Company to maintain minimum cash balances
of $2.0 million and leverage and coverage ratios, as defined. The Company is in
compliance with or has received waivers for these covenants.

      Under the New Term Loan, the Company granted the bank a mortgage upon, and
security interest in, substantially all of the property owned by the Company,
including the real property, building and fixtures, equipment, inventory,
accounts receivable, cash and certain intangible assets, subject to Bayer's
security interest in the Bayer Collateral (see Note 12) and the security
interests of a third party under a Master Equipment Lease Agreement (see Note
8).

8. Capital Lease Obligation

      On April 8, 1996, the Company entered into a Master Equipment Lease
Agreement (the "Master Lease") under which the Company borrowed $6.2 million to
be used for leasing production equipment. The Master Lease contains escalating
monthly lease payments over a five-year period. The Master Lease also contains
an early purchase option and an option to purchase the equipment at 15.0% of the
equipment cost at the end of the lease term. The effective interest rate is
approximately 16.2% per annum. As a part of the Pentose merger, the Company
assumed the capital lease obligations under a $0.6 million equipment line of
credit. The Company has an option to purchase all of the leased equipment for
the fair market value of the equipment at the end of the lease. The effective
interest rate is approximately 12.6% per annum. Total future minimum payments
under the capital lease obligations are as follows:

           2000                                                    $2,061,000
           2001                                                     1,865,000
           2002                                                       514,000
           2003                                                        78,000
                                                                   ----------
           Total minimum lease payments                             4,518,000
            Less amounts representing interest                       (582,000)
                                                                   ----------
            Present value of minimum lease payments                 3,936,000
            Less current maturities                                 1,488,000
                                                                   ----------
            Long-term portion                                      $2,448,000
                                                                   ==========

      The fair value of the Company's capital lease obligations was
approximately $4.1 million at January 1,2000.


                                       9
<PAGE>

9. Stockholders' Equity

Common Stock

      On April 29, 1997, the Company completed a $15 million private placement
of 1,797,894 shares of common stock, par value $0.01 per share, to CBC, less
issuance costs of $0.9 million. In addition, the Company issued a contingent
stock purchase warrant exercisable into 1% of the Company's fully diluted shares
for every $1 million in subsequent private equity capital raised, after giving
effect to such financing, subject to a cap of 5% of the fully diluted equity of
the Company. This warrant expired upon consummation of the initial public
offering (IPO). The Company issued a warrant to purchase 32,361 shares of common
stock to the private placement agent with an estimated fair market value of $0.3
million. This warrant was exercised upon consummation of the IPO.

      In October 1997, the New York Blood Center ("NYBC") and the Company agreed
to amend a license agreement whereby the NYBC would receive common stock of the
Company in lieu of cash payable to the NYBC in connection with certain royalty
payments due under the license agreement totaling $0.3 million (see Note 15).
The amendment was approved by the Company's Board of Directors in January 1998,
and pursuant to a Stock Purchase Agreement dated January 23, 1998, the Company
issued 35,778 shares of common stock, par value $0.01 per share to the NYBC.

      On June 15, 1998, the Company completed an IPO of 3,000,000 shares of the
Company's common stock, par value $0.01 per share, at $12.00 per share, raising
gross proceeds of $36 million before underwriters' commissions and expenses. On
July 10, 1998, the underwriters of the IPO partially exercised their
over-allotment option for additional 325,000 shares priced at $12.00 per share,
raising additional gross proceeds of $4 million before underwriters' commissions
and expenses. In conjunction with the collaboration agreement between the
Company and Pall Corporation (Pall), during 1998, Pall acquired $9 million of
the Company's common stock in two private placements, the second of which closed
contemporaneously with and at the same price, terms and conditions as the IPO.
The Company is required to reserve 2,504,472 shares of common stock in
connection with future sales under the Pall collaboration agreement (see Note
12). The net proceeds received by the Company have been and will be used to
fund costs associated with the marketing and distribution of PLAS+SD, clinical
trials, research and development, working capital, and capital investments,
including the expansion of the manufacturing facility and other corporate
purposes.

      On November 12, 1999, the Company and Pentose Pharmaceuticals, Inc.,
completed a merger whereby Pentose shareholders received 6,443,731 shares of
VITEX common stock, par value $0.01 per share for all the outstanding common and
preferred shares of Pentose. These shares represented 34% of the outstanding
VITEX common stock after the merger. Of the newly issued shares, 4,435,149
shares are restricted as to trading for one year after the merger date. The
Company approved an increase in the number of authorized shares of common stock
to 35,000,000 shares as a part of the merger.

