<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: December 31, 2001

                                      or

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

                    For the transition period from      to

                        Commission File Number: 0-23678

                            BioSphere Medical, Inc.
            (Exact Name of Registrant as Specified in Its Charter)

                      Delaware                 04-3216867
                   (State or Other
                   Jurisdiction of
                    Incorporation             (IRS Employer
                  or Organization)         Identification No.)

                1050 Hingham St., Rockland, Massachusetts 02370
              (Address of Principal Executive Offices) (Zip Code)

                                (781) 681-7900
             (Registrant's telephone number, including area code)

          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 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 was $76,630,000 based on the closing price of the shares as
reported by the Nasdaq National Market on March 16, 2002.

   Number of shares outstanding of the registrant's Common Stock as of March
16, 2002 was 12,910,495.

                     Documents incorporated by reference:
    Proxy Statement for the 2002 Annual Meeting of Stockholders--Part III.

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

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                                    PART I

Item 1.  BUSINESS

   We are pioneering the use of our proprietary bio-engineered acrylic beads,
known as microspheres, for medical applications using embolotherapy techniques
and also to develop potential applications in several non-embolotherapy
applications. We believe microsphere technologies, such as our proprietary
microsphere platform, are enabling the rapid development of a new,
"micro-interventional" market. We expect that micro-interventional devices will
expand the capability of catheter-based interventional technologies and permit
clinicians to treat medical conditions in a more effective and minimally
invasive manner.

   Embolotherapy is a minimally invasive procedure in which embolic materials,
such as our microspheres, are delivered through a catheter into the blood
vessels to inhibit blood flow to tumors or vascular defects or to control blood
loss presurgically. Our initial product, Embosphere(R) Microspheres, is
targeted for treatment of hypervascularized tumors and arteriovenous
malformations. Hypervascularized tumors are tumors that have a large number of
blood vessels feeding them and include certain tumors affecting the brain and
spinal cord, tumors in the uterus, known as uterine fibroids, and tumors
associated with primary liver cancer. By selectively blocking the tumor's blood
supply, embolotherapy is designed to cause the tumor to shrink and necrose.
Based on preliminary research, we believe that our microsphere technology
platform can also be adapted to deliver drugs, living tissue or genetic
material to targeted sites.

   Our microspheres have a variety of characteristics that we believe make them
preferable to other embolic materials currently used in embolotherapy.
Specifically, we have designed our products to be easier to use and their
delivery to the tumor more targeted and controlled, which we believe will
result in better outcomes for the patient. By improving the practice and
awareness of embolotherapy and the benefits of our products, we believe that
patients who are currently untreated, surgical candidates and patients
considering treatment with other embolics may seek treatment with our
microsphere technology.

   We believe that our platform microsphere technology also has several
non-embolotherapy applications, such as tissue bulking, repair and
regeneration. In this context, we are exploring and/or developing microspheres
for use in the treatment of a number of conditions, including stress urinary
incontinence and gastroesophageal reflux disease.

   BioSphere Medical, Inc. was originally incorporated as a Delaware
corporation in 1993 under the name BioSepra Inc., as a chromatography media
company. During 1999, we strategically refocused our business on the
development and commercialization of our proprietary microspheres for medical
applications. During 2000, we established two wholly owned subsidiaries to
pursue the development of our microsphere technologies in applications outside
of, and complementary to, embolotherapy. In May 2000, we established Biosphere
Medical Japan, Inc., a Delaware corporation, to develop and commercialize
Embosphere Microspheres and HepaSphere SAP(TM) Microspheres in the Far East. In
December 2000, we established BSMD Ventures, Inc., also a Delaware corporation,
to explore and develop non-embolotherapy applications for our proprietary
microspheres.

INDUSTRY OVERVIEW

Embolotherapy Markets

   Embolotherapy has been in use for more than 20 years by interventional
radiologists to mechanically block the flow of blood to treat certain
peripheral tumors and arteriovenous malformations and to control blood loss.
Historically, embolotherapy has been used in various brain-based procedures as
a means of blocking the blood supply to inoperable tumors or to minimize
bleeding within targeted surgical areas. As applications within the brain are
considered among the most medically sensitive and complex, we believe the
continued use of embolotherapy in these high-risk procedures attests to its
overall safety and efficacy. In recent years, interventional radiologists in
the United States, Europe and Japan have begun to expand the scope of

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embolotherapy to include uterine artery embolization and the treatment of
certain cancers, including liver cancer. Moreover, a growing number of affected
people are taking proactive steps in seeking alternative treatments,
particularly as a result of increased general awareness brought about by the
proliferation of medical internet sites.

   We refer to the use of embolotherapy as a method of blocking blood flow to
tumors and other malformations as passive embolotherapy. We believe the
potential market for passive embolotherapy continues to expand beyond niche
neurovascular applications into broader medical opportunities, such as uterine
fibroid and liver tumor embolization.

   In addition, in a process we refer to as active embolotherapy, we are
pursuing the development of microspheres as well as other technologies designed
to release embedded drugs, live cells, ionizing radiation or genetic material
specifically at a targeted site. We believe that delivering a drug directly to
the tumor site and then releasing it over time may increase the effectiveness
of the drug while decreasing the adverse side effects.

Uterine Fibroids

   Uterine fibroids are non-cancerous tumors growing within or on the wall of
the uterus. Their cause is unknown. Most patients with uterine fibroids do not
initially have symptoms and remain untreated until the patient experiences
abnormal bleeding, increased urinary frequency, pain, swelling or fertility
difficulties.

   Until now, women suffering from uterine fibroids have had few treatment
options. These existing treatment options include the following:

..  Hysterectomy. Hysterectomy is a surgical procedure to remove the uterus.
   While hysterectomy has a relatively low complication rate, it requires a
   hospital stay of several days, a recovery period of up to six to eight weeks
   and results in loss of fertility for women of child-bearing age.
   Furthermore, hysterectomies have been tied to adverse psychological effects,
   as well as the onset of early menopause.

..  Myomectomy. Myomectomy is the surgical removal of the uterine fibroids
   without removal of the uterus. It is usually performed on women who wish to
   preserve their fertility. In addition to the invasiveness of the procedure,
   the most significant disadvantage of myomectomy is a 10 to 30 percent
   recurrence rate. Even though a myomectomy has been the only procedure
   available to women with severe symptoms from uterine fibroids that wish to
   preserve fertility, the recurrence rate and invasiveness have resulted in
   resistance from both third party payors and patients. Relatively few
   myomectomies are performed in relation to the number of eligible patients.

..  Medical Management and "Watchful Waiting." About 95 percent of symptomatic
   fibroid patients either receive hormone treatment on a temporary basis to
   relieve symptoms or remain untreated and tolerate the symptoms. Even if the
   patient receives treatment, once treatment ceases, the uterine fibroids
   usually regrow. While hormone treatment temporarily reduces symptoms,
   patients often experience side effects associated with the accompanying
   hormonal changes. Moreover, women cannot conceive while taking the hormones.
   Women with less severe symptoms who are, therefore, not candidates for
   hormone treatment, and those seeking to conceive have few satisfactory
   options. In these circumstances, physicians usually monitor symptoms and
   will administer therapy only if the condition worsens.

   The therapies currently available for treating uterine fibroids may have
significant drawbacks including:

    .  temporary or permanent loss of fertility for women of child-bearing age;

    .  lengthy recovery periods;

    .  premature menopause and related symptoms;

    .  high costs, including costs of medications, surgical procedures, and
       frequent and long hospital stays;

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    .  discomfort and side effects from invasive surgical procedures and
       hormone therapy; and

    .  risk of recurrence of the fibroids.

   Another method of treating uterine fibroids, more recently adopted by
physicians, is uterine artery embolization. Though not approved by the FDA for
this specific use, another embolic material commonly used today in uterine
artery embolization is polyvinyl alcohol, or PVA. Polyvinyl alcohol has several
limitations, including:

..  Inconvenience and limited effectiveness. Polyvinyl alcohol often clogs in
   the catheter, interrupting the procedure and necessitating potentially
   hazardous, costly and time-consuming catheter replacement. In addition,
   because of its imprecise size and shape, polyvinyl alcohol may not fully
   occlude the blood vessel, allowing the blood to circumvent the embolic
   material and continue to feed the tumor.

..  Limited control. Polyvinyl alcohol often fragments and aggregates, or
   clumps, in the blood vessel, causing vessel blockages prior to reaching the
   desired site of blood flow occlusion. In addition to catheter problems,
   clumping during embolization is clinically problematic. If clumping occurs
   at non-targeted sites in the vessel after injection into the artery,
   incomplete embolization can occur. In addition, occlusions can block desired
   normal blood supply causing undesired necrosis or death of healthy tissue.

..  Chronic inflammatory response. Polyvinyl alcohol often stimulates an
   inflammatory response by the body that persists for an extended period of
   time.

   Based upon the shortcomings in existing technologies and therapies we
discussed above, we believe there are significant opportunities in developing
and commercializing alternative embolic treatment products for patients
suffering from uterine fibroids. For example, there are approximately 300,000
hysterectomies performed annually in the United States for uterine fibroids. We
believe that substantially all of these cases could be effectively treated with
our Embosphere Microspheres.

Primary Liver Cancer

   Primary liver cancer originates in the liver, rather than traveling to the
liver from another cancer site in the body. Over 70 percent of primary liver
cancers are inoperable and are, therefore, treated primarily with chemotherapy
or radiation. However, due to the destructive nature of both radiation and
chemotherapy, these therapies have traditionally been associated with the
following limitations and side effects:

..  Radiation. While radiation therapy can shrink or eliminate certain
   individual tumors, its use in treating liver cancer is limited. Since it is
   difficult to isolate radiation exposure to the liver tumor, radiation
   therapy often results in damage to the surrounding non-tumorous tissue.

..  Chemotherapy. Chemotherapy seeks to control cancer by selectively killing
   the more-rapidly-dividing cancer cells and is widely used for treating
   cancer elsewhere in the body. The use of systemically delivered chemotherapy
   agents, however, has shown little benefit in treating liver cancer. Similar
   to the limitations of radiation therapy, therapeutic doses of chemotherapy
   to the cancerous tissue have a damaging effect on the normal surrounding
   tissue.

   Other treatments currently under investigation to treat inoperable primary
liver cancer are radio frequency tumor ablation, which seeks to kill the tumor
by means of destructive electrical energy, and embolization. Interventional
radiologists are also currently using chemoembolotherapy to treat liver cancer.
Chemoembolotherapy refers to the delivery of drugs in a mixture that contains
embolic materials to create a higher localized concentration of the drug.

   We believe there are significant opportunities in developing and
commercializing alternative embolic products for use in non-operable liver
cancer cases.

                                      4

<PAGE>

Non-Embolotherapy Applications

   Advances in cell biology are resulting in rapid advances in the fields of
organ and tissue repair, reconstruction and regeneration, which we generally
refer to as tissue engineering. These developments in tissue engineering are
targeted at facilitating the body to heal itself through the delivery of
molecular signals, cells or supporting structures to the appropriate sites in
the body.

   In certain conditions, including stress urinary incontinence,
gastroesophageal reflux disease, urinary reflux in infants and certain skin
conditions, the normal anatomic supports are not present in the body. Injecting
fillers into the existing structures to bulk them up, referred to as tissue
bulking, is designed to recreate the missing anatomic supports, thereby
eliminating the condition.

   Tissue repair and regeneration involves the development of bioartifical
cells, tissues and supporting matrixes, which are scaffolds that hold the cells
or tissues together. These tissue scaffolds may also be developed from
synthetic polymers. Tissue scaffold products have a number of potential
applications, including cartilage and bone repair as well as organ supplements
or replacements.

OUR BUSINESS STRATEGY

   Utilizing our platform microsphere technology, our strategy is to develop
and commercialize innovative embolotherapy products for conditions where
minimally invasive treatments do not currently exist. Because our primary focus
is on embolotherapy, our strategy, with respect to other business
opportunities, is to develop these products through proof of principle and then
seek strategic partnerships to complete the commercialization process. Our
criterion for product selection is that the product must have the potential to
become the global leader in a significant market. The key elements of our
strategy are as follows:

..  Continue to advance our microsphere technology for use in current passive
   embolotherapy applications. We are focusing the initial implementation of
   our microsphere technology on addressing large embolotherapy market
   opportunities. We believe that embolotherapy will represent an attractive
   alternative to the current treatment options, many of which are invasive
   surgical procedures or have other significant drawbacks. We received FDA
   clearance in April 2000 for use of Embosphere Microspheres in the
   embolization of arteriovenous malformations and hypervascularized tumors in
   the United States. We intend, pending FDA clearance or approval, to market
   our products for use in embolization of uterine fibroids. We have recently
   completed the enrollment of our pivotal Phase II clinical trial to support
   an application for marketing clearance or approval from the FDA for the use
   of our Embosphere Microspheres in the specific treatment of uterine
   fibroids. Our Embosphere Microspheres are also approved in the European
   Union, Australia and Canada. In Japan, our Hepasphere SAP Microspheres have
   been used experimentally in over 100 patients for liver cancer embolotherapy.

..  Develop new embolotherapy platforms, including active microsphere
   technologies that advance the scope of embolotherapy into new therapeutic
   applications. We believe that there are opportunities to use microspheres as
   well as other technologies to advance the scope of embolotherapy into new
   therapeutic applications. We are currently pursuing opportunities in the
   area of active embolotherapy, which is the use of embolotherapy to deliver
   therapeutic agents directly to a target site. Therapeutic agents may include
   drugs, ionizing radiation, live cells or genetic material. We believe that
   active embolotherapy could, for example, allow blocking of the blood flow to
   the tumor site while allowing targeted, more effective delivery of
   therapeutic agents. We are currently conducting pre-clinical research on our
   Viasphere(TM) Microspheres, which are being designed as precisely-sized
   highly hydrophilic microspheres to which living cells, genetic materials or
   drugs are attached. We are also conducting pre-clinical research on our
   Radiosphere(TM) Microspheres which are similarly designed to deliver
   targeted radiation therapy.

                                      5

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..  Pursue opportunities for microsphere technology in other medical
   applications with large target markets and commercialize these opportunities
   primarily through strategic alliances and partnerships. We believe that
   there are significant opportunities for applying our platform microsphere
   technology beyond embolotherapy. These opportunities include configuring our
   microspheres to serve as a bulking agent to treat stress urinary
   incontinence, gastroesophageal reflux disease and dermal repair, or as a
   tissue scaffold for tissue or organ regeneration. We believe that our
   microspheres will be an attractive treatment alternative in each of these
   markets. We intend to establish strategic alliances or partnerships as the
   primary vehicle to commercialize products outside the field of embolotherapy
   based on our microspheres.

..  Build a broad, value-added ancillary product portfolio to facilitate
   embolotherapy procedures. We intend to complement our microsphere product
   line by offering value-added ancillary products used in each procedure, such
   as specialty catheters, guidewires and other delivery systems. Our ancillary
   products will be specifically designed for our targeted procedures and will
   be aimed at facilitating ease of use, enhancing clinical performance during
   the procedure and providing differentiating benefit to our customers. We
   believe that this will enable us to leverage our existing distribution
   channels and satisfy more of our physician customer's needs by providing
   more complete product solutions for each procedure.