      On December 6, 1999, the Company reached a performance milestone under its
collaboration agreement with Pall. As required under the agreement, Pall
invested $3 million for approximately 538,821 shares of the Company's common
stock based on the then current market price of $5.57 per share.

Preferred Stock

      The Company's Certificate of Incorporation was restated during 1998 to
increase the number of shares of preferred stock authorized from 500 shares to
1,000,000 shares. The preferred stock may be issued from time to time in one or
more series, with such designations, rights and preferences as shall be
determined by the Board of Directors. No preferred stock was outstanding as of
January 1, 2000 or January 2, 1999.

10. Stock Plans

Employee Stock Purchase Plan

      In February 1998, the Company adopted its 1998 Employee Stock Purchase
Plan (the 1998 Purchase Plan) under which employees may purchase shares of
common stock at a discount from fair market value. The 1998 Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Rights to purchase common stock under
the 1998 Purchase Plan are granted at the discretion of the Compensation
Committee of the Board of Directors, which determines the frequency and duration
of individual offerings under the 1998 Purchase Plan and the dates when stock
may be purchased. Eligible employees participate voluntarily and may withdraw
from any offering at any time before stock is purchased. Participation
terminates automatically upon termination of employment. The purchase price per
share of common stock to the purchaser under the 1998 Purchase Plan is 85% of
the lesser of the Company's common stock fair market value at the beginning of
the


                                       10
<PAGE>

offering period or on the applicable exercise date and may be paid through
payroll deductions, periodic lump sum payments or both. The 1998 Purchase Plan
terminates in February 2008. There are 89,445 shares of common stock reserved
for issuance under the 1998 Purchase Plan, of which 22,078 shares of common
stock were issued during the year ended January 1, 2000.

Director Stock Option Plan

      In February 1998, the Company adopted the Director Stock Option Plan (the
"1998 Director Plan"). All of the directors who are not employees of the Company
(the "Eligible Directors") are currently eligible to participate in the 1998
Director Plan. Each non-employee who is initially elected to the Company's Board
of Directors shall, upon his initial election by the Company's stockholders.
automatically be entitled to an option to purchase 15,000 shares of common
stock. In addition, each Eligible Director will be entitled to receive an annual
option to purchase 2,000 shares of common stock. During the year of plan
adoption, each of the Company's existing directors, as permitted by his
affiliate or employer was granted an option to purchase 17,000 shares of common
stock. Directors who were prohibited by their employer from receiving stock
options from the Company were compensated through alternative arrangements.

      The options vest over a four-year period with 25% of the grant vesting
after six months, and 25% vesting at the end of the second, third and fourth
year thereafter, provided that the option-holder is still a director of the
Company at the opening of business on such date. The 1998 Director Plan has a
term of ten years. The exercise price for the options is equal to the last sale
price for the common stock on the business day immediately preceding the date of
grant. The exercise price may be paid in cash or shares. In July 1999, the
Company amended the Director Plan to increase the number of options available to
150,000 from 89,445 (65,000 options available for future grants as of January
1, 2000).

Equity Incentive Plan

      The Company's Equity Incentive Plan was originally adopted in October 1995
and was amended and restated in February 1998, as the 1998 Equity Incentive Plan
(the "1998 Equity Plan"). The amendment in February 1998 increased the shares of
common stock reserved from 1,788,908 to 2,146,690. The amendment in July 1999
increased the shares of common stock reserved to 2,400,000 (394,986 options
available for future grants as of January 1, 2000). The 1998 Equity Plan permits
the granting of both incentive stock options and nonstatutory stock options. The
option price of the shares for incentive stock options cannot be less than the
fair market value of such stock at the date of grant. Options are exercisable
over a period determined by the Board of Directors, but not longer than ten
years after the grant date. All stock options issued to-date have been granted
at the fair market value of the stock on the respective grant dates.

Supplemental Stock Option Plan

      In connection with the Pentose merger, the Company adopted the 1999
Supplemental Stock Option Plan (the "1999 Plan") authorizing the granting of
both incentive and nonstatutory stock options on 1,000,000 shares of common
stock reserved under the plan (521,215 options available for future grants as of
January 1, 2000). The purpose of the 1999 Plan is to attract and retain the best
available personnel, primarily former employees of Pentose, and to provide
additional incentive for employees and consultants. The option price of the
shares for incentive stock options cannot be less than the fair market value of
such stock at the date of grant or 110% of the fair market value per share if
the optionee owns more than 10% of the total combined voting power of the
Company.