..  Build a sales infrastructure consistent with the customer base and the
   geographic distribution of the patient population. We intend to market our
   products primarily through direct sales efforts in the United States and
   through a combination of distributors, field representatives and direct
   marketing support in other parts of the world. In the United States, there
   are approximately 2,500 to 3,000 interventional radiologists and 200 to 300
   interventional neuroradiologists. We believe that we can market effectively
   to these groups with a relatively small, targeted sales force. We intend to
   tailor our sales infrastructure to the demographics of the patient
   population for each of the targeted markets. For example, there are a large
   number of primary liver cancer patients in Asia due to the prevalence of
   hepatitis. Accordingly, we will likely choose to focus more of our sales
   resources in Asia on our Hepasphere SAP Microspheres product than on our
   Embosphere Microspheres.

PRODUCTS

   Our innovative microsphere technology evolved out of approximately 15 years
of research and development of polymer formulations used in the field of
biological separations and drug purification. In 1999, we made a strategic
decision to focus on microsphere technologies for medical applications. We
believe that our microsphere technology is a platform technology which can be
configured in several different ways to have applications as a pure embolic
material, an embolic material linked to a gene or drug, a bulking agent or a
scaffold for tissue engineering.

   The following table summarizes information about our principal products and
products under research and development.

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<TABLE>
<CAPTION>
   PRODUCT / PRODUCT
      CANDIDATES             POTENTIAL MARKETS               STATUS                TARGET CUSTOMERS
------------------------ ------------------------- -------------------------- ---------------------------
<S>                      <C>                       <C>                        <C>

EMBOLOTHERAPY
---------------------------------------------------------------------------------------------------------
Embosphere(R)            Hypervascularized tumors, Marketed in United States, Interventional Radiologist;
 Microspheres            arteriovenous             Canada, Australia and      Interventional
                         malformations             European Union             Neuroradiologist

                         Uterine fibroids          Marketed in Canada,        Interventional Radiologist
                                                   Australia and European
                                                   Union
                                                   Pivotal Phase II clinical
                                                   trial in United States
---------------------------------------------------------------------------------------------------------
EmboGold(TM)             Hypervascularized tumors, Marketed in United States, Interventional Radiologist;
 Microspheres            arteriovenous             Canada, Australia and      Interventional
                         malformations             European Union             Neuroradiologist

                         Uterine fibroids          Marketed in European       Interventional Radiologist
                                                   Union, Canada and
                                                   Australia
                                                   Pivotal Phase II clinical
                                                   trial in United States
---------------------------------------------------------------------------------------------------------
Hepasphere SAP(TM)       Liver cancer              Investigational use in     Interventional Radiologist
 Microspheres                                      human patients in Japan
---------------------------------------------------------------------------------------------------------
TempRx(TM) Microspheres  Trauma, hemorrhage        Research                   Interventional Radiologist
---------------------------------------------------------------------------------------------------------
LiquiDx(TM) Microspheres Abdominal aortic          Research                   Interventional Radiologist
                         aneurysm graft leaks

                         Cerebral aneurysm         Research                   Interventional
                                                                              Neuroradiologist
---------------------------------------------------------------------------------------------------------
Radiosphere(TM)          Cancer                    Research                   Interventional Radiologist
  Microspheres
---------------------------------------------------------------------------------------------------------
Viasphere(TM)            Cancer                    Research                   Interventional Radiologist
 Microspheres
---------------------------------------------------------------------------------------------------------
TISSUE ENGINEERING
---------------------------------------------------------------------------------------------------------
MatrX(TM) Microspheres   Urinary incontinence      Pre-clinical               Urologist

                         Vesicoureteral reflux     Pre-clinical               Urologist

                         Facial contour defects    Pre-clinical               Dermatologist

                         Gastroesophageal reflux   Research                   Gastroenterologist
                         disease
---------------------------------------------------------------------------------------------------------
GenS2(TM) Microspheres   Tissue regeneration       Research                   Orthopedic Surgeon
                                                                              Dermatologist
---------------------------------------------------------------------------------------------------------
</TABLE>

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PASSIVE EMBOLOTHERAPY

Embosphere Microspheres

   Our initial product, Embosphere Microspheres, is intended for use in passive
embolotherapy to block the blood supply to hypervascularized tumors and
arteriovenous malformations. Embosphere Microspheres have been used in Europe,
the United States, Canada and Australia to treat hypervascularized tumors and
arteriovenous malformations and to presurgically control blood loss. We believe
that if we receive clearance or approval from the FDA specifically for uterine
artery embolization, the principal application of the Embosphere Microspheres
will be for this indication.

   Uterine artery embolization is a minimally invasive procedure performed by
interventional radiologists. In this procedure, microspheres are injected
through a small catheter into the blood vessels feeding the fibroid tumor,
preferentially blocking the blood supply to the fibroids, but not to the
surrounding healthy tissues. The goal of the uterine artery embolization
procedure is to eliminate the flow of blood to the uterine fibroid, thereby
alleviating related symptoms, while preserving normal uterine and ovarian
function.

   We believe that embolotherapy is a significantly more attractive alternative
in the treatment of uterine fibroids, particularly when compared to the
invasiveness of such surgical procedures as hysterectomy or myomectomy, or even
when compared to hormone therapy and "watchful waiting." Current therapies can
have significant adverse side effects including temporary or permanent loss of
fertility, lengthy recovery periods, high costs, discomfort and risk of
recurrence of fibroids.

   Although the effect of uterine artery embolization on continued fertility
has not been established, we believe that uterine artery embolization has the
potential to preserve the fertility of the patient that would otherwise be lost
through hysterectomy or may be compromised by the use of current therapies or
technologies, and to reduce or eliminate the risk of recurrence of the uterine
fibroid tumor and the complications associated with myomectomy. Most uterine
artery embolization procedures can be performed in less than one hour, while
the patient is sedated, but awake. The patient generally stays overnight in the
hospital to manage any discomfort associated with the procedure and typically
returns to everyday activities in three to five days. In contrast, hysterectomy
patients undergo general anesthesia, stay in the hospital for four to five days
and have a recovery period lasting up to six to eight weeks.

   Embolotherapy using polyvinyl alcohol has several limitations associated
with its imprecise size and shape, including less effective occlusion of the
blood supply to the tumor, inflammation and untargeted embolization resulting
in the injury of the surrounding normal tissue. Independent studies have
indicated that Embosphere Microspheres have a variety of characteristics that
may make them preferable to polyvinyl alcohol. These include:

..  Uniform Spherical Shape/Calibrated Particle Size. We are able to synthesize
   beads with uniform sizing and a spherical shape. When embolic materials are
   irregularly shaped or sized, as is the case with polyvinyl alcohol,
   clinicians find vessel targeting more difficult, and may also experience an
   increased incidence in unwanted embolization of blood vessels away from the
   site of the tumor.

..  Compliant and Resilient Properties. We have developed a soft, elastic
   microsphere, that has the capability to compress significantly.
   Consequently, clinicians can deliver these beads through microcatheters.
   Many clinicians prefer using microcatheters during embolization since such
   catheters minimize the frequency of artery or vessel spasm during the
   procedure. Vessel spasm can be of particular concern during uterine artery
   embolization as it can disrupt the flow of blood. Clinicians rely on blood
   flow during embolization to direct the microspheres to the vessel targeted
   for occlusion.

..  Hydrophilic Properties. As a result of the materials used to manufacture
   microspheres, our products are hydrophilic, which means that they absorb
   moisture. This characteristic is important in that it prevents the
   microspheres from clumping in the catheter and the artery during the
   procedure.

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..  Non-biodegradability. Our microspheres are composed of a synthetic
   three-component polymer that is compatible with the human body. This polymer
   is insoluble and non-biodegradable. We believe, therefore, that our
   Embosphere Microspheres are an appropriate agent for permanent vessel
   occlusion.

..  Cell Adhesion. Our Embosphere Microspheres are cross-linked with a cell
   adhesion promoter composed of gelatin. This material promotes cell adhesion,
   resulting in a more rapid, stable and complete occlusion of the vessel.

..  Charged Surface Property. Our microspheres are positively charged, enabling
   them to attach to the negatively-charged blood vessel wall. This attachment
   to the vessel wall minimizes the potential for the microspheres to migrate
   to non-targeted vessels.

   Embosphere Microspheres are currently available in six sizes, from 40 to
1,200 microns, based on current customer requirements and targeted
applications. They are designed to precisely fit the blood vessels, resulting
in targeted and controlled occlusion. They can be used with existing,
commercially available catheters and delivery systems. We anticipate that
subsequent generations of Embosphere Microspheres, such as our EmboGold(TM)
Microspheres, will incorporate new product characteristics. These new product
characteristics may include improved cell adhesion properties and an improved
ability for the physician to visualize the product using conventional x-ray or
magnetic resonance imaging during administration. All of these products may
require a new 510(k) approval. In February 2002, we began selling EmboSphere
Microspheres in a new enhanced vial package.

   We received CE Mark approval of our Embosphere Microspheres in the European
Union in 1997 and more recently received marketing approval in Australia and
Canada. In April 2000, we received marketing clearance from the FDA for our
Embosphere Microspheres, through a 510(k) notification for hypervascularized
tumors and arteriovenous malformations.

   The 510(k) clearance for hypervascularized tumors and arteriovenous
malformations does not specifically cover treating uterine fibroids. For the
treatment of uterine fibroids through embolization, we recently completed
enrollment of a clinical trial under an investigation device exemption to
support an application for clearance or approval from the FDA for this specific
indication. In January 2000, we initiated a Phase I clinical trial of
Embosphere Microspheres for uterine artery embolization. Thirty patients were
enrolled in the multi-center study at Roxborough Memorial Hospital,
Philadelphia, the Miami Cardiac and Vascular Institute, Miami and Georgetown
University Medical Center, Washington, D.C., as of June 2000. These patients
were followed for a period of one year in accordance with the study plan. In
October 2000, we initiated our pivotal Phase II clinical trial of the safety
and efficacy of Embosphere Microspheres for uterine artery embolization, in
which we studied an expanded patient population of 100 patients at seven
clinical sites. These sites included Miami Cardiac and Vascular Institute,
Miami; Roxborough Memorial Hospital, Philadelphia; Piedmont Hospital, Atlanta;
Georgetown University Medical Center, Washington D.C.; Women's Health Center,
Phoenix; Albany Medical Center, Albany; and Beverly Hills Center for Special
Surgery, Beverly Hills. We announced full enrollment of the UAE arm of this
study in September 2001 and, in January 2002, announced full enrollment of the
remaining hysterectomy study arm.

EmboGold(TM) Microspheres

   EmboGold Microspheres, an enhanced version of Embosphere Microspheres, were
launched in the US in September 2001 after receiving FDA clearance earlier in
the year. In March 2002, we received CE Mark approval in the European Union.
This product enhancement added color to the spheres for improved visibility
during preparation and injection. EmboGold Microspheres are provided in a
special 20cc syringe and packaged in a sterile Tyvek(R) sealed tray. The
syringe container was designed to provide added convenience in handling and
preparation.

Hepasphere SAP(TM) Microspheres

   Through our wholly owned subsidiary, Biosphere Medical Japan, Inc., we are
developing Hepasphere SAP Microspheres for the treatment of primary liver
cancer. Our Hepasphere SAP Microspheres are expandable microspheres for
injection via catheter into the blood vessels feeding the liver cancer tumor.
Once at the tumor

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site, they are designed to expand by absorbing water from the blood and
effectively block the blood supply to the tumor. Targeted liver embolotherapy
is intended to starve the liver tumor, without damaging the surrounding tissues
or causing any adverse side effects on other parts of the body, such as those
associated with chemotherapy and radiation.

   Over 100 primary liver cancer patients have been treated to date with
Hepasphere SAP Microspheres on an investigational basis in Japan. In September
1999, we obtained a worldwide exclusive license to Hepasphere SAP Microspheres
from its Japanese inventor. We plan to apply to the Japanese Ministry of Health
and Welfare for marketing approval within the next 18 to 24 months.

TempRx(TM) Microspheres

   We believe that a significant opportunity exists for temporary or resorbing
embolic materials. Currently, embolic materials are frequently used to
temporarily treat internal bleeding from trauma or specific disease and we
believe that this could be a suitable application for temporary embolics. We
believe that there is also a growing interest to use temporary or dissolving
embolics in many current embolization applications, including liver and fibroid
embolization. We are currently conducting research on our TempRx Microspheres
as temporary embolics.

LiquiDx(TM) Microspheres

   We are in the research stage of developing liquid embolics, or embolics that
are in a liquid state when injected and, depending on the application,
subsequently convert to a solid gel. Potential applications include treatment
of endovascular graft leaks, aneurisms, and large vessel embolization
applications including pelvic congestion syndrome and varicocele.

ACTIVE EMBOLOTHERAPY

   We believe that our microspheres which are being designed to deliver drugs,
radioactive material or genetic materials may have several advantages over
current gene therapy, drug delivery or radiation products, including the direct
delivery to tumor. Our microspheres for active embolotherapy will be designed
to deliver the drug or gene therapy product directly to the tumor, avoiding the
potential side effects associated with high levels of circulating drugs, genes,
or radiation after an intravenous infusion through the blood vessel system.
Direct delivery should permit the use of higher, potentially more effective,
dosage of the product.

Radiosphere(TM) Microspheres

   We believe the first step in marketing embolics that can deliver drugs or
agents to treat cancer will be to develop microspheres that are "loaded" with
drugs or agents at the treatment center using currently available equipment and
techniques. We are developing our microsphere technology platform to be
specifically formulated to express a high affinity for certain radioactive
compounds. We believe that these spheres, when loaded, can be injected through
a catheter to deliver radiation treatment directly to the tumor site. We
believe that transvascular targeting of radiation is a potentially superior
method to currently existing radiation treatment modalities because it offers a
conceptually optimum way of uniformly dosing the tissue that is most actively
proliferating while, at the same time, minimizing dosage to non-targeted areas.
We also believe this approach will simplify logistical and handling
requirements for radioactive materials in a hospital setting such as storage
and shelf life. We have completed proof of concept for this technology and we
expect to initiate pre-clinical testing in early 2003.

Viasphere(TM) Microspheres

   We are conducting early-stage research on our Viasphere Microspheres, which
are being designed as precisely-sized highly hydrophilic microspheres to which
genetic materials or drugs are attached. We are developing these microspheres
to be injected into the blood vessels feeding the tumor. We expect that once
the flow of blood to the tumor has been occluded, Viasphere Microspheres will
begin delivering concentrated genes or drugs into the tumor.

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Other Embolization Products

   We intend to develop and commercialize other embolization products that
include:

    .  delivery systems for embolic materials, such as specialty catheters and
       guidewires,

    .  procedure-enhancing technologies that are designed to improve the
       uniformity of microsphere dispersion during injection, reduce radiation
       exposure and optimize efficiency of procedure time and implanted
       material, and

    .  additional embolic materials such as innovative coils, embolics that
       solidify upon injection and resorbable embolics to treat aneurisms and
       large arteriovenous malformations, as well as for specific tumors based
       upon their type or location.

   In November 2001, we announced that we had received FDA clearance to market
our EmboCath(TM) Infusion Catheter. The EmboCath Infusion Catheter is a
micro-catheter style catheter that is designed to be used to inject
embolization material in the pelvic and abdominal region and has properties
that we believe optimize the unique design of our hydrophilic and compressible
microspheres.

NON-EMBOLOTHERAPY TECHNOLOGIES

MatrX(TM) Microspheres

   Our MatrX Microspheres product, currently in pre-clinical development, are
highly hydrophilic synthetic microspheres designed to cause tissue bulking as a
means to provide anatomic support in disease conditions where this support is
missing. MatrX Microspheres preparations will be designed to be easily
injectable yet large enough to avoid digestion within the body. We anticipate
that the microsphere matrix, once injected, will be rapidly populated by
surrounding cells and provide a stable, mechanically resistant tissue bulking
structure. Potential applications of MatrX Microspheres preparations for tissue
bulking include:

..  Stress Urinary Incontinence. Approximately four million adults in the United
   States suffer from stress urinary incontinence, which is the involuntary
   loss of urine during coughing, laughing, sneezing, jogging, or any other
   activity which causes a sufficient increase in pressure within the abdomen.
   Stress urinary incontinence is currently treated in a variety of ways, but
   the majority of patients are managed with techniques that treat the
   symptoms, but do not restore urinary continence. Most curative approaches to
   the treatment of urinary incontinence require significant surgical
   interventions.