Stock Based Compensation Plans

      The Company continues to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, (APB 25) and related
interpretations when accounting for its stock-based compensation plans. Under
APB 25, because the exercise price of the Company's employee stock options is
set equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

      Pro forma information regarding net loss and net loss per share for each
of the years in the three year period ended January 1, 2000 was determined as if
the Company had accounted for its stock options using the fair value method
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions: volatility of 67% for fiscal years
1999 and 1998 and no volatility during fiscal year 1997; expected dividend yield
of 0%; risk-free interest rate of 6.0% for fiscal years 1999, 1998 and 1997; and
an expected life of five years for fiscal years 1999 and 1998 and ten years for
fiscal year 1997.

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from


                                       11
<PAGE>

those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.

      For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:

<TABLE>
<CAPTION>
                                          1999             1998               1997
                                          ----             ----               ----
<S>                                   <C>               <C>              <C>
Net loss:
 As reported                          ($37,329,000)     ($6,400,000)     ($11,700,000)
 Pro forma                            ($37,718,000)     ($7,408,000)     ($11,975,000)
Basic and diluted net loss per share:
 As reported                                ($2.78)          ($0.61)           ($1.62)
 Pro forma                                  ($2.81)          ($0.71)           ($1.65)
</TABLE>

Information as to options for shares of common stock granted for fiscal years
1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                 1999                    1998                    1997
                                                 ----                    ----                    ----
                                            Weighted-               Weighted-               Weighted-
                                              average                 average                 average
                                             exercise                exercise                exercise
                                 Options        price    Options        price     Options       price
                                 -------        -----    -------        -----     -------       -----
<S>                              <C>            <C>     <C>             <C>     <C>             <C>
Outstanding, beginning of year   1,702,975      $7.15   1,373,300       $5.05     812,880       $2.80
Granted                            922,571       3.77     642,344       10.09     678,487        7.85
Exercised                         (152,935)      2.80    (220,577)       2.80     (12,522)       2.80
Forfeited                         (266,638)      9.13     (92,092)       9.40    (105,545)       7.01
                                 ---------              ---------               ---------
Outstanding, end of year         2,205,926       6.01   1,702,975        7.15   1,373,300        5.05
                                 =========              =========               =========
Exercisable, end of year         1,044,609       5.05     484,398        4.33     385,957        2.82
                                 =========              =========               =========

Weighted average fair value of
options granted during the year                 $3.50                   $6.16                   $3.94
</TABLE>

The following table summarizes the information on stock options outstanding at
January 1,2000:

                            Options Outstanding         Options Exercisable
                            -------------------         -------------------
                              Weighted-
                               average      Weighted-                 Weighted-
Range of                      remaining      average                   average
exercise          Number     contractual     exercise   Number        exercise
prices          outstanding     life          price   Exercisable       price
--------------------------------------------------------------------------------
$0.03             22,184         7.5          $0.03        16,636       $0.03
$0.21            152,934         7.9          $0.21        86,881       $0.21
$0.62            303,667         9.0          $0.62       144,899       $0.62
$2.80 - 3.88     480,543         5.4          $3.04       381,987       $2.89
$5.38 - 7.75     260,361         9.3          $7.20         1,250       $7.75
$8.39 - 11.63    971,646         7.6          $9.54       409,243       $9.18
$17.58            14,591         8.5         $17.58         3,713      $17.58
               ---------                                ---------
               2,205,926                                1,044,609
               =========                                =========

                                       12
<PAGE>

11. Income Taxes

      The Company's deferred tax assets were as follows at:

                                                         1999             1998
                                                         ----             ----
      Deferred tax assets:
       Research and development tax credits        $1,320,081         $445,000
       Net operating loss carry forward            14,992,878       12,334,000
       Start-up expenditures                          646,436        1,490,000
       Depreciation and amortization                  172,124          305,000
       ARC Sales incentives and other expenses      1,578,265               --
       Other, net                                   1,044,574          867,000
                                                  -----------      -----------
           Total deferred tax assets              $19,754,358      $15,441,000
      Deferred tax liabilities:                    (1,742,910)              --
                                                  -----------      -----------
       Net deferred assets                        $18,011,448      $15,441,000
       Valuation allowance                        (18,011,448)     (15,441,000)
                                                  -----------      -----------
                                                           --               --
                                                  ===========      ===========

      At January 1, 2000 and January 1, 1999, a valuation allowance has been
applied to offset the respective deferred tax assets in recognition of the
uncertainty that such tax benefits will be realized. The valuation allowance
increased by $2.6 million in fiscal year 1999 and $2.5 million in fiscal year
1998.