   Tissue bulking agents are either biologically derived or synthetic and are
   designed to be injected in or near the bladder neck to increase tissue bulk.
   While bulking procedures are gaining acceptance, the body typically absorbs
   biologically-derived bulking agents, requiring retreatment. Other
   limitations include migration of the synthetic agents to other non-affected
   parts of the body causing adverse health effects, incompatibility of the
   synthetic agents with the human body and difficulty in injecting the agents
   into the walls of the urethra. Accordingly, currently available therapies
   provide only limited benefit in the treatment of stress urinary incontinence.

   We are currently developing our MatrX Microspheres tissue-bulking product,
   which is designed to be injected into the urethral wall to reduce or
   eliminate the incidence of urinary incontinence. We are conducting
   pre-clinical research on the application of our MatrX Microspheres
   tissue-bulking product for stress urinary incontinence.

..  Vesicoureteral Reflux. Vesicoureteral reflux is a condition in which urine
   may backflow from the bladder through the ureter and into the kidneys. This
   condition, which can result in urinary tract infections, pain, fever and
   discomfort, affects over one percent of children. We are conducting
   preclinical research on the application of MatrX Microspheres to bulk the
   area of tissue at the junction of the ureter and bladder to increase
   backflow resistance.

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..  Gastroesophageal Reflux Disease. Gastroesophageal reflux disease occurs when
   the stomach contents abnormally flow upward into the esophagus, which can
   lead to pain and esophageal ulcers. In many cases, gastroesophageal reflux
   disease is attributable to decreased tone of the lower esophageal muscle
   tissue or to a congenitally small band of muscle tissue. We are conducting
   research on how MatrX Microspheres tissue-bulking product, injected directly
   into the esophageal muscle tissue, improves its function.

GenS/2(TM)/ Microspheres Injectable Tissue Scaffold

   We are researching the use of GenS/2/ Microspheres injectable tissue
scaffold products for such applications as cartilage repair and other tissue or
organ replacement. Several companies are developing and marketing bioartifical
cells, tissues and supporting scaffoldings that hold the cells or tissues
together. However, the existing tissue scaffoldings are either difficult to
inject into the body, are digested by the body over time or do not adequately
merge into the original tissue. In addition, most procedures still require
surgery to implant the bioartifical tissues.

   We believe that our microsphere technology can be formulated into injectable
microsphere scaffolds, which we call GenS/2/ Microspheres, which may overcome
many of the limitations of tissue scaffolds currently commercially available.
We are designing this product to adhere to cells and to be small enough to be
injected, yet large enough to avoid digestion after injection.

Other Non-Strategic Products

   In addition to our Embosphere Microspheres products, we sell barium delivery
kits and other ancillary products in the European Union. Barium is purchased
from Guerbet Medical, Inc. and resold for use in gastrointestinal medical
testing. We sell other ancillary devices as medical products for hospital and
physician use. While we generated a significant portion of our revenue in 2001
and 2000 from these non-strategic products, we do not expect these products to
be a significant component of our future sales.

MARKETING AND SALES

   We currently market our embolotherapy products through direct sales efforts
in the United States and Canada and through a combination of direct sales,
distributors, field representatives and direct marketing support in the
European Union and other parts of the world. We are in the process of expanding
our sales and marketing presence in the European Union, the United States and
Japan. In January 2002, we entered into an exclusive pan-European distribution
agreement with Terumo Europe N.V., a wholly owned subsidiary of Terumo
Corporation. Terumo is a world leader in developing, manufacturing and
marketing cardiovascular and interventional radiology products, including
microcatheters, guidewires and introducer systems that directly complement our
embolization products. Terumo Europe will use its large direct sales and
marketing team to develop markets and sell our microspheres in the European
markets.

   We plan to attend major medical conventions throughout the world pertaining
to our targeted markets and invest in market development, including physician
training and patient outreach. We are working closely with major academic
centers to serve as centers for excellence for physician training, product
evaluation and ongoing research. Many members of our Medical Advisory Board are
associated with these major academic centers.

RESEARCH AND DEVELOPMENT

   Our research and development group consists of ten employees and three
consultants. In addition, we have several development agreements with outside
product development contractors and study agreements with several medical
centers.

   Our research and development group is focusing on developing our product
technology in three areas:

    .  continuous improvement of our core technology;

    .  new embolotherapy materials and platforms;

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    .  complementary embolotherapy products; and

    .  new initiatives aimed at leveraging our core technology in new market
       areas.

   Our core technologies include microsphere technologies, organic and
inorganic polymer and surface chemistries for microsphere design and
development, non-viral DNA transfection technology, and expertise and know-how
in microsphere manufacturing.

   During the fiscal years ended December 31, 2001, 2000 and 1999, we spent
approximately $4.76 million, $2.52 million and $968,000, respectively on our
research and development efforts. We expect our research and development
expenses to increase in the future as we seek to increase our research and
development staff and related facilities, enhance our existing products and
develop additional products.

COMPETITION

Passive Embolotherapy

   The primary competitive embolotherapy product sold by competitors is
polyvinyl alcohol, or PVA, a product introduced into the market more than 20
years ago. We encounter, and expect to continue to encounter, competition in
the sale of our current and future passive embolotherapy products. Our
principal competitors in the field of passive embolotherapy are Boston
Scientific Corporation, Cook Incorporated and Cordis Corporation, a Johnson &
Johnson company, as well as companies selling or developing non-embolotherapy
solutions for the disease states targeted by us. These competitors have, and
our future competitors are likely to have, greater financial, operational,
sales and marketing resources and more experience in research and development
than we have. We compete primarily on the basis of product performance, ease of
use, degree of targeted embolization control, and quality of patient outcome.
Our future success will depend in large part on our ability to gain market
leadership at the early stage of the development and acceptance of new
procedures, and our ability to continue to develop and bring to market
differentiated products enhancing embolotherapy.

Active Embolotherapy

   Although we are not aware of any company selling or marketing active
embolotherapy products, we expect to encounter competition in the future sale
of any active embolotherapy products. We expect that our future competitors in
this area may have greater financial, operational, sales and marketing
resources and more experience in research and development than we have. In
addition, we expect to compete with companies that are developing and marketing
other anticancer therapies and gene therapy drugs. These competitors include
several large pharmaceutical companies along with numerous smaller
biotechnologies. We believe that the principal competitive advantages in the
active embolotherapy market will include the ability to deliver a highly
concentrated dose of gene or drug to the tumor without negatively affecting
other parts of the body, product designs facilitating a minimally invasive
outpatient procedure, and a sales and marketing organization which is able to
support specialized physician groups.

Tissue Bulking and Tissue Engineering

   In the field of tissue bulking and tissue engineering, we believe that
competition will come from companies that are currently developing and
marketing tissue bulking, tissue repair and regeneration products. We believe
our principal competitors in the field of tissue engineering are companies such
as Boston Scientific Corporation, CR Bard, Inc., Johnson & Johnson and
Medtronic, Inc. These competitors have, and our future competitors are likely
to have, greater financial, operational, sales and marketing resources and more
experience in research and development than we have. We believe that the
principal competitive advantages in the tissue engineering market will be the
ability to obtain durable effects while reducing the invasiveness of the
procedure.

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GOVERNMENT REGULATION

   FDA Regulation. The FDA, and other federal, state, local, and foreign
authorities, regulate our products and manufacturing activities. Pursuant to
the Federal Food, Drug, and Cosmetic Act and the regulations promulgated
thereunder, the FDA regulates the development, clinical testing, manufacture,
packaging, labeling, storage, distribution and promotion of medical devices.
Before a new device can be introduced into the market, the manufacturer must
generally obtain marketing clearance through a 510(k) notification or approval
through a premarket approval application. We generally will be required to
obtain 510(k) clearance or premarket approval prior to commercial distribution
of future products or additional applications of current products. Our proposed
active embolotherapy products will likely be regulated as combination products,
meaning they could be subject to regulation similar to drugs as well as
devices, which may involve more extensive clinical testing and a more rigorous
FDA review process than required for our microspheres and ancillary products,
and other proposed products.

   Classification of Medical Devices. In the United States, medical devices
intended for human use are classified into three categories, Class I, II, or
III, on the basis of the controls deemed reasonably necessary by the FDA to
assure their safety and effectiveness. Class I devices are subject to general
controls, for example, labeling, adherence to the FDA's Good Manufacturing
Practice regulations and in some instances, premarket notification under
Section 510(k). Class II devices are subject to general and special controls,
for example, performance standards, postmarket surveillance, patient
registries, and FDA guidelines. Class III is the most stringent regulatory
category for medical devices. Many Class III devices are subject to premarket
approval requirements. Class III devices include, for example, devices which
are life-sustaining, or life-supporting, or new devices which have not been
found substantially equivalent to legally marketed devices.

   510(k) Clearance. The FDA will clear a device under section 510(k) if the
submitted information establishes that the proposed device is substantially
equivalent to a legally marketed Class I or II medical device, or to a Class
III medical device for which the FDA has not yet called for a premarket
approval application. Commercial distribution can begin only after the FDA
issues an order finding that the device is substantially equivalent to a device
that is legally marketed and not subject to a premarket approval requirement.
The 510(k) notice may have to be supported by laboratory testing, animal
testing and/or clinical testing. The FDA may determine that a proposed device
is not substantially equivalent to a legally marketed device, in which case a
premarket approval will be required to market the device, unless additional
information can be submitted to support a substantial equivalence
determination, or the FDA, pursuant to a timely request from a 510(k)
submitter, makes a risk-based determination that a not-substantially-equivalent
device can be classified into Class I or II. An FDA request for additional data
could require that clinical studies of the device's safety and effectiveness be
performed. In April 2000, we received 510(k) clearance to market Embosphere
Microspheres for embolization of hypervascularized tumors and arteriovenous
malformations. Our embolotherapy device is classified into Class III by the
FDA, which means that even though we obtained 510(k) clearance to market the
device, the FDA could issue a proposed rule and, subsequently, promulgate a
regulation requiring premarket approval of the device to allow it to remain on
the market or could require premarket approval for new treatment indications
for the device. A requirement for premarket approval will likely require us to
continue costly clinical trials and there is no guarantee that we can provide
the FDA sufficient data for premarket approval in a timely fashion, if at all.
Failure to obtain premarket approval would result in removal of our product
from the United States market.

   If human clinical trials of a device are required, and the device presents a
"significant risk," the sponsor, usually the manufacturer or the distributor of
a device, must obtain FDA approval of an investigational device exemption
application prior to commencing human clinical trials. Sponsors of clinical
trials are permitted to charge for devices distributed in the course of a study
provided such charges do not exceed recovery of the costs of manufacture,
research, development and handling, but devices may not be commercialized,
e.g., promoted as safe or effective. The study must comply with the FDA's
investigational device exemption regulations or other regulations. The sponsor
must also obtain approval from one or more institutional review boards.
Investigational device exemption trials are subject to extensive regulation,
and may be placed on hold or terminated by the FDA if, among other reasons,
there is reason to believe the risks do not outweigh the anticipated benefits.
The clinical trial process may take years.

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   Premarket Approval. A premarket approval application must be filed and
approved before a device can be marketed if a proposed device is not
substantially equivalent to a legally marketed device or, as discussed above,
if it is a pre-amendments Class III device, i.e., a device in commercial
distribution prior to May 28, 1976, for which the FDA has called for premarket
approvals. A premarket approval application must be supported by valid
scientific evidence, which typically includes extensive data, including
pre-clinical and clinical trial data, to demonstrate the safety and
effectiveness of the device. Obtaining approval can take several years and
approval may be conditioned on, among other things, substantial restrictions on
indications for use and the conduct of postmarket surveillance studies.

   The FDA has not formally decided how it will conduct the premarket review
for the use of embolic particles for uterine fibroid embolization. The FDA may
decide to require a premarket approval application or, alternatively, may allow
commercial clearance via a 510(k) notice together with clinical support that
substantiates product safety and efficacy. We have received an investigational
device exemption pursuant to which we are conducting clinical studies to
investigate the safety and efficacy of the Embosphere Microspheres for uterine
artery embolization. We intend to file for marketing clearance under the 510(k)
process unless the FDA requires a premarket approval application.

   Drug Regulations: Drug and device approvals require extensive clinical
testing involving multiple phases. The clinical data must demonstrate, from
adequate and well-controlled trials, that the drug or device, as the case may
be, is safe and effective in order to obtain approval. Clinical trials
typically take years to complete. Before initiating such a clinical trial, we
must obtain an investigational new drug exemption, or INDA, from FDA.

   Changes in Approved Devices. Device manufacturers must obtain new FDA 510(k)
clearance when there is a major change or modification in the intended use of a
legally marketed device or a change or modification, including product
enhancements, to a legally marketed device that could significantly affect its
safety or effectiveness. Supplements for approved premarket approval devices
are required for device changes, including some manufacturing changes that may
affect safety or effectiveness. For devices marketed pursuant to 510(k)
determinations of substantial equivalence, we must obtain FDA clearance of a
new 510(k) notification prior to marketing the modified device; for devices
marketed with premarket approval, we must obtain FDA approval of a supplement
to the premarket approval prior to marketing the modified device.

   Good Manufacturing Practices and Reporting. The Federal Food, Drug, and
Cosmetic Act requires us to comply with Good Manufacturing Practices or Quality
Systems regulations. We must comply with various quality control requirements
pertaining to all aspects of our product design and manufacturing process
including requirements for packaging, labeling and record keeping, including
complaint files. The FDA enforces these requirements through periodic
inspections of medical device manufacturing facilities. In addition, the
Medical Device Reporting regulation obligates us to inform the FDA whenever
information reasonably suggests that one of our devices may have caused or
contributed to death or serious injury, or when one of our devices
malfunctions, if the device would be likely to cause or contribute to a death
or a serious injury in the event the malfunction recurred.

   Labeling and Advertising. Labeling and promotional activities are also
subject to scrutiny by the FDA. Among other things, labeling is violative of
the law if it is false or misleading in any respect or it fails to contain
adequate directions for use. Moreover, claims that are outside the labeling
either approved or cleared by the FDA may violate the Federal Food, Drug, and
Cosmetic Act.

   Our product promotion is also subject to regulation by the Federal Trade
Commission under the Federal Trade Commission Act, which prohibits unfair
methods of competition and unfair or deceptive acts or practices in or
affecting commerce, as well as unfair or deceptive practices such as the
dissemination of any false advertisement pertaining to medical devices. Under
the Federal Trade Commission's substantiation doctrine, an advertiser is
required to have adequate data for all product claims at the time the claims
are first used in advertising or other promotions.

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   Import Requirements. To import a device, the importer must file an entry
notice and bond with the U.S. Customs Department pending an FDA decision on the
product's admissibility. All devices are subject to FDA examination before
release from Customs. Any article that appears to be in violation of the
Federal Food, Drug, and Cosmetic Act may be refused admission and a notice of
detention and hearing may be issued. A product also can be detained without
physical examination if the product has a past history or other information
indicates that it may be violative. A device must have received 510(k)
clearance or be subject to an approved premarket approval application if
required.