      In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. In order to fully realize the deferred tax asset, the Company
will need to generate future taxable income of approximately $36.5 million. At
January 1, 2000. the Company has available net operating loss carry-forwards for
federal and state income tax reporting purposes of approximately $36.6 million,
and has available research and development credit carry-forwards for federal
income tax reporting purposes of approximately $1.3 million, which are available
to offset future taxable income, if any. These carry-forwards will expire
beginning in 2010. The Company experienced a change in ownership during July
1998, which resulted in approximately $22.8 million of the Federal net operating
loss being subject to an annual limitation of approximately $7.4 million. In
addition, the net operating loss carry-forwards of $36.6 million includes $6.2
million from the acquisition of Pentose which is subject to an annual limitation
of $2.1 million.

12. Collaborations

      Bayer. On February 7, 1995, the Company entered into an Agreement for
Custom Processing (the "Processing Agreement") with Bayer, a world leader in the
manufacturing and marketing of plasma products, whereby the Company fractionates
plasma for Bayer in return for a contracted fee. The Processing Agreement has
been amended several times, most recently in January 2000 wherein the term was
extended through 2003 and new minimum production volumes were defined. The
Processing Agreement provides fur annual price adjustments based on the consumer
price index.

      The Processing Agreement contains defined default provisions and, in the
case of a continuing event of default, Bayer may: (i) terminate the Processing
Agreement; (ii) suspend its obligations under the Processing Agreement; or (iii)
take over the operation of fractionating its plasma. In the event of such a
takeover, Bayer continues to be responsible for payment to the Company at the
Base Processing Fee in effect for all volumes of plasma actually processed,
subject to the requirement that Bayer use its best efforts to achieve the
minimum production volumes specified in the Processing Agreement, deducting
therefrom all reasonable expenses paid related to the processing operation. The
Company is currently in compliance with its obligations under the Processing
Agreement.

      The Company and Bayer executed, concurrently with the execution of the
Processing Agreement, a Reimbursement and Security Agreement, a Mortgage, a
Lease Agreement and a Sublease Agreement (the "Reimbursement Agreement"), which
was subsequently superseded by a Security Agreement (the "Security Agreement")
upon the Company's refinancing of its long-term debt on December 22, 1997 (see
Note 7). The agreements secure certain obligations of the Company to Bayer,
including Bayer's march-in rights relating to the Processing Agreement, a
priority security interest in all of the equipment and other personal property
owned by the Company involved in the Company's plasma fractionation operation,
and a subordinated security Interest in the Company's real property, building,
fixtures and equipment.

                                      13
<PAGE>

      On July 17, 1998, the Company repaid, in full, amounts owed to Bayer under
the settlement agreement between the Company and Bayer, whereby the Company
agreed to pay damages of $4.1 million to compensate Bayer for its loss of plasma
caused by an equipment malfunction which occurred in 1996, while the Company was
processing plasma for Bayer. The amount payable under the settlement agreement
was $3.1 million at December 31, 1997, and carried interest at a rate of prime
plus 3% at the time it was repaid in 1998. The Company filed a claim with the
insurance carrier and in December 1999 a negotiated settlement was reached under
which the Company received a cash payment of $3.5 million.

      American National Red Cross. In December, 1997, the Company entered into a
Supply, Manufacturing, and Distribution Agreement (the "Red Cross Agreement")
with the American National Red Cross (the "Red Cross") over a term of 57 months
for the Red Cross to become the exclusive distributor of the Company's virally
inactivated transfusion plasma product, PLAS+SD. Under the agreement, the Red
Cross, which is the largest supplier of transfusion plasma to hospitals in the
United States, providing approximately 45% of the transfusion plasma used
annually, is required to purchase stated minimum quantities of PLAS+SD to
maintain its exclusive rights. Once the Red Cross places its annual purchase
order with the Company, it is obligated to supply the Company with a sufficient
quantity of plasma to enable the Company to fulfill such order. The Red Cross
has placed a purchase order with the Company for the twelve-month period ending
September 30, 2000. The Red Cross must pay for the amount of PLAS+SD specified
in the purchase order even if it is unable to supply sufficient quantities of
plasma. The Red Cross must purchase all of its virally inactivated plasma from
the Company unless an FDA approved product has been independently shown to be
safer than the PLAS+SD. The Company, in turn, is obligated to offer any excess
capacity that it has to produce PLAS+SD above the stated minimum purchase
requirements to the Red Cross before selling PLAS+SD to any other party.

      Effective October 1,1998, the Red Cross Agreement was amended to, among
other things, reduce the Red Cross's minimum annual purchase order commitment
required to maintain its exclusive marketing and distribution rights, provide
for higher prices during periods of lower volume purchases, and commit increased
marketing spending by both the Company and the Red Cross. Under the amended
agreement, the Red Cross is required to pay to the Company a fixed price per
unit of PLAS+SD, plus a royalty which is initially fixed. Beyond a specified
volume, the royalty becomes variable, based on equal sharing of the amount by
which the average selling price of the Red Cross exceeds a stated amount. The
Company has granted to the Red Cross a right of first refusal for exclusive
distribution rights to any subsequent generation of virally inactivated
transfusion plasma that is developed during the term of the agreement. The
Company and the Red Cross have each committed to spend minimum amounts for
marketing PLAS+SD during the two-year period ending September 30, 2000. The
Company's spending commitment is expected to be satisfied, to a large extent, by
the cost of its sales force. Additionally, a joint marketing committee will
coordinate all marketing activities for PLAS+SD. The exclusive distribution
agreement between the Company and the Red Cross provides that the Red Cross will
use its best efforts to insure universal availability of the Company's virally
inactivated plasma products to all potential customers, including both Red Cross
blood centers and non-Red Cross blood centers.

      Under a previous collaboration agreement, the Red Cross had made a total
of $3.0 million non-interest bearing, unsecured advances to the Company's
predecessor to be used to fund improvements to its manufacturing facility. Under
this previous agreement, the loan amortized at the rate of 15% per year
following receipt of marketing approval of PLAS+SD with a balloon payment due in
year five. In conjunction with the amended agreement and the incentive program
described below, the repayment schedule was modified to reflect the first
repayment of 30% of the loan balance on the third anniversary date of the
approval of the PLAS+SD PLA, May 6, 2001, and 15% of the balance on each of the
following two years, with the balance of the loan payable on the sixth
anniversary of the PLAS+SD PLA. Upon finalization of the repayment terms, the
Company discounted the advance to its net present value using an interest rate
of 7.75%, resulting in a gain of $.6 million which was recorded in fiscal year
1998 and a further discount of $70,000 which was recorded in the third quarter
of fiscal year 1999 in connection with a contract modification as discussed
below. Each of the Company and Red Cross has the right to terminate the
agreement upon written notice in certain circumstances, including failure to
achieve minimum end-user sales or a material breach of the agreement which is
not cured by the other party.

      On October 1, 1999, the Red Cross announced a plan to accelerate to a full
conversion of fresh frozen plasma to PLAS+SD, the Company's virally inactivated
transfusion plasma, over the course of the next year. Additionally, the Red
Cross announced a significant reduction in pricing for this product and a
standard national pricing policy. To support this major initiative by the Red
Cross and to reduce Red Cross inventory levels, the Company offered certain
incentives which principally consists of a program under which the Red Cross can
earn a rebate for units of PLAS+SD shipped by Red Cross to end customers
subsequent to October 1, 1999. This rebate is to be applied against purchases if
certain pricing milestones are achieved. The program has a one-year period and
encompasses an agreement with the Red Cross to defer by one year the first
scheduled repayment under the $3 million advance from the Red Cross. Based on
Red Cross' projected sales during the one year period of the incentive plan, the
Company has estimated and recorded a charge of $4.5 million for the projected
costs of the incentives.

                                       14
<PAGE>

      Red Cross. The Company may either terminate the Red Cross Agreement in its
entirety or convert the exclusive rights of the Red Cross to non-exclusive
rights if the stated minimum purchase requirements are not met by the Red Cross.
In addition, the failure to achieve certain end-user sales levels could result
in the termination of the Red Cross Agreement effective June 30, 2000 by either
the Red Cross or the Company. Although the current level of sales by the Red
Cross to end users is below the required levels, management believes that the
Red Cross will continue to provide plasma under the purchase order placed by the
Red Cross for the twelve-month period ending September 30, 2000. The termination
of the Red Cross Agreement by either the Red Cross or the Company would have a
material adverse effect on the Company's future results of operations and cash
flows.