   Export Requirements. Products for export from Europe and from the United
States are subject to foreign countries' import requirements and the FDA's or
European regulating bodies' exporting requirements. The introduction of our
products in foreign markets may subject them to foreign regulatory clearances,
which may impose additional product standards, packaging and labeling
requirements and import restrictions on devices. Regulatory requirements to
market devices vary from country to country. In addition, each country has its
own tariff regulations, duties, and tax requirements.

   In addition to the import requirements of foreign countries, we must also
comply with the United States laws governing the export of products regulated
by the FDA. Devices that have obtained 510(k) clearance or premarket approval
and comply with the law in all other respects may be exported without further
FDA authorization. However, foreign countries often require, among other
things, an FDA certificate for products for export. To obtain this certificate,
the device manufacturer must certify to the FDA that the product has been
granted clearance or approval in the United States and that the manufacturing
facilities appeared to be in compliance with Good Manufacturing Practices
regulations at the time of the last FDA inspection.

   Under the FDA Export Reform and Enhancement Act of 1996, an unapproved
device requiring a premarket approval or a device subject to an investigational
device exemption may be exported to any country if the product complies with
the laws of that country and has valid marketing authorization in one of the
following countries or authorities: Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa, the European Union, or a country in the
European Economic Community, or EEC, if the device is marketed in an EEC
country or authorized for general marketing in the EEC. The FDA is authorized
to add countries to this list in the future. Further, a device may be exported
under this provision only if, among other things, it meets the specifications
of the foreign purchaser, complies with the laws of the importing country, is
labeled for export, is manufactured in substantial compliance with Good
Manufacturing Practices regulations or recognized international standards, is
not sold in the United States, and meets other conditions.

   Fines and Penalties for Noncompliance. Failure to comply with applicable FDA
regulatory requirements could result in, among other things, premarket
clearance or approval withdrawal, injunctions, product withdrawals, voluntary
or mandatory patient/physician notifications, recalls, warning letters, product
seizures, civil penalties, fines and criminal prosecutions. In addition, the
Federal Trade Commission has a variety of processes and remedies available to
it for enforcement, both administratively and judicially, including compulsory
process, cease and desist orders and injunctions. Federal Trade Commission
enforcement can result in orders requiring, among other things, limits on
advertising, corrective advertising, consumer redress, rescission of contracts
and such other relief as may be deemed necessary. Violation of such orders
could result in substantial financial or other penalties. Any such action by
the FDA or the Federal Trade Commission could materially adversely affect our
ability to successfully market our products.

   Medical device laws are also in effect in many countries outside of the
United States. These range from comprehensive device approval requirements for
some or all of our medical device products to simpler requests for product data
or certification. The number and scope of these requirements are increasing.
Sales of medical devices in the European Union are subject to the European
Medical Device Directive. This directive contains requirements for quality
system and product performance guidelines to which all manufacturers must
comply. These guidelines contain quality system guidelines and preproduction
product design verification that closely resemble current FDA guidelines. In
1997, we obtained ISO 9002 international quality systems registration, a

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certification showing that our procedures and manufacturing facilities comply
with standards for quality assurance and manufacturing process control. Our
compliance with this registration has been confirmed since 1997 in semi-annual
surveillance audits. In January 2002, we obtained certification to
EN46001/ISO9001, which along with the manufacturing and quality controls of
ISO9002, also adds design control requirements. The EN46001/ISO 9001
certification and the European Medical Device Directive Certification signifies
compliance with the requirements, enabling us to affix the CE Mark to our
Embosphere Microsphere and our EmboGold Microsphere product. The CE Mark
denotes conformity with European standards for safety and allows certified
devices to be placed on the market in all European Union countries. Medical
devices may not be sold in European Union countries unless they display the CE
Mark.

   Failure to comply with applicable federal, state and foreign medical device
laws and regulations would likely have a material adverse effect on our
business. In addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future changes. We
cannot predict what impact, if any, such changes might have on our business,
but such change could have a material impact.

   We are subject to various federal, state, local and foreign laws and
regulations relating to the protection of the environment, as well as health
and safety. In the course of our business, we are involved in the handling,
storage and disposal of certain chemicals. The laws and regulations applicable
to our operations include provisions that regulate the discharge of materials
into the environment. Usually these environmental laws and regulations impose
"strict liability," rendering a person liable without regard to negligence or
fault on the part of such person. Such environmental laws and regulations may
expose us to liability for the conduct of, or conditions caused by, others, or
for acts that were in compliance with all applicable laws at the time the acts
were performed. We do not believe that we have been required to expend material
amounts in connection with our efforts to comply with environmental
requirements or that compliance with such requirements will have a material
adverse effect upon our capital expenditures, results of operations or
competitive position. Failure to comply with applicable environmental and
related laws could have a material adverse effect on our business. In addition,
because the requirements imposed by such laws and regulations are frequently
changed, we are unable to predict the cost of compliance with such requirements
in the future, or the effect of such laws on our capital expenditures, results
of operations or competitive position.

PROPRIETARY TECHNOLOGY AND PATENT RIGHTS

   We seek to establish and protect our proprietary technologies and products
through a combination of patent, copyright, trademark and trade secrets laws,
as well as confidentiality provisions in our contracts. We have implemented a
patent strategy designed to maximize our intellectual property rights. We are
pursuing patent coverage in the United States and foreign countries to protect
the technology, inventions and improvements that we consider critical to the
development of our products and business.

   In January 1998, we entered into an agreement with L'Assistance
Publique-Hopitaux De Paris, referred to as AP-HP, pursuant to which AP-HP has
granted us the exclusive right to use two jointly-owned patents relating to
micospheres. We are required to pay to AP-HP a royalty on the commercial sale
of any products, which incorporate technology covered by the patents. We may
only sublicense these exclusive rights under the agreement with the prior
written consent of AP-HP, which consent cannot be unreasonably withheld. The
rights granted under the contract are for an initial period, which ends on
September 16, 2009, and are renewable by mutual agreement between the parties.
The agreement can be terminated on three months notice by either party if the
other party does not perform one or more of its obligations under the agreement
and fails to cure its nonperformance during the notice period. These
jointly-owned patents will expire in 2014.

   In addition, as part of the sale of our former core business to Invitrogen,
Inc., formerly know as Life Technologies, in May 1999, we entered into a
cross-license agreement with Invitrogen. Under that agreement, Invitrogen has
granted to us an exclusive, worldwide, perpetual, royalty-free license to its
technology and patents relating to our core field of development, including any
improvement to that technology made prior to May 2004.

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Under the agreement, we also granted to Invitrogen an exclusive, worldwide,
perpetual, royalty-free license to any improvements to the technology they have
licensed to us, which are useful in Invitrogen's fields of development. Either
party can terminate the agreement, and all licenses granted thereunder on sixty
day's notice in the event of a breach of the agreement by the other party.

   In 1999, we entered into an agreement with Dr. Shinichi Hori, pursuant to
which we have an exclusive royalty-bearing license to Japanese patent rights
for our Hepasphere SAP Microsphere product. These patent rights expire in 2012.
There are no United States or other international filings corresponding to this
patent application. We intend to file patent applications directed to
improvement of this inventor's technology. However, present applications may
not issue as patents, and these patents, if issued, may not provide us with
sufficient protection against competitors. Further, we may be required to
obtain additional licenses concerning the Japanese patent application and any
licenses, if obtained, may not be on terms that are acceptable to us.

   We were recently granted a United States patent directed to the treatment of
urinary incontinence using microparticles. This patent expires in March 2019.

   We have filed two patent applications relating to materials and methods for
active embolotherapy, gene therapy and the treatment of gastroesophageal reflux
disease, urinary incontinence and skin wrinkles. In addition, in July 1999, we
entered into an agreement with the Louis Pasteur University in Strasbourg,
France and Centre National de la Recherche Scientifique pursuant to which we
received exclusive, royalty-bearing worldwide rights to two United States
patents relating to active embolotherapy technology. We have filed a patent
application relating to our material, formulation process and method of use for
our new EmboGold Microspheres.

   We have filed four United States patent applications and corresponding
foreign applications relating to the use of embolotherapy for tissue bulking
and the treatment of urinary incontinence, vesicoureteral reflux, dermal
augmentation, skin wrinkles and gastroesophageal reflux disease. We have also
filed patent applications relating to materials and methods for tissue
regeneration.

   Our success depends to a significant degree upon our ability to develop
proprietary products and technologies and to obtain patent coverage for these
products and technologies. We intend to continue to file patent applications
covering any newly-developed products and technologies. However, as discussed
above, there can be no guarantee that any of our pending or future filed
applications will be issued as patents. There can be no guarantee that the
United States Patent and Trademark Office or some third party will not initiate
an interference proceeding involving any of our pending applications or issued
patents. Finally, there can be no guarantee that our issued patents or future
issued patents, if any, will provide adequate protection from competition, as
further discussed below.

   Patents provide some degree of protection for our proprietary technology.
However, the pursuit and assertion of patent rights, particularly in areas like
medical device development, involve complex legal and factual determinations
and, therefore, are characterized by significant uncertainty. In addition, the
laws governing patent issuance and the scope of patent coverage continue to
evolve, particularly in life sciences. Moreover, the patent rights we possess
or are pursuing generally cover our technologies to varying degrees. As a
result, we cannot assure you that patents will issue from any of our patent
applications or from applications licensed to us or that any of our issued
patents will offer meaningful protection. In addition, our issued patents or
patents licensed to us may be successfully challenged, invalidated,
circumvented or rendered unenforceable so that our patent rights may not create
an effective competitive barrier. Moreover, the laws of some foreign countries
may not protect our proprietary rights to the same extent, as do the laws of
the United States. There can be no assurance that any patents issued to us will
provide a legal basis for establishing an exclusive market for our products or
provide us with any competitive advantages or that the patents of others will
not have an adverse effect on our ability to do business or to continue to use
our technologies freely. In view of these factors, the value of our
intellectual property position is uncertain.

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   We may be subject to third parties filing claims asserting that our
technologies or products infringe on their intellectual property. We cannot
predict whether third parties will assert such claims against us or our
licensees or against the licensors of technology licensed to us, or whether
those claims will harm our business. If we are forced to defend against such
claims, regardless of their merit or whether they are resolved in favor of or
against us, our licensees or our licensors, we may face costly litigation and
diversion of management's attention and resources. As a result of such
disputes, we may have to develop, at a substantial cost non-infringing
technology, or enter into licensing agreements. These agreements, if necessary,
may be unavailable on terms acceptable to us, or at all, which could seriously
harm our business or financial condition.

   We also rely in part on trade secret protection of our intellectual
property. We attempt to protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants. Our
employees also sign agreements requiring that they assign to us their interests
in inventions and original expressions and any corresponding patents and
copyrights arising from their work for us. However, it is possible that these
agreements may be breached, invalidated or rendered unenforceable and if so our
trade secrets could be disclosed to others, including our competitors, and
there may not be an adequate corrective remedy available. Despite the measures
we have taken to protect our intellectual property, parties to our agreements
may breach the confidentiality provisions in our contracts or infringe or
misappropriate our patents, copyrights, trademarks, trade secrets and other
proprietary rights. In addition, third parties may independently discover or
invent competitive technologies or reverse engineer our trade secrets, or other
technology. Therefore, the measures we are taking to protect our proprietary
technology may not be adequate.

EMPLOYEES

   As of February 28, 2002, we employed 87 persons. Of these employees, 10 are
primarily engaged in research and development activities, 20 are engaged in
manufacturing, 38 are engaged in sales and marketing, and the remainder are
engaged in finance and administration. Of these 87 persons, 44 are located in
the United States, 41 are located in France and 2 are located in Japan.

   Our employees in the United States are not covered by a collective
bargaining agreement. In Europe, our employees are covered by the provisions of
an agreement setting forth national guidelines and standards for labor
relations within our industry. We consider our relations with our employees to
be good.

RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

   This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be considered to be forward-looking statements. Although
not a complete list of words that might identify forward-looking statements, we
use the words "believes," "anticipates," "plans," "expects," "intends," and
similar expressions to identify forward-looking statements. There are a number
of important factors that could cause our actual results to differ materially
from those indicated by forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Form 10-K. We expressly disclaim any obligation to
update or alter our forward-looking statements, whether as a result of new
information, future events or otherwise.

RISK RELATING TO OUR FUTURE PROFITABILITY

Because we have a history of losses and our future profitability is uncertain,
our common stock is a highly speculative investment

   We have incurred operating losses since our inception and, as of December
31, 2001, had an accumulated deficit of approximately $54.9 million. We expect
to spend substantial funds to continue research and product testing, to
establish sales, marketing, quality control, regulatory and administrative
capabilities and for other general corporate purposes. We expect to continue
incurring losses for the next fiscal year as we expand our commercialization
efforts.

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<PAGE>

   We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and expand, diversify or continue our operations.

RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY

If we do not achieve widespread market acceptance of our Embosphere
Microspheres product, our business prospects will be seriously harmed

   Our Embosphere Microspheres are based on new technologies and therapeutic
approaches. In the United States, we only recently began selling our Embosphere
Microspheres product for the embolization of hypervascularized tumors and
arteriovenous malformations. We will require additional FDA approval before we
can market Embosphere Microspheres in the United States for use in the
embolization of uterine fibroids. Our success will depend upon the medical
community, patients and third party payors accepting our Embosphere
Microspheres product as medically useful, cost-effective and safe. In
particular, our success will depend upon obstetrics and gynecology physicians
referring patients to interventional radiologists to receive treatment using
our products in lieu of, or in addition to, receiving other forms of treatment
that the obstetrics and gynecology physicians can otherwise provide directly.

   Negative publicity associated with any adverse medical effects attributed to
embolization treatments generally or our product specifically, may create the
market perception that our products are unsafe. For example, patients commonly
experience a day or two of post-procedure abdominal pain or cramping. Other
infrequently occurring complications may include allergic reactions, rashes,
early onset of menopause, infertility and infection that may, in some limited
cases, require a hysterectomy. In addition, Embosphere Microspheres are
designed to remain in the body permanently. As a result, there is some limited
risk that some or all of the Embosphere Microspheres used in a medical
procedure may travel in the blood system beyond the intended site of action and
occlude, or block, other blood vessels, resulting in significant adverse health
effects on the patient or even death. Moreover, to use our Embosphere
Microspheres correctly for a particular medical procedure, physicians must
select and use the proper size and quantity of Embosphere Microspheres. A
physician's selection and use of the wrong size or quantity of Embosphere
Microspheres could have significant adverse health effects on the patient,
including death. It will be necessary for us to spend significant amounts of
money and allocate management resources to educate physicians about the
selection and use of the proper size and quantity of Embosphere Microspheres in
patient therapy. In addition, there is only limited data concerning the
long-term health effects on persons resulting from embolotherapy using our
Embosphere Microspheres.

   If we are not able to successfully educate physicians to properly use our
product or if the market determines or concludes that our product is not safe
or effective for any reason, we may be exposed to product liability claims,
product recalls and fines or other penalties or enforcement actions by
regulatory agencies and associated adverse publicity. In addition, we have
provided to our customers a satisfaction guarantee that requires us to accept
the return of any inventory and credit the entire amount of the original order
if a properly trained customer is not satisfied with the performance of our
microspheres. If we experience adverse publicity or are subject to product
liability claims, excessive guarantee claims, recalls, fines and the like, we
will be unable to achieve widespread market acceptance of our Embosphere
Microsphere products and achieve profitability.