      Pall. On February 19, 1998, the Company and Pall entered into a series of
agreements (the "Pall Agreements") providing for, among other things, a
collaboration on the development and marketing of systems employing the
Company's viral inactivation technologies for red blood cell and platelet
concentrates. Pall is a leading manufacturer and supplier of filtration
products, including those relating to the collection, preservation, processing,
manipulation, storage and treatment of blood and blood products. Under the Pall
Agreements, Pall receives exclusive worldwide distribution rights to all the
Company's systems incorporating viral inactivation technology for red blood
cells and platelets. The parties have also agreed to share research,
development, clinical and regulatory responsibilities and will equally share
profits and joint expenses from operations after each party is reimbursed for
its cost of goods. Upon execution of the Pall Agreements, Pall made a $4 million
equity investment representing 477,042 shares at $8.39 per share. Pursuant to
the terms of the Pall Agreements, Pall also acquired $5 million of the Company's
common stock in a private placement, which closed contemporaneously with, and at
the same price, terms, and conditions as the IPO. In addition, the Pall
Agreements provide that Pall will purchase up to $17 million worth of the
Company's common stock in installments tied to the achievement of specified
development milestones. Such equity investments by Pall will be made at the
prevailing market price per share. The Company reached an equity milestone in
December 1999 and, accordingly, Pall invested $3 million in the Company's common
stock. Certain of the Pall Agreements may be terminated in certain circumstances
including an event of default by either party. In connection with the transition
of the Company's Chief Scientific Officer from employee to consultant, Pall has
the rights to terminate the Pall Agreements within a one-year period ending
October 2000. In fiscal year 1999, the Company recorded a one-time charge to
operations and an increase to stockholders' equity of $2.2 million representing
the difference between the purchase price paid by Pall and the estimated fair
value of the common stock on the date of purchase.

      United States Surgical Corporation. In September 1996, as amended in
October 1996, the Company entered into an Exclusive Distribution Agreement with
United States Surgical Corporation, a subsidiary of Tyco International, Inc.
("U.S. Surgical") fibrin sealant program for a period of 15 years. In connection
with entering into the agreement, U.S. Surgical paid a $3,000,000 up front fee
to the Company. U.S. Surgical was to fully fund all direct clinical and
regulatory costs associated with the development and regulatory approval of the
Company's fibrin sealant. Pursuant to the agreement, the Company granted U.S.
Surgical the mutually exclusive worldwide right, until October 2011, to seek, in
its own name as permitted by law, necessary government approvals for and to use,
market, distribute and sell fibrin sealants, and any improvements thereto. The
fibrin sealant product is currently in Phase III clinical trials. The Company is
not devoting a significant amount of resources to commercializing this product
and does not expect the product to have a material effect on sales or earnings
of the Company in the future.

13. Charge Related to Product Recall

      On April 16, 1999, the Company initiated a voluntary recall of lots of
PLAS+SD which were found to contain a heightened presence of parvovirus B-19.
This recall, which was a precautionary measure, was completed on May 12, 1999.
In the accompanying statements of operations for fiscal year 1999, the charge
related to product recall of $2.6 million includes the write-off of inventory
lots with heightened levels of parvovirus B-19, production testing, other direct
recall expenses and a reserve for an equitable sharing of recall costs incurred
by the Company's exclusive distributor of PLAS+SD, the Red Cross. Costs
associated with idle production facilities during the recall period, in the
amount of $0.3 million, are included in cost of sales. At January 1, 2000,
substantially all of the recall costs have been spent.

      Since the initial recall, the Company has developed and validated a
process to screen untreated plasma for parvovirus B-19 prior to commencing the
manufacturing process. This screening uses an experimental, highly sensitive
Polymerase Chain Reaction (PCR) test in order to ensure that this virus is below
specified laboratory levels. The Company has applied to the FDA for a parvovirus
B-19 label claim based on this process with approval expected in 2000.

14. Related-Party Transactions

License Agreements

      The Company's predecessor, Melville Biologics, Inc., was formed more than
15 years ago by New York Blood Center, Inc. (NYBC), a world leader in research
and development in the fields of hematology and transfusion medicine, to process
plasma


                                       15
<PAGE>

fractions and derivatives, and to facilitate its research efforts. Effective
January 1, 1995, pursuant to a transfer agreement between the Company and the
NYBC, the NYBC transferred to the Company substantially all of the assets of the
predecessor Company, including a cGMP manufacturing facility used primarily to
produce plasma fractions and related operating and product licenses and certain
other specified tangible and intangible assets, as well as various contracts and
the assumption of certain obligations of the NYBC related to such assets and
contracts. As a result of its spin-off from the NYBC, the Company became the
licensee of a substantial portfolio of patents and patent applications held by
the NYBC, including those related to the use of the SD viral inactivation
technology. In exchange for these net assets, the NYBC received all of the
issued and outstanding common stock of the Company. Under the various licenses
with NYBC, the Company has been granted exclusive and non-exclusive worldwide
rights to the NYBC patents relating to viral inactivation and other
technologies. The Company also has rights of first negotiation for the license
to any NYBC improvements not otherwise exclusively licensed in the field of
viral inactivation for use with certain products, as defined.