We will be required to expend significant resources for research, development,
testing and regulatory approval of our products under development and these
products may not be developed successfully

   We are developing and commercializing products for medical applications
using embolotherapy techniques and also seeking to develop potential
applications in several non-embolotherapy applications. Except for our
Embosphere Microspheres product, most of our product candidates are still in
the early stages of research and development. Our products may not provide
greater benefits than current treatments or products, or than treatments or
products under development. All of our products under development will require
significant

                                      20

<PAGE>

additional research, development, pre-clinical and/or clinical testing,
regulatory approval and a commitment of significant additional resources prior
to their commercialization. Our potential products may not:

    .  be developed successfully;

    .  be proven safe and effective in clinical trials;

    .  offer therapeutic or other improvements over current treatments and
       products;

    .  meet applicable regulatory standards or receive regulatory approvals;

    .  be capable of production in commercial quantities at acceptable costs; or

    .  be successfully marketed.

If we do not develop, obtain marketing approvals and successfully introduce new
products, we may not achieve revenue opportunities

   We derived more than a majority of our revenue for the years ended December
31, 2001 and 2000 from the sale of Embosphere Microspheres. In addition,
although we have not received FDA clearance or approval to market our
Embosphere Microspheres for the specific use in the treatment of uterine
fibroids, we believe that a majority of our revenue in the United States for
the years ended December 31, 2001 and 2000 was derived from the sale of
Embosphere Microspheres for use in uterine fibroid embolization. We derived
approximately 19% of our revenue for the years ended December 31, 2001, and 49%
of our revenue for the year ended December 31, 2000 from the sale of
non-strategic products that we do not expect to constitute a significant
portion of our revenue on an ongoing basis. Accordingly, we need to seek and
obtain marketing approval for the use of Embosphere Microspheres for uterine
artery embolization, develop and introduce new applications for our
embolotherapy technology and pursue opportunities for microsphere technology in
other medical applications. If we are not successful in these efforts, we may
not achieve revenue opportunities.

If we experience delays, difficulties or unanticipated costs in establishing
the sales, distribution and marketing capabilities necessary to successfully
commercialize our products, we will have difficulty maintaining and increasing
our sales

   We are currently developing sales, distribution and marketing capabilities
in the United States and have only limited sales, distribution and marketing
capabilities in the European Union. It is expensive and time-consuming for us
to develop a global marketing and sales force. Moreover, we may choose or find
it necessary to enter into strategic collaborations to sell, market and
distribute our products. The terms of any collaboration may not be favorable to
us. We may not be able to provide adequate incentive to our sales force or to
establish distribution and marketing collaborations with other companies to
promote our products. We must also market our products in compliance with
federal, state and local laws relating to the providing of incentives and
inducements. Violation of these laws can result in substantial penalties. If we
are unable to successfully motivate and expand our marketing and sales force
and further develop our sales and marketing capabilities, or if our
distributors fail to promote our products, we will have difficulty maintaining
and increasing our sales.

If the strategic redirection of our business is not successful, we may be
unable to achieve growth in our business

   In early 1999, we decided to exit the chromatography business, which had
constituted our core business, to focus on the commercialization of
microspheres for use in embolotherapy and other medical applications.

   We have restated our historical financial statements to reflect the
discontinuation of our chromatography business. In addition, 73% of 1999
revenue, 49% of 2000 revenue and approximately 19% of revenue in 2001 included
in our consolidated financial statements was derived from the sale of products
we consider to be non-strategic and which we do not expect to constitute a
significant portion of our revenue on an ongoing basis. Our strategic shift
from the chromatography business to the commercialization of microspheres may
not prove to be successful and, consequently, we may be unable to commercially
develop our business and achieve profitability.

                                      21

<PAGE>

If we are unable to obtain adequate product liability insurance, then we may
have to pay significant monetary damages in a successful product liability
claim against us

   The development and sale of medical devices entails an inherent risk of
product liability. Product liability insurance is generally expensive for
medical device companies such as ours. Although we maintain limited product
liability insurance coverage for our products, it is possible that we will not
be able to obtain further product liability insurance on acceptable terms, if
at all. Insurance we subsequently obtain may not provide us with adequate
coverage against all potential claims. If we are exposed to product liability
claims for which we have insufficient insurance, we may be required to pay
significant damages which would prevent or delay our ability to commercialize
our products.

If we are not able to compete effectively, we may experience decreased demand
for our products, which may result in price reductions

   We have many competitors in the United States and abroad, including medical
device and therapeutics companies, universities and other private and public
research institutions. Our success depends upon our ability to develop and
maintain a competitive position in the embolotherapy market. Our key
competitors are Cordis Corporation, a Johnson & Johnson company, Boston
Scientific Corporation and Cook Incorporated. These and many of our other
competitors have greater capabilities, experience and financial resources than
we do. As a result, they may develop products that compete with our Embosphere
Microspheres product more rapidly or at less cost than we can. Currently, the
primary products with which our Embosphere Microspheres compete for some of our
applications are polyvinyl alcohol, polymerizing gels and coils. In addition,
our competitors may develop technologies that render our products obsolete or
otherwise noncompetitive.

   We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market
and continue to commercially develop our business. Moreover, we may not be able
to compete effectively, and competitive pressures may result in less demand for
our products and impair our ability to become profitable.

If we fail to maintain, or in some instances obtain, an adequate level of
reimbursement for our products by third-party payors, there may be no
commercially viable markets for our products

   The availability and levels of reimbursement by governmental and other third
party payors affects the market for any medical device. We may not be able to
sell our products profitably if reimbursement is unavailable or limited in
scope or amount. Some insurance companies do not reimburse for embolization
procedures. These third-party payors continually attempt to contain or reduce
the costs of healthcare by challenging the prices that companies such as ours
charge for medical products. In some foreign countries, particularly the
countries of the European Union where our Embosphere Microspheres product is
currently marketed and sold, the pricing of medical devices is subject to
governmental control and the prices charged for our products have in some
instances been reduced as a result of these controls. Additionally, in both the
United States and some foreign jurisdictions, there have been a number of
legislative and regulatory proposals to change the healthcare system. Further
proposals are likely. These proposals, if adopted, could result in less revenue
for us, and could affect our ability to raise capital and market our products.

If we do not retain our senior management, other key employees, scientific
collaborators and advisors, we may not be able to successfully implement our
business strategy

   The loss of key members of our management team could harm us. We also depend
on our scientific collaborators and advisors, all of whom have other
commitments that may limit their availability to us. Our success is
substantially dependent on the ability, experience and performance of these
members of our senior management and other key employees, scientific
collaborators and advisors. Because of their ability and experience, if we lose
one or more of these individuals, we may not be able to successfully implement
our business strategy.

                                      22

<PAGE>

If we do not attract and retain skilled personnel, we will not be able to
expand our business

   Our future success will depend in large part upon our ability to attract and
retain highly skilled scientific, operational, managerial and marketing
personnel, particularly as we expand our activities in clinical trials, the
regulatory approval process and sales and manufacturing. We face significant
competition for these types of persons from other companies, research and
academic institutions, government entities and other organizations.
Consequently, if we are unable to attract and retain skilled personnel, we will
not be able to expand our business.

If we make any acquisitions, we will incur a variety of costs and may never
successfully integrate the acquired business into ours

   We may attempt to acquire businesses, technologies, services or products
that we believe are a strategic complement to our business model. We may
encounter operating difficulties and expenditures relating to integrating an
acquired business, technology, service or product. These acquisitions may also
absorb significant management attention that would otherwise be available for
ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. We may also make dilutive issuances of
equity securities, incur debt or experience a decrease in the cash available
for our operations, or incur contingent liabilities in connection with any
future acquisitions.

Because Sepracor Inc. and our executive officers and directors own a
significant amount of our common stock, they may be able to exert control over
us

   As of January 31, 2002, Sepracor Inc. beneficially owns approximately 25% of
our outstanding common stock. In addition, as of January 31, 2002, our
executive officers and directors beneficially owned, in the aggregate,
approximately 9% of our outstanding common stock, excluding shares owned by
Sepracor which some of our directors and executive officers may be deemed to
beneficially own, but including shares issuable upon exercise of vested options
and warrants. Two of our directors are executive officers of Sepracor. Sepracor
and our executive officers and directors will have substantial control over all
corporate actions requiring stockholder approval irrespective of how our other
stockholders may vote, including:

    .  the election of directors;

    .  the amendment of charter documents;

    .  the approval of mergers and other significant corporate transactions,
       including a sale of substantially all of our assets; and

    .  the defeat of any non-negotiated takeover attempt that might otherwise
       benefit the public stockholders.

   This ownership concentration could cause the market price of our common
stock to decline. In addition, conflicts of interest between Sepracor and us
may arise, including with respect to competitive business activities and
control of our management and our affairs.

RISKS RELATING TO REGULATORY MATTERS

If we do not obtain the regulatory approvals required to market and sell our
products, then our business will be unsuccessful and the market price of our
stock will substantially decline

   We are subject to regulation by government agencies in the United States and
abroad with respect to the manufacture, packaging, labeling, advertising,
promotion, distribution and sale of our products. For example, our products are
subject to approval or clearance by the FDA prior to marketing in the United
States for commercial use. Similar regulations exist in most major foreign
markets, including the European Union and Asia. The process of obtaining
necessary regulatory approvals and clearances will be time-consuming and
expensive for us. If we do not receive required regulatory approval or
clearance to market our products, we will not be able to develop and
commercialize our products and become profitable, and the value of our common
stock will substantially decline.

                                      23

<PAGE>

   We are focusing our immediate product commercialization efforts on our
Embosphere Microspheres. In April 2000, we obtained clearance from the FDA to
market our Embosphere Microspheres in the United States for the embolization of
hypervascularized tumors and arteriovenous malformations. However, before we
can market Embosphere Microspheres in the United States for use in the
embolization of uterine fibroids, we will require either FDA clearance of a
premarket notification under Section 510(k) of the Federal Food, Drug, and
Cosmetic Act, which we refer to as a 510(k) notification, or the more time
consuming and expensive approval of a premarket approval application. We do not
expect to receive the required clearance or approval for specific labeling for
uterine fibroids until at least the last quarter of 2002, if at all. In order
to obtain FDA clearance or approval to market our product for this indication,
we are conducting clinical trials. We cannot assure you that the data resulting
from this study will be considered by the FDA to be sufficient to permit
clearance or approval. If we do not receive FDA clearance or approval to market
our Embosphere Microspheres in the United States in the treatment of uterine
fibroids, our business will be adversely affected.

If the FDA or other regulatory agencies place restrictions on, or impose
additional approval requirements with respect to, products we are then
marketing, we may incur substantial additional costs and experience delays or
difficulties in continuing to market and sell these products

   Even if the FDA grants us approval or clearance with respect to any of our
products, it may place substantial restrictions on the indications for which we
may market the product, which could result in lower revenues. The marketing
claims we are permitted to make in labeling or advertising regarding our
Embosphere Microspheres are limited to those specified in any FDA clearance or
approval. For example, because our products are not specifically approved for
labeling for use for uterine fibroids, we may not promote them for this use.
However, we believe that a majority of our revenue in the United States for the
years ended December 31, 2001 and 2000 was derived from the sale of Embosphere
Microspheres for use in uterine fibroid embolization.

   We may in the future make modifications to our Embosphere Microspheres or
their labeling which we determine do not necessitate the filing of a new 510(k)
notification. However, if the FDA does not agree with our determination, it
will require us to make additional 510(k) filings for the modification, and we
may be prohibited from marketing the modified product until we obtain FDA
clearance. Similarly, if we obtain premarket approval, we may not be able to
make product or labeling changes until we get FDA approval.

   Further, the FDA has classified our embolotherapy device into Class III,
which means that even though we have obtained clearance under Section 510(k) to
market the device for certain indications, the FDA could in the future
promulgate a regulation requiring premarket approval of the device under
Section 515 of the Federal Food, Drug, and Cosmetic Act to allow it to remain
on the market. We may experience difficulty in providing to the FDA sufficient
data for premarket approval in a timely fashion, if at all. In addition, the
FDA may require us to conduct a postmarket surveillance study which would
require us to track specific elements of patient experience with our Embosphere
Microspheres product after we have begun marketing it. If such a study revealed
previously unknown adverse events or an unexpectedly high rate of adverse
events, the FDA could place further restrictions on our marketing of the
device, or rescind our clearance or approval.

   Our products will be subject to continuing FDA requirements relating to
quality control, quality assurance, maintenance of records, documentation,
manufacturing, labeling and promotion of medical devices. We are also required
to submit medical device reports to the FDA to report device-related deaths or
serious injuries, as well as malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available.

If our clinical trials are not completed successfully, we will not be able to
develop and commercialize our products

   Although for planning purposes we forecast the timing of completion of
clinical trials, the actual timing can vary dramatically due to factors such as
delays, scheduling conflicts with participating clinicians and clinical
institutions, the rate of patient accruals and the uncertainties inherent in
the clinical trial process. In addition, we

                                      24

<PAGE>

may rely on academic institutions or clinical research organizations to
supervise or monitor some or all aspects of clinical trials involving our
products. Accordingly, we may have less control over the timing and other
aspects of these clinical trials than if we conducted them entirely on our own.
In addition, we will need FDA approval to initiate some clinical trials, and
the trials must be conducted in compliance with FDA regulations. Furthermore,
clinical or regulatory issues may occur that will compel us to temporarily or
permanently suspend our clinical trials. As a result of these factors, we or
third parties may not successfully begin or complete our clinical trials and we
may not make regulatory submissions or receive required regulatory approvals to
commence or continue our clinical trials in the time periods we have
forecasted, if at all. If we or third parties fail to commence or complete, or
experience delays in, any of our planned clinical trials, then we are likely to
incur additional costs and delays in our product development programs, and we
may not be able to successfully develop and commercialize our products. If we
incur costs and delays in our programs or if we do not successfully develop and
commercialize our products, our stock price could decline.

If we fail to comply with regulatory laws and regulations, we will be subject
to enforcement actions, which will affect our ability to market and sell our
products and may harm our reputation

   If we fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which could affect our
ability to develop, market and sell our products successfully and could harm
our reputation and lead to less acceptance of our products by the market. These
enforcement actions include:

    .  product seizures;

    .  voluntary or mandatory recalls;

    .  voluntary or mandatory patient or physician notification;

    .  withdrawal of product clearances or approvals;

    .  withdrawal of investigational device exemption approval;

    .  restrictions on, or prohibitions against, marketing our products;

    .  fines;

    .  restrictions on importation of our products;

    .  injunctions;

    .  civil and criminal penalties; and

    .  withdrawal of premarket approval or rescission of premarket notification
       clearance.

RISKS RELATING TO INTELLECTUAL PROPERTY

If we are unable to obtain patent protection for our products, their
competitive value could decline

   We may not obtain meaningful protection for our technology and products with
the patents and patent applications that we own or license relating to our
microsphere technology. In particular, the patent rights we possess or are
pursuing generally cover our technologies to varying degrees, and these rights
may not prevent others from designing products similar to or otherwise
competitive with our Embosphere Microspheres and other products commercialized
by us. For example, our U.S. patent directed to copolymers used to make our
present Embosphere Microspheres expired in June 2001. Two other U.S. patents
and their foreign equivalents are also directed to materials and methods for
performing embolization. To the extent that our competitors are able to design
products competitive with ours without infringing our intellectual property
rights, we may experience less market penetration with our products and,
consequently, we may have decreased revenues.

                                      25

<PAGE>

   We do not know whether competitors have similar United States patent
applications on file, since United States patent applications filed before
November 28, 2000 or for which no foreign patents will be sought are secret
until issued, and applications filed after November 28, 2000 are published
approximately 18 months after their earliest priority date. Consequently, the
United States Patent and Trademark Office could initiate interference
proceedings involving our owned or licensed United States patent applications
or issued patents. Further, there is a substantial backlog of patent
applications at the United States Patent and Trademark Office, and the approval
or rejection of patent applications may take several years.

   We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.

If we become involved in expensive patent litigation or other proceedings to
enforce our patent rights, we could incur substantial costs and expenses or
substantial liability for damages or be required to stop our product
development and commercialization efforts

   In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us and, as a result, our patents could be narrowed, invalidated
or rendered unenforceable by a court. Furthermore, we may be sued for
infringing on the intellectual property rights of others. We may find it
necessary, if threatened, to initiate a lawsuit seeking a declaration from a
court regarding the proprietary rights of others. Intellectual property
litigation is costly, and, even if we prevail, could divert management
attention and resources away from our business.

   The patent position of companies like ours generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. We may not prevail in any patent-related proceeding. If we
do not prevail in any litigation, we could be required to pay damages, stop the
infringing activity, or obtain a license. Any required license might not be
available to us on acceptable terms, or at all. In addition, some licenses may
be nonexclusive, and therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or are
unable to design around a patent, we may be prevented from selling some of our
products, which could decrease our revenue.

If any of our licenses to use third-party technologies in our products are
terminated, we may be unable to develop, market or sell our products

   We are dependent on various license agreements relating to each of our
current and proposed products that give us rights under intellectual property
rights of third parties. These licenses impose commercialization, sublicensing,
royalty, insurance and other obligations on us. Our failure, or any third
party's failure, to comply with the terms of any of these licenses could result
in us losing our rights to the license, which could result in us being unable
to develop, manufacture or sell products which contain the licensed technology.

RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING

We will continue to need additional funds, and if additional capital is not
available, we may have to limit, scale back or cease our operations

   We may need to raise additional funds to develop and commercialize our
products successfully. If we cannot raise more funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
workforce and license to others products or technologies that we otherwise
would seek

                                      26

<PAGE>

to commercialize ourselves. Although we are presently negotiating a credit line
with a bank, we currently have no committed source of capital in the United
States. We may seek additional funding through collaborative arrangements,
borrowing money or the sale of additional equity securities. We may not receive
additional funding on reasonable terms or at all. Any sales of additional
shares of our capital stock are likely to dilute our existing stockholders.

   Further, if we issue additional equity securities, the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of our common stock. Alternatively, we may borrow money from commercial
lenders, possibly at high interest rates, which will increase the risk of your
investment in us.

If operating results fluctuate significantly from quarter to quarter, then our
stock price may decline

   Our operating results could fluctuate significantly from quarter to quarter.
These fluctuations may be due to several factors including the timing and
volume of customer orders for our Embosphere Microspheres, customer
cancellations and general economic conditions. We also expect that our
operating results will be affected by seasonality, since we expect our revenues
to decline substantially in the third quarter of each year from the first two
quarters of each year because we do a significant percentage of our business in
the European Union, which typically experiences a slowdown of business during
August. Due to these fluctuations, our operating results in some quarters may
not meet the expectations of stock market analysts and investors. In that case,
our stock price would probably decline.

   In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be
able to improve our operating margins. In addition, we plan to significantly
increase operating expenses in the next several years. Failure to achieve
anticipated levels of revenue could therefore significantly harm our operating
results for a particular fiscal period.

RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS

If we experience manufacturing delays or interruptions in production, then we
may experience customer dissatisfaction and our reputation could suffer

   If we fail to produce enough products at our own manufacturing facility or
at a third-party manufacturing facility, we may be unable to deliver products
to our customers on a timely basis, which could lead to customer
dissatisfaction and could harm our reputation and ability to compete. We
currently produce all of our Embosphere Microspheres products in one
manufacturing facility in France and sub-contract a significant portion of the
final packaging process to an independent contract manufacturer. We would
likely experience significant delays or cessation in producing our products at
either of these facilities if a labor strike, natural disaster, local or
regional conflict or other supply disruption were to occur. If we are unable to
manufacture our products at our facility in France, or package certain of our
products with our contract manufacturer, we may be required to enter into
arrangements with one or more alternative contract manufacturing companies. We
have contingency plans to establish manufacturing in the United States in place
but we could encounter delays or difficulties establishing relationships with
alternate contract manufacturers or in establishing agreements on terms that
are favorable to us. In addition, if we are required to depend on third-party
manufacturers, our profit margins may be lower, which will make it more
difficult for us to achieve profitability.

   Also, manufacturers, including us, must adhere to the FDA's current Good
Manufacturing Practices regulations, which are enforced by the FDA through its
facilities inspection program. The manufacturers may not be able to comply or
maintain compliance with Good Manufacturing Practices regulations. If our
manufacturers fail to comply, their non-compliance could significantly delay
our receipt of premarket approval or result in FDA enforcement action,
including an embargo on imported devices. For a premarket approval device, if
we change our manufacturing facility or switch to a third-party manufacturer we
will be required to submit a premarket approval application supplement before
the change is implemented.

                                      27

<PAGE>

Because we rely on a limited number of suppliers, we may experience difficulty
in meeting our customers' demands for our products in a timely manner or within
budget

   We currently purchase key components of our Embosphere Microspheres from a
variety of outside sources. Some of these components may only be available to
us through a few sources. We generally do not have long-term agreements with
any of our suppliers.

   Our reliance on our suppliers exposes us to risks, including:

    .  the possibility that one or more of our suppliers could terminate their
       services at any time without penalty;

    .  the potential inability of our suppliers to obtain required components;

    .  the potential delays and expenses of seeking alternative sources of
       supply;

    .  reduced control over pricing, quality and timely delivery due to the
       difficulties in switching to alternative suppliers; and

    .  the possibility that one or more of our suppliers could fail to satisfy
       any of the FDA's required current Good Manufacturing Practices
       regulations.

   Consequently, in the event that our suppliers delay or interrupt the supply
of components for any reason, our ability to produce and supply our products
could be impaired, which could lead to customer dissatisfaction.

RISKS RELATING TO OUR FOREIGN OPERATIONS

If we are unable to meet the operational, legal and financial challenges that
we will encounter in our international operations, we may not be able to grow
our business

   Our operations are currently conducted primarily through our French
subsidiary. Furthermore, we currently derive a significant portion of our
revenue from the sale of our Embosphere Microspheres and other products in the
European

   Union. We are increasingly subject to a number of challenges, which
specifically relate to our international business activities. Our international
operations may not be successful if we are unable to meet and overcome these
challenges, which would limit the growth of our business. These challenges
include:

    .  failure of local laws to provide the same degree of protection against
       infringement of our intellectual property;

    .  protectionist laws and business practices that favor local competitors,
       which could slow our growth in international markets;

    .  potentially longer sales cycles to sell products, which could slow our
       revenue growth from international sales; and

    .  potentially longer accounts receivable payment cycles and difficulties
       in collecting accounts receivable.

Because we exchange foreign currency received from international sales into
U.S. dollars and are required to make foreign currency payments, we may incur
losses due to fluctuations in foreign currency translations

   A significant portion of our business is conducted in the European Union
Euro. We recognize foreign currency gains or losses arising from our operations
in the period incurred. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business will cause foreign currency
translation gains and losses, which may cause fluctuations in our future
operating results. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.

                                      28

<PAGE>

RISK RELATING TO OUR STOCK PRICE

Because the market price of our stock is highly volatile, investments in our
stock could rapidly lose their value and we may incur significant costs from
class-action litigation

   The market price of our stock is highly volatile. As a result, investments
in our stock could rapidly lose their value. In addition, the stock market
often experiences extreme price and volume fluctuations, which affect the
market price of many medical device companies and which are often unrelated to
the operating performance of these companies.

   Recently, when the market price of a stock has been as volatile as our stock
price has been, holders of that stock have occasionally instituted securities
class action litigation against the company that issued the stock. If any of
our stockholders were to bring a lawsuit of this type against us, even if the
lawsuit is without merit, we could incur substantial costs in defending the
lawsuit. The lawsuit could also divert the time and attention of our management.

Item 2.  PROPERTIES

   We currently lease office and manufacturing facilities in Rockland,
Massachusetts, and Roissy, France. Our Rockland, Massachusetts, office includes
approximately 13,000 square feet of corporate offices and laboratory space
pursuant to a five-year lease expiring in March of 2005. Our Roissy, France
facility includes approximately 18,150 square feet of office, laboratory and
manufacturing space and is leased through May 2010.

   At our facility in France, we produce our Embosphere Microspheres and some
ancillary disposable devices. Embosphere Microsphere production includes the
synthesis of raw materials and third party manufactured intermediary compounds.
For certain products currently sold in North America, final product packaging
is performed by a contracted third-party within the United States under Good
Manufacturing Practices manufacturing standards.

   We believe that our currently-leased facilities in Rockland, Massachusetts
and Roissy, France are suitable to meet our current requirements and that
suitable additional or substitute space will be available to us on commercially
reasonable terms, if needed in the future.

Item 3.  LEGAL PROCEEDINGS

   We are not a party to any material legal proceedings.

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

   No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the quarter ended
December 31, 2001.

                                      29

<PAGE>

EXECUTIVE OFFICERS

   Our executive officers, their respective ages as of December 31, 2001 and
their positions are as follows:

<TABLE>
<CAPTION>
  Name                Age Position
  ----                --- --------
  <S>                 <C> <C>
  John M. Carnuccio.. 48  Chief Executive Officer, President and Director
  Alain Brunier...... 57  President, Europe
  Jonathan R. McGrath 47  Vice President, Worldwide Research and Development
  Robert M. Palladino 47  Vice President and Chief Financial Officer
  Robert T. Phelps... 45  Vice President, U.S. Sales and Business Development
  Michael Miley...... 39  Vice President, U.S. Marketing
</TABLE>

   John M. Carnuccio, age 48, has served as a director of BioSphere since June
1999. From January 1999 until May 1999, Mr. Carnuccio served as Executive Vice
President of BioSphere and President of the Medical Products Business of
BioSphere. In May 1999, he was appointed President and Chief Executive Officer
of BioSphere. From 1979 to January 1999, Mr. Carnuccio served in a number of
capacities at Boston Scientific Corporation, a worldwide manufacturer of
medical devices for interventional medicine, most recently as Vice President,
Market Development, Interventional Gynecology, from April 1998 to January 1999
and as Vice President and General Manager, Microvasive Urology Division from
1992 to April 1998.

   Alain Brunier, age 57, has served as President, Europe since June 2000. From
1996 to May 2000, Mr. Brunier served as Managing Director, France & North
Africa of St. Jude Medical, a manufacturer of pacemakers and other medical
devices used by cardiologists. From 1990 to 1996, Mr. Brunier served as Vice
President and Chief Executive, Europe, Middle East & Africa of Telectronics, a
manufacturer of pacemakers and implantable defibrillators. Prior to 1990, Mr.
Brunier has also held senior management positions at SMAD - HEMO France and
Baxter-Travenol.

   Jonathan R. McGrath, age 47, has served as Vice President, Worldwide
Research and Development since August 1999. From 1995 to 1998, Mr. McGrath
served as Vice President of Research and Development at Urologix, a urological
device company. From 1990 to 1995, he served as Vice President of Research and
Development at Schneider/Pfizer, a cardiovascular device company. From 1987 to
1990, Mr. McGrath served as the Vice President of Product Development &
Operations at Harbor Medical, a surgical device company. From 1980 to 1987, Mr.
McGrath held various positions at Boston Scientific Corporation, most recently
as the Director of Metals Product Development.

   Robert M. Palladino, age 47, has served as Chief Financial Officer and Vice
President since December 1999. From March 1999 to December 1999, Mr. Palladino
served as Vice President and Chief Financial Officer of Coretek, Inc., a fiber
optics manufacturer. From 1995 to 1999, he served as Vice President of Finance
at C.P. Clare Corporation, a multinational electronics firm. He also served as
Assistant Treasurer at the Kendall Company, a health care manufacturer from
1991 to 1995.

   Robert T. Phelps, age 45, has served as the Vice President, U.S. Sales and
Business Development since August 1999. From 1998 to 1999 Mr. Phelps was
self-employed as a strategic sales consultant. From 1993 to 1998, Mr. Phelps
served as Vice President of Sales, Orthopedic Division at Johnson & Johnson, a
pharmaceutical company. From 1990 to 1993, Mr. Phelps served as the Group
Controller, Orthopedics Division at Johnson & Johnson.

   Michael Miley, age 39, has served as Vice President, U.S. Marketing, since
August 2001. From January 2001 to July 2001, Mr. Miley served as Senior
Director of Worldwide Market Development for BioSphere. From August 2000 to
December 2000, Mr. Miley was an independent consultant to BioSphere. From 1988
to 2000, Mr. Miley held various sales and marketing positions with Boston
Scientific Corporation, most recently as Director of Marketing, International -
Aneurysmal Therapies.

                                      30

<PAGE>

                                    PART II

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

   Our Common Stock has traded on the Nasdaq National Market from March 1994
through January 13, 1999 and from March 29, 2000 to the present. Our Common
Stock traded on the National Association of Securities Dealers, Inc. OTC
Bulletin Board from January 14, 1999 to March 28, 2000. As of March 15, 2002,
there were approximately 128 stockholders of record of our Common Stock.

   The following table shows the range of high and low sales prices per share
of our Common Stock as reported on the Nasdaq National Market or the OTC
Bulleting Board, as the case may be, for the last two fiscal years.

<TABLE>
<CAPTION>
                                                               2001
                                                           -------------
                                                            High   Low
                                                           ------ ------
          <S>                                              <C>    <C>
                         First Quarter.................... $19.81 $ 9.50
                         Second Quarter................... $19.00 $11.56
                         Third Quarter.................... $13.79 $ 6.96
                         Fourth Quarter................... $11.56 $ 7.00

                                                               2000
                                                           -------------
                                                            High   Low
                                                           ------ ------
                         First Quarter.................... $50.50 $ 6.00
                         Second Quarter................... $31.38 $12.25
                         Third Quarter.................... $18.63 $10.50
                         Fourth Quarter................... $14.56 $ 9.00
</TABLE>

   We have not paid any dividends on our Common Stock since our inception and
do not intend to pay any dividends in the foreseeable future.

                                      31

<PAGE>

Item 6.  SELECTED CONSOLIDATED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and related notes to
those statements and other financial information included elsewhere in this
Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                      2001     2000     1999     1998     1997
Year Ended December 31,                             --------  -------  -------  -------  -------
(In thousands, except per share amounts)
<S>                                                 <C>       <C>      <C>      <C>      <C>
Statement of Operations Data:
Revenue:
 Revenue from product sales........................ $  8,752  $ 3,961  $ 2,263  $   155  $   117
 License fees and collaboration revenue............      250       --        3       47       35
                                                    --------  -------  -------  -------  -------
   Total Revenue...................................    9,002    3,961    2,266      202      152
Costs and expenses:
 Costs of products sold............................    2,356    1,461    1,404       95       72
 Research and development..........................    4,755    2,517      968       34       34
 Selling, general and administrative...............   12,839    7,847    4,003    1,364    1,195
 Stock-based compensation to non-employees.........       --    1,261       --       --       --
                                                    --------  -------  -------  -------  -------
   Total costs and expenses........................   19,950   13,086    6,375    1,493    1,301
                                                    --------  -------  -------  -------  -------
Loss from operations...............................  (10,948)  (9,125)  (4,109)  (1,291)  (1,149)
Other income (expense):............................
 Interest income...................................      794      715      234       30       32
 Interest expense..................................      (31)     (54)    (134)    (222)     (72)
 Other.............................................     (160)      17       15       --       --
                                                    --------  -------  -------  -------  -------
Net loss from continuing operations................ $(10,345) $(8,447) $(3,994) $(1,483) $(1,189)
Net loss from discontinued operations..............       --       --     (539)    (330)  (2,615)
                                                    --------  -------  -------  -------  -------
Net loss........................................... $(10,345) $(8,447) $(4,533) $(1,813) $(3,804)
                                                    ========  =======  =======  =======  =======
Basic and diluted net loss per common share from
  continuing operations............................ $  (0.89) $ (0.87) $ (0.47) $ (0.17) $ (0.14)
Basic and diluted net loss per common share from
  discontinued operations..........................       --       --    (0.06)   (0.04)   (0.31)
                                                    --------  -------  -------  -------  -------
Basic and diluted net loss per common share........ $  (0.89) $ (0.87) $ (0.53) $ (0.21) $ (0.45)
Basic and diluted weighted average number of common
  shares outstanding...............................   11,642    9,700    8,456    8,437    8,423
                                                    --------  -------  -------  -------  -------

                                                      2001     2000     1999     1998     1997
Balance Sheet Data as of December 31,               --------  -------  -------  -------  -------
(In thousands)
Cash, cash equivalents and marketable securities... $ 23,119  $15,276  $ 5,368  $ 2,235  $ 2,370
Working capital....................................   22,789   14,136    4,490    2,552    3,835
Total assets.......................................   29,984   19,306    7,496   12,664   12,787
Debt and minority interest acquisition obligation..      303      575      945       82      164
Stockholders' equity...............................   25,873   15,686    4,588    9,136   10,716
                                                    --------  -------  -------  -------  -------
</TABLE>

                                      32

<PAGE>

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS

   The following discussion of our financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and the related Notes included elsewhere in this report. Except for
historical information contained herein, matters discussed in this report
constitute forward-looking statements. We use the words "expects," "estimates,"
"intends," "plans," "should" and similar expressions to identify such
forward-looking statements. Actual results could differ materially from those
set forth in the forward-looking statements. In light of the substantial risks
and uncertainties inherent in all future projections, our inclusion of
forward-looking statements in this report should not be regarded as
representations by us that our objectives or plans will be achieved. Many
factors could cause our actual results, performance or achievements to differ
materially from those in the forward-looking statements. Reference is made in
particular to the risk factors set forth in the subsection Item 1.
Business--"Risk Factors That May Affect Future Operating Results" to this
report and the discussions set forth below in this report under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

  Overview

   We are pioneering the use of our proprietary bio-engineered acrylic beads,
known as microspheres, for medical applications using embolotherapy techniques
and also to develop potential applications in several non-embolotherapy
applications. Embolotherapy is a minimally invasive procedure in which embolic
materials, such as our microspheres, are delivered through a catheter into the
blood vessels to inhibit blood flow to tumors or vascular defects or to control
blood loss presurgically. Our initial product, Embosphere Microspheres, is
targeted for the treatment of hypervascularized tumors and arteriovenous
malformations. Hypervascularized tumors are tumors that have a large number of
blood vessels feeding them and include certain tumors affecting the brain and
spinal cord, tumors in the uterus, known as uterine fibroids, and tumors
associated with primary liver cancer. By selectively blocking the tumor's blood
supply, embolotherapy is designed to cause the tumor to shrink and necrose.
Based on preliminary research, we believe that our microsphere technology
platform can also be adapted to deliver drugs, living tissue or genetic
material to targeted sites.

   BioSphere Medical, Inc. was originally incorporated in 1993 under the name
BioSepra, Inc., as a chromatography media company. During 1999, we
strategically refocused our business on the development and commercialization
of our proprietary microspheres for medical applications. In February 1999, we
acquired a 51% ownership interest in Biosphere Medical S.A., a French societe
anonyme, which we refer to as BMSA. Between April 2000 and November 2001, we
acquired the remaining ownership interest in BMSA. BMSA retains the license to
the embolotherapy device that is the main focus of our business. In May 1999,
we sold substantially all of our assets relating to our former core business,
chromatography, and changed our name to BioSphere Medical, Inc. As of December
31, 2001, Sepracor Inc., a specialty pharmaceutical company, beneficially owned
approximately 25% of our outstanding common stock.

   In April 2000, we received clearance from the United States FDA for
embolization of hypervascularized tumors and arteriovenous malformations,
excluding specific marketing approval for the uterine fibroids. In December
2000, we commenced our pivotal Phase II clinical testing, under an
investigational device exemption, of the safety and effectiveness of treating
uterine fibroids by uterine artery embolization with our Embosphere
Microspheres. An investigational device exemption is a regulatory exemption
granted by the FDA to medical device manufacturers for the purpose of
conducting clinical studies. We intend, pending FDA clearance or approval for
this indication, to promote our microspheres for the treatment of uterine
fibroids. We do not anticipate receiving this clearance or approval before the
last fiscal quarter of 2002, if at all.

   We received CE mark approval of our Embosphere Microspheres product in the
European Union in 1997. CE mark approval is a certification granted by European
regulatory bodies, or by some manufacturers with satisfactory quality systems,
that substantiates the compliance of products with specific standards of
quality and/or safety. This approval is generally required prior to the
commercialization of a medical device in the European Union. In January 2000,
we received marketing approval of our Embosphere Microspheres product in
Australia and Canada.

                                      33

<PAGE>

   Our revenue is primarily generated from product sales of Embosphere
Microspheres in the United States, European Union, Australia and Canada.
Product revenues also include the sale of barium and other ancillary products
manufactured by us or by third parties. Although we have not received FDA
clearance or approval to market our Embosphere Microspheres for the specific
use in the treatment of uterine fibroids, we believe that a majority of our
revenue in the United States for the years ended December 31, 2001 and 2000 was
derived from the sale of Embosphere Microspheres for use in uterine fibroid
embolization.

   During 2000, we established two wholly owned subsidiaries to pursue the
development of other microsphere technologies. In April 2000, we established
Biosphere Medical Japan, Inc., a Delaware corporation, to develop and
commercialize Embosphere Microspheres as well as Hepasphere SAP Microspheres in
Asia. In December 2000, we established BSMD Ventures, Inc., also a Delaware
corporation, to explore and develop non-embolotherapy applications with a
specific focus on tissue engineering uses.

   We have experienced operating losses in each fiscal period since our
inception. As of December 31, 2001, we had approximately $23.1 million in cash
and short-term marketable securities and an accumulated deficit of
approximately $54.9 million. In connection with the execution of our business
plan, we expect to experience continued losses for the next fiscal year. The
sale of our former chromatography business in 1999 has been presented in the
financial statements in accordance with discontinued operations accounting
principles. Accordingly, the results of all discontinued operations have been
excluded from the continuing operations and presented separately in the
accompanying selected financial data.

  Critical Accounting Policies

   The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure at the date of our
financial statements. Our significant accounting policies are summarized in
Note B to our consolidated financial statements. The significant accounting
policies which we believe are the most critical in gaining full understanding
and evaluating our reported financial results include the following:

  Revenue Recognition

   Revenues from product sales are recognized when requested goods are shipped
to customers and collection is considered probable. Management establishes
reserves for potential sales returns and evaluates, on a monthly basis, the
adequacy of those reserves based upon realized experience. Under our current
policy, only those products on a customers' initial order qualify for credit
returns. To date, returns have been minimal and immaterial. While such returns
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same return rates
that we have in the past. Any significant change in product satisfaction and
any resulting credit returns could have a material adverse impact on our
operating results for the period or periods in which such returns materialize.

  Accounts Receivable

   We continuously monitor collections and payments from our customers and
maintain a provision for estimated credit losses based upon our historical
payment experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our
expectations and the provisions established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past.
Substantially all of our receivables are due from hospitals, distributors,
health care clinics, and managed care systems located throughout the United
States, Australia, Canada, and Europe. A significant portion of products sold,
both foreign and domestic, are ultimately funded through government
reimbursement programs. As a consequence, changes in these programs can have an
adverse impact on liquidity and profitability of our customer base.

                                      34

<PAGE>

  Inventories

   We value our inventory at the lower of the actual cost to purchase or
manufacture the inventory. We regularly review inventory quantities in process
and on hand and record a provision for production loss and obsolete inventory
based primarily on actual loss experience and on our estimated forecast of
product demand. Therefore, significant increases in the demand for our products
could result in a short-term increase in production loss while a significant
decrease in demand could result in an increase in the amount of excess
inventory quantities on hand. In the future, if our inventory is determined to
be overvalued, we would be required to recognize such costs in our costs of
goods sold at the time of such determination. Likewise, if our inventory is
determined to be undervalued, we would have over-reported our costs of goods
sold in previous periods and would be required to recognize a reduced per unit
cost at the time of sale. Therefore, although we make every effort to ensure
the accuracy of our production process and forecasts of future product demand,
any significant unanticipated changes in production yield or product demand
could have a significant impact on the value of our inventory and our reported
operating results.

  Deferred Taxes

   We use the asset and liability accounting method whereby deferred tax assets
and liabilities are recognized based on temporary differences between the
financial statements and tax bases of assets and liabilities using current
statutory tax rates. A valuation allowance against net deferred tax assets is
recorded if, based on the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. Management
evaluates, on a quarterly basis, the ability to recover the deferred tax assets
and the level of the valuation allowance. Due to the size of our net operating
loss carryforward in relation to our history of unprofitable operations we have
not recognized any of our net deferred tax assets. We currently provide for
income taxes only to the extent that we expect to pay cash taxes (primarily
foreign subsidiary and certain state minimum net worth tax) for current income.
However, future improvements in operational performance could result in the
increased certainty of our ability to apply our deferred tax assets against
taxable income which, could in turn, result in a significant impact on the
value of our deferred tax assets and our reported operating results.

  Results of Operations

  Years Ended December 31, 2001, 2000 and 1999

   Total revenue increased to $9.0 million for the year ended December 31, 2001
from $3.96 million for the same period in 2000 and $2.27 million in 1999. The
$5.04 million increase from 2000 to 2001, as well as the $1.69 million increase
from 1999 to 2000 is primarily due to an increase in sales of Embosphere
Microsphere in the United Sates following receipt of FDA 510(k) clearance and
commercial introduction in April 2000. North American revenues increased 394%
from $1.27 million in 2000 to $6.27 million in 2001. No product sales were
recorded in North America during 1999. Included in our 2001 consolidated and
North American revenue was $250,000 in collaboration revenue recognized through
a supply agreement with a third party. We expect that sales of our Embosphere
Microspheres will continue to account for a majority of our revenue in 2002.

   Costs of products sold for the year ended December 31, 2001 was $2.36
million, compared to $1.46 million in 2000 and $1.40 million in 1999,
representing 27%, 37%, and 62% of product revenue, respectively. The $895,000
increase in the cost of product revenues in the year ended December 31, 2001
was due to increased sales volume offset by the effects of a shift in product
sales to the Embosphere Microsphere products which have a higher gross profit
margin than our other products.

   Gross margin for the year ended December 31, 2001 was $6.65 million or 73%
of product revenues compared with $2.5 million or 63% of product revenues for
the same period in 2000 and $862,000 or 38% of product revenues in 1999. The
increase in gross margin for each of the years ended December 31, 2001 and 2000
was attributable to the effects of a shift in the majority of sales to the
higher margin Embosphere

                                      35

<PAGE>

Microsphere products, predominantly in North America. Also contributing to the
gross margin improvement during 2001 and 2000 was the effect of improved
manufacturing efficiencies and process improvements realized at our French
production facility.

   Research and development expenses increased to $4.76 million in 2001 from
$2.52 million in 2000 and $968,000 in 1999. The $2.24 million increase from
2000 to 2001 as well as the $1.55 million increase in research and development
expenses from 1999 to 2000 was due primarily to clinical trial and regulatory
submission costs incurred relative to seeking regulatory approval for
Embosphere Microsphere and EmboGold Microspheres in the United States. The 89%
increase from 2000 to 2001 was also due to the final process development and
validation costs incurred with respect to the release of our EmboGold
Microspheres product line combined with additional salary and staffing expense
in the United States. We anticipate future research and development expenses
will increase as a result of the advancement of Embosphere Microsphere products
through our pivotal Phase II clinical trial for uterine artery embolization of
uterine fibroids, which was initiated in October 2000. The Phase II trial was
approved by the FDA under an investigational device exemption. Additional
expenses are also expected to result from the continued development and
enhancement of our current products and product candidates.

   Selling, general and administrative expenses, net of non-cash, non-employee
stock option acceleration charges, increased to $12.84 million for the year
ended December 31, 2001 from $7.85 million in 2000 and $4.0 million in 1999.
The $4.99 million and $3.84 million increases in selling, general and
administrative expenses from 2000 to 2001 and from 1999 to 2000, respectively,
were primarily due to the implementation of our product commercialization plan,
including salary and other related costs associated with increased personnel,
sales and marketing, investor relations and all other expenses associated with
developing and introducing a new product platform in both the North American
and European territories. Future selling, general and administrative expenses
are expected to increase consistent with the growth in our revenue and the
embolization industry in general.

   In connection with stock options previously issued to non-employee advisors,
we recognized, in accordance with Emerging Issues Task Force Abstract 96-18
"Accounting for equity instruments that are issued to other than employees for
acquiring, or in conjunction with selling, goods or services" (EITF 96-18),
$1.26 million in non-employee compensation expense during the year ended
December 31, 2000. The non-cash stock-based compensation charge has been
presented as a separate line item within the Statement of Operations for the
year ended December 31, 2000. The $1.26 million aggregate fair value of the
non-employee stock options was derived from the Black-Scholes option-pricing
model.

   Interest income was $794,000 in the year ended December 31, 2001 compared to
$715,000 in 2000 and $234,000 in 1999. The growth in interest income in each of
the sequential years was due to the continued increase in the average-daily
invested cash balances offset, to a limited extent, by reduced rates of return,
particularly during fiscal 2001. Increased invested cash primarily resulted
from the May 1999 sale of our discontinued chromatography operations resulting
in net proceeds of approximately $9.6 million along with the net proceeds of
$5.9 million, $11.8 million and $20.4 million from our February 2000, July 2000
and July 2001 equity placements, respectively.

   Interest expense decreased from $134,000 in 1999 to $54,000 in 2000 and to
$31,000 in 2001. This sequential decrease for each of 2001 and 2000 was
primarily due to the retirement of our debt in the second quarter of 1999.
Interest expense during 2001 primarily resulted from the cost of financing
operational cash flow as well as certain capital leases. Interest expense in
2000 resulted primarily from non-cash interest charges generated from the
potential obligation to purchase the remaining outstanding minority interest in
BMSA. See Note C to the consolidated financial statements.

   Other income and (expense) increased from $15,000 in 1999 to $17,000 in
2000, then decreased to ($160,000) in 2001. Other income and expense is
primarily comprised of the foreign currency exchange gains and losses and to a
limited extent, gains on the sale of idle assets. The $177,000 change from 2000
to 2001 was primarily due to foreign currency losses associated with our
inter-company trade.

                                      36

<PAGE>

   We have not recorded any tax benefit resulting from our operating losses as
management believes the ability to realize and benefit against future taxable
income is uncertain.

   Net loss from continuing operations increased to $10.35 million for the year
ended December 31, 2001 compared to $8.45 million in 2000 and $3.99 million in
1999. The increases are a direct result of the implementation of our strategic
plan to develop, introduce and commercialize our EmboSphere Microspheres,
EmboGold Microspheres, and other product lines both in the North American and
European markets.