      Under the license agreements, the Company is required to pay royalties to
the NYBC on the Company's revenues derived from the use of these licenses, as
defined. The Company is required to pay aggregate minimum royalties to maintain
its exclusive licenses of $1.5 million in fiscal year 1999, $2.2 million in
fiscal year 2000, $2.4 million in fiscal year 2001 and $2.8 million in each year
thereafter. Royalty and milestone payments in the amount of $1.7 million were
payable to the NYBC for fiscal year 1999, $1 million were payable fiscal year
1998, while $0.6 million were payable to the NYBC in 1997, of which $0.3 million
was paid in cash and the balance paid pursuant to a stock purchase agreement,
whereby the Company issued 35,778 shares of common stock to the NYBC. The
Company also is required to meet certain research and development milestones, as
defined, to maintain its exclusive licenses. Further, the Company is required to
spend minimum annual amounts towards the further development, evaluation and
registration of products, as defined. If minimum royalties are nor paid or if
any milestone is not met, as defined for a given country, the NYBC may terminate
the license for that country and may terminate other such licenses if the
licenses in all covered countries have been individually terminated.

      The NYBC may terminate any license by reasonable notice if the Company
fails to cure a breach, conform to government regulations, or sell products
within a specified number of years, as defined. Upon termination, all rights
revert to the NYBC. The Company is currently in compliance with all such
obligations and covenants.

Other Services

      The NYBC sponsors certain scientific research at the Company. NYBC
payments of $45,000, $96,000 and $104,000 for the fiscal years 1999, 1998 and
1997, respectively, have been netted against research and development expenses
in the accompanying statements of operations.

      Ampersand, a venture capital Company and major shareholder of the Company,
has provided certain management advisory services to the Company, including the
provision of an interim Chief Executive Officer during fiscal 1998. Amounts
payable to Ampersand for such services totaled $0.2 million in that year.

      The Company purchased approximately $0.8 million and $1.1 million of
production related materials and supplies from Pall for the fiscal years 1999
and 1998, respectively.

15. Supplemental Disclosure of Cash Flow Information

      Information on cash paid for interest and non-cash investing and financing
activities are as follows:

<TABLE>
<CAPTION>
                                                                1999          1998         1997
                                                                ----          ----         ----
<S>                                                           <C>          <C>          <C>
Cash paid during the year for interest                        $1,022,000   $1,560,000   $1,511,000
Income taxes paid during the year                                 12,000        7,000        4,000
Non-cash investing and financing activities:
   Note receivable from stockholder                                   --           --      $35,000
   Conversion of notes payable to capital lease obligations           --           --   $2,847,000
   Debt financing costs included in accounts
     payable or accrued expenses                                      --           --     $170,000
</TABLE>


                                       16
<PAGE>

<TABLE>
<S>                                                           <C>          <C>          <C>
Capital Improvements and equipment costs
   included in property, plant and equipment and
   accounts payable or accrued expenses                       $45,422        $410,000      $47,000

Issuance of common stock to New York
   Blood Center in satisfaction of obligation                      --         300,000           --
</TABLE>

16. Profit Sharing 401(k) Plan

      Effective January 1, 1995, the Company established a 401(k) Profit Sharing
Plan (the "401(k) Plan") which covers substantially all employees. All eligible
employees may elect to contribute a portion of their wages to the 401(k) Plan,
subject to certain limitations. The Company accrued a contribution of $0.2
million for fiscal year 1999. Employer contributions were not made during the
fiscal years ended 1998 or 1997. The Company adopted the Pentose 401(k) savings
plan at the time of the merger. Substantially all of the employees of Pentose
are eligible to participate in this plan. The Company contributed $1,645 for the
Pentose 401(k) Plan from the date of the merger to January 1, 2000. It is the
Company's intention to consolidate the two 401(k) plans in 2000.

17. Commitments and Contingencies

Lease Commitments

Future minimum lease payments under non-cancellable operating leases at January
1, 2000 are as follows:

                2000                         1,355,000
                2001                         1,085,000
                2002                         1,078,000
                2003                         1,109,000
                2004                           939,000

      The Company leases its office facilities and certain equipment under
non-cancellable operating leases. Rent expense was approximately $.4 million for
each of the fiscal years 1999, 1998 and 1997.