  Liquidity and Capital Resources

   We have historically funded our operations from product sales, net proceeds
provided by public and private equity offerings, funds provided by the sale of
our former chromatography business, funds provided by Sepracor, bank financing,
equipment financing leases and to a lesser extent, the exercise of stock
options. As of December 31, 2001, we had $23.12 million of cash, cash
equivalents and marketable securities, an increase of $7.84 million from $15.28
million as of December 31, 2000. This increase primarily resulted from the net
proceeds of $20.4 million from our public offering of common stock in July 2001
offset, to a limited extent, by cash used to fund operations. As of December
31, 2001, we had $22.79 million in working capital. We expect to finance our
2002 operations through product sales and existing cash balances.

   For the year ended December 31, 2001, we used $10.77 million in operating
cash primarily to fund our sales, marketing, research and product development
activities and to finance working capital requirements. Cash used in operations
is expected to decrease over the next twelve month period as anticipated
increases in product revenues are expected to offset the Company's operational
and product development expenditures.

   Net cash used in investing activities was $14.75 million for the year ended
December 31, 2001 and primarily represents our investment of cash in excess of
current operational needs in marketable securities. We also used $953,000 in
connection with the purchase of the remaining outstanding equity interest in
BMSA. From this step-acquisition, our total ownership interest in BMSA
increased from 85% to 100%. The remaining cash used in investing activities of
approximately $1.25 million was used to purchase property and equipment
relating to establishing full manufacturing capabilities at BMSA and to obtain
office equipment and furnishings in our corporate headquarters in Rockland,
Massachusetts. We anticipate future capital expenditures will increase over the
next twelve-month period consistent with our plan to expand our manufacturing,
sales and marketing presence in the United States, Europe, the Far East,
Australia and Canada. If available on favorable terms, we expect to finance
certain future fixed asset acquisitions through leasing arrangements.

   Net cash provided by financing activities was $20.78 million for the year
ended December 31, 2001. On July 3, 2001, we completed an underwritten public
offering of 4.0 million shares of our common stock at $11.00 per share. Of the
4.0 million shares of common stock offered, we sold 2.0 million shares and
Sepracor sold 2.0 million shares. Our net proceeds were approximately $20.4
million. Proceeds from the public offering will be used for working capital and
general corporate purposes, including product commercialization and research
and development. On August 6, 2001, Sepracor sold an additional 600,000 shares
of our common stock pursuant to the exercise of the underwriter's
over-allotment option. As a result of this offering, including the
over-allotment, Sepracor's beneficial ownership interest in our outstanding
common stock decreased from approximately 55% to approximately 25%. In both
February 2000 and in July 2000, we completed private-equity placements
resulting in the issuance of an aggregate of 1,868,787 shares of common stock
for net proceeds of approximately $17.72 million. The February 2000
private-equity issuance included warrants to purchase a total of 163,468 shares
of common stock with an exercise price of $20 per share. Cash provided by
financing activities also includes $149,000 and $558,000 received in connection
with the sale of common stock through the exercise of options granted under our
incentive stock option plans during the years ended December 31, 2001 and 2000,
respectively.

   We believe that our existing cash and other working capital, including the
approximate $23.12 million in cash, cash equivalents and marketable securities
that we have as of December 31, 2001, will be sufficient to fund our operating
and capital requirements, as currently planned, at least through the next
twelve-month period.

                                      37

<PAGE>

However, our cash requirements may vary materially from those now planned due
to changes in anticipated research and development efforts, the scope and
results of pre-clinical and clinical testing, changes in the focus and
direction of our research and development programs, competitive and
technological advances, the timing and results of FDA regulatory review, the
market's acceptance of any approved products, and other factors.

   We expect to incur substantial additional costs, including costs related to
ongoing research and development activities, pre-clinical studies, clinical
trials, the expansion of our manufacturing, laboratory and administrative
functions as well as costs relating to further commercialization activities. We
may also need additional funds for possible strategic acquisitions of
synergistic businesses, products and/or technologies. These additional funds
may be raised from time to time through additional public or private sales of
equity, through borrowings, or through other financings. There are no
assurances that we will be able to obtain any additional funding that may be
required on acceptable terms, if at all.

  Borrowing Arrangement

   In March 2000, BMSA entered into a (Euro)152,450 ($135,000 equivalent as of
December 31, 2001) term loan with a French national bank that is payable over
five years and accrues interest at 5.4% per annum. The total loan balance
outstanding as of December 31, 2001 was approximately (Euro)104,000 or $92,000.

   As a co-borrower under Sepracor's commercial bank facility, we had
availability to borrow up to $2.0 million through a line of credit agreement.
As a result of our July 2001 underwritten public offering, Sepracor's ownership
of our outstanding common stock was reduced to less than 50%, thereby
automatically terminating the co-borrowing arrangement. Because we are no
longer a party to the loan agreement, which had no outstanding balance as of
December 31, 2001, the bank released Sepracor's guaranty of our obligations to
the bank and Sepracor terminated its related security interest in our assets.

  Commitments

   As of December 31, 2001, we have entered into two operating leases pursuant
to the lease of our facilities in Rockland, Massachusetts and Roissy, France.
The Rockland, Massachusetts lease expires in March of 2005 and the Roissy,
France operating lease expires in May 2010. During 2001, we entered into
several non-cancelable capital lease agreements with various
equipment-financing companies, in connection with the acquisition of certain
manufacturing and computer equipment. The leases have initial terms of 30 to 60
months with interest rates of 5.4% to 13.4%. All corresponding leased equipment
serves as pledged capital with respect to each respective capital lease
agreement.

   Future cash payments, including interest, under contractual obligations in
effect as of December 31, 2001, are as follows:

<TABLE>
<CAPTION>
                                          Term  Operating Capital
       Period                             Loans  Leases   Leases  Total
       ------                             ----- --------- ------- ------
                                                  (In thousands)
       <S>                                <C>   <C>       <C>     <C>
       2002.............................. $ 31   $  502    $ 76   $  609
       2003..............................   31      501      76      608
       2004..............................   31      480      76      587
       2005..............................    7      223      69      299
       2006..............................   --      139      47      186
       Thereafter........................   --      475      --      475
                                          ----   ------    ----   ------
       Total contractual cash commitments $100   $2,320    $344   $2,764
</TABLE>

                                      38

<PAGE>

  Related Party Transactions

   The Company subcontracts a key portion of its final packaging processes to
an independent third-party contract manufacturer. If such services were not
available at a reasonable cost from our existing contract manufacturer, we
would need to obtain new contracts with new providers or incur the expense of
internalizing the packaging process. Such a conversion could cause us to incur
additional expense in validating the process under FDA Good Manufacturing
Practices, delay the availability of finished product and limit commercial
sales of our products.

   Receivable from related party represents the portion of offering expenses
that Sepracor has agreed to pay as a result of Sepracor's participation in the
July 2001 public offering of 4.0 million shares of our common stock. Total
related party receivables are offset by amounts due to Sepracor for certain
administrative services provided to us on an arms-length basis by Sepracor as
of December 31, 2001. Total administrative fees charged for services rendered
in the year ended December 31, 2001 were not material. All receivable from
related party balances were received in full in February 2002.

   Sepracor is entitled to certain rights with respect to the registration
under the Securities Act of a total of 1,400,000 shares of our common stock.
These rights provide that Sepracor may require us to register shares, subject
to certain conditions and limitations. As of December 31, 2001, Sepracor has
not exercised these rights.

   As of December 31, 2001, the Company is not a party to any unconsolidated
special purpose entity arrangements.

  Recent Accounting Pronouncements

   In 2002, Statement of Financial Accounting Standards or SFAS, No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we
will cease to amortize $1.44 million of goodwill. During 2001, we recorded
approximately $177,000 of amortization within selling, general and
administrative expense and would have recorded an estimated $200,000 of
amortization during 2002. In lieu of periodic amortization, we are required to
perform an initial impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We expect to complete our initial review over the
next six-month period.

   We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment charge will not be recorded.

Item 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Derivative Financial Instruments, Other Financial Instruments, and Derivative
  Commodity Instruments

   As of December 31, 2001, we did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required under Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 107 "Disclosures About Fair
Value of Financial Instruments."

  Primary Market Risk Exposures

   Our primary market risk exposures are in the area of foreign currency
exchange rate risk. We are exposed to currency exchange rate fluctuations
related to our operations in France. Operations in France are denominated in
the euro. We have not engaged in formal currency hedging activities to date,
but do have a limited natural hedge in that our expenses in France are
primarily denominated in local currency, and we also attempt to minimize
exchange rate risk by converting non-U.S. currency to U.S. dollars as often as
practicable. We generally view

                                      39

<PAGE>

our investment in foreign subsidiaries with a functional currency other than
our reporting currency as long-term. Our investment in foreign subsidiaries is
sensitive to fluctuations in foreign currency exchange rates. The effect of a
change in foreign exchange rates on our net investment in foreign subsidiaries
is reflected in the "Other accumulated comprehensive loss" component of
stockholders' equity. A ten-percent depreciation in year-end 2001 and 2000
functional currencies relative to the U.S. dollar would not result in a
material reduction of stockholders' equity. Because our foreign currency
exchange rate risk is not material, no quantitative tabular disclosure has been
provided.

Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

   To the Board of Directors and Stockholders of BioSphere Medical, Inc. and
subsidiaries:

   We have audited the accompanying consolidated balance sheets of BioSphere
Medical, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BioSphere Medical, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted
in the United States.

                                          /S/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 17, 2002.

                                      40

<PAGE>

                            BIOSPHERE MEDICAL, INC.

                          CONSOLIDATED BALANCE SHEETS
               (In thousands except share and per share amounts)

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                   ------------------
                                                                                     2001      2000
                                                                                   --------  --------
<S>                                                                                <C>       <C>
                                      ASSETS
Current assets:
 Cash and cash equivalents........................................................ $ 10,569  $ 15,276
 Marketable securities............................................................   12,550        --
 Accounts receivable, net of allowance for doubtful accounts of $105 and $29 as of
   December 31, 2001 and 2000, respectively.......................................    1,809     1,142
 Inventories, net.................................................................    1,111       639
 Receivable from related party....................................................      276        --
 Prepaid and other current assets.................................................      282       124
                                                                                   --------  --------
   Total current assets...........................................................   26,597    17,181
 Property and equipment, net......................................................    1,570       694
 Goodwill, net....................................................................    1,443     1,144
 Other assets.....................................................................      374       287
                                                                                   --------  --------
   Total assets................................................................... $ 29,984  $ 19,306
                                                                                   ========  ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable................................................................. $    771  $    924
 Accrued compensation.............................................................    1,383       994
 Other accrued expenses...........................................................    1,569     1,086
 Payable to related party.........................................................       --        14
 Current portion of long-term debt and capital lease obligations..................       85        27
                                                                                   --------  --------
   Total current liabilities......................................................    3,808     3,045
Minority interest acquisition obligation..........................................       --       478
Long-term debt and capital lease obligations......................................      303        97
                                                                                   --------  --------
   Total liabilities..............................................................    4,111     3,620
Commitments (Note I)
Stockholders' equity:
 Preferred stock, $0.01 par value, 1,000,000 shares authorized....................       --        --
 Common stock, $0.01 par value, 25,000,000 shares authorized; 12,721,000 and
   10,595,000 shares issued and outstanding as of December 31, 2001 and 2000,
   respectively...................................................................      127       106
Additional paid-in capital........................................................   80,583    60,100
Accumulated deficit...............................................................  (54,860)  (44,515)
Accumulated other comprehensive income (loss).....................................       23        (5)
                                                                                   --------  --------
   Total stockholders' equity.....................................................   25,873    15,686
                                                                                   --------  --------
   Total liabilities and stockholders' equity..................................... $ 29,984  $ 19,306
                                                                                   ========  ========
</TABLE>

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

                                      41

<PAGE>

                            BIOSPHERE MEDICAL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                                                       -------------------------------
                                                                          2001         2000      1999
                                                                        --------      -------  -------
<S>                                                                    <C>           <C>       <C>
Revenues:
 Product sales........................................................ $  8,752      $ 3,961   $ 2,266
 Collaboration revenue................................................      250           --        --
                                                                        --------      -------  -------
   Total revenue......................................................    9,002        3,961     2,266
                                                                        --------      -------  -------
Costs and expenses:
 Costs of product sales...............................................    2,356        1,461     1,404
 Research and development.............................................    4,755        2,517       968
 Selling, general and administrative (1)..............................   12,839        7,847     4,003
 Stock-based compensation to non-employees............................       --        1,261        --
                                                                        --------      -------  -------
   Total costs and expenses...........................................   19,950       13,086     6,375
                                                                        --------      -------  -------
Loss from operations..................................................  (10,948)      (9,125)   (4,109)
Interest income.......................................................      794          715       234
Interest expense......................................................      (31)         (54)     (134)
Other (expense) / income, net.........................................     (160)          17        15
                                                                        --------      -------  -------
Loss from continuing operations.......................................  (10,345)      (8,447)   (3,994)
Loss from discontinued operations.....................................       --           --      (539)
                                                                        --------      -------  -------
   Net loss........................................................... $(10,345)     $(8,447)  $(4,533)
                                                                        ========      =======  =======
Basic and diluted net loss per common share:
 Continuing operations................................................ $  (0.89)     $ (0.87)  $ (0.47)
 Discontinued operations..............................................       --           --     (0.06)
                                                                        --------      -------  -------
   Total.............................................................. $  (0.89)     $ (0.87)  $ (0.53)
                                                                        ========      =======  =======
Basic and diluted weighted average number of common shares outstanding   11,642        9,700     8,456
                                                                        ========      =======  =======
</TABLE>

(1) Excludes compensation charges relating to the issuance of stock options to
    non-employees.



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

                                      42

<PAGE>

                            BIOSPHERE MEDICAL, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                        AND COMPREHENSIVE INCOME (LOSS)
                                (In thousands)

<TABLE>
<CAPTION>
                                  Common Stock
                                  -------------
                                                                        Accumulated
                                                Additional                 Other         Total
                                                 Paid-in   Accumulated Comprehensive Stockholders'
                                  Shares Amount  Capital     Deficit   Income (Loss)    Equity
                                  ------ ------ ---------- ----------- ------------- -------------
<S>                               <C>    <C>    <C>        <C>         <C>           <C>
Balance at December 31, 1998       8,456  $ 84   $40,587    $(31,535)      $ --        $  9,136
 Comprehensive loss:
   Net loss......................     --    --        --      (4,533)        --          (4,533)
   Translation adjustment........     --    --        --          --        (15)            (15)
                                                                                       --------
   Total comprehensive loss......     --    --        --          --         --          (4,548)
                                  ------  ----   -------    --------       ----        --------
Balance at December 31, 1999       8,456    84    40,587     (36,068)       (15)          4,588
 Comprehensive loss:
   Net loss......................     --    --        --      (8,447)        --          (8,447)
   Translation adjustment........     --    --        --          --         10              10
                                                                                       --------
   Total comprehensive loss......                                                        (8,437)
 Issuance of common stock, net
   (Note L)......................  1,869    19    17,697          --         --          17,716
 Issuance of common stock under
   employee benefit and incentive
   plans.........................    270     3       555          --         --             558
 Stock-based compensation to
   non-employee..................     --    --     1,261          --         --           1,261
                                  ------  ----   -------    --------       ----        --------
Balance at December 31, 2000      10,595   106    60,100     (44,515)        (5)         15,686
 Comprehensive loss:
   Net loss......................     --    --        --     (10,345)        --         (10,345)
   Translation adjustment........     --    --        --          --         28              28
                                                                                       --------
   Total comprehensive loss......                                                       (10,317)
 Issuance of common stock, net
   (Note