Litigation

      The Company is aware that in the course of ongoing litigation between the
NYBC and a third party, the third party has asserted claims against NYBC based
on breach of a contract that was executed in 1988 by those parties and rights
under which were assigned to the Company in 1995. The third party has claimed
that it is entitled to payments from the NYBC based on improvements in albumin
throughput yields attributable to certain filtration technology licensed to the
NYBC by the third party. The Company understands that the NYBC believes it has
meritorious defenses against this third party's claims and, in any event, as
part of the assignment of NYBC's rights under the disputed contract by the NYBC
to the Company, the Company assumed no responsibility for pre-existing contract
liabilities. However, there can be no assurance that the third party will not
assert claims against the Company under that contract which are similar in
nature to the claims being asserted against the NYBC. No such claims have been
asserted to date. The Company believes that it would have meritorious defenses
against any such claims.

      On March 23, 1998, the Company received a Civil Investigative Demand
("CID") from the Antitrust Division of the U.S. Department of Justice (the
Justice Department) as part of the Justice Department's investigation into
possible antitrust violations in the sale, marketing and distribution of blood
products. A CID is a formal request for information and a customary initial step
of any Justice Department investigation. The Justice Department is permitted to
issue a CD to anyone whom the Justice Department believes may have information
relevant to an investigation. Therefore, the receipt of a CID does not mean that
the recipient is the target of an investigation, nor does it presuppose that
there is a probable cause to believe that a violation of the antitrust laws has
occurred or that any formal complaint ultimately will be filed. During 1999, the
Company was notified through its attorneys that the Justice Department has
concluded its investigation with no action and the file was officially closed.

      On August 27, 1998, the Appellate Division of the Supreme Court of New
York awarded the Company a summary judgment against its insurance carrier,
reversing a lower court decision which denied the Company's previous claim for
recovery of costs incurred in 1996 as a result of a plasma processing loss. The
Company recorded a special charge in 1996 to recognize reimbursement due to
Bayer Corporation for the plasma loss ($4.1 million) and to write off processing
costs ($1 million). The Company had filed a claim with the insurer to recover
these and related costs. On October 27, 1998, the insurance carrier filed a


                                       17
<PAGE>

motion to appeal the decision of the Appellate Court. Such appeal was
subsequently rejected. The insurance carrier subsequently took its appeal to the
New York Court of Appeals which declined to hear the matter. The case was
returned to the New York Supreme Court for assessment of damages. In December
1999, a negotiated settlement was reached with the insurance carrier under which
the Company received a cash payment of $3.5 million.

18. Quarterly Financial Data (Unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Fiscal 1999 Quarter Ended            January 1, 2000     October 2, 1999(1) July 3, 1999  April 3, 1999


<S>                                           <C>                <C>            <C>           <C>
Product sales                                 $11,427            $10,502        $9,352        $11,142
Less ANRC incentive program                        --             (4,500)           --             --
                                             --------    -     ---------        ------       --------
   Net sales                                   11,427              6,002         9,352         11,142
Gross margin (loss) from product sales          4,367               (294)        4,026          5,082
Net income (loss)                             (28,950)            (5,826)       (3,168)           615
Earnings (loss) per share:
   Basic and diluted                            (1.78)             (0.47)        (0.25)          0.05

----------------------------------------------------------------------------------------------------
Fiscal 1998 Quarter Ended             January 2, 1999    October 3, 1998  July 4, 1998  April 4, 1998

Product sales                                 $10,028            $11,660        $7,946         $4,121
Gross margin (loss) from product sales          4,091              3,842         2,583           (621)
Net income (loss)                               1,025                486        (1,696)        (6.215)
Earnings (loss) per share:
    Basic and diluted                            0.08               0.04         (0.18)         (0.76)
------------------------------------------------------------------------------------------------------
</TABLE>

----------
(1) The Company restated its financial statements for the quarter ended October
2, 1999 to reflect the Red Cross incentive program (see Note 12) cost of $4.5
million. The effect of the restatement was to increase the loss by $4.5 million,
or $0.36 per share.

    Earnings per share calculations for each of the quarters are based on
weighted average number of shares outstanding in each period. Therefore, the sum
of the quarters in a year does not necessarily equal the year's earnings per
share.

19. New Accounting Pronouncements

      On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 -- "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No. 101 provides the SEC staff's views on the
recognition of revenue including nonrefundable technology access fees received
by biotechnology companies in connection with research collaboration with third
parties. SAB No. 101 states that in certain circumstances the SEC staff believes
that up-front fees, even if nonrefundable, should be deferred and recognized
systematically over the term of the research arrangement. SAB101A, which amends
the implementation date for SAB 101, requires registrants with a fiscal year
that begins between December 16, 1999 and March 15, 2000 to adopt the accounting
guidance contained therein by no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company is currently
assessing the financial impact of complying with SAB No. 101 and has not yet
determined whether applying the accounting guidance of SAB 101 will have a
material effect on its financial position or results of operations.

                                       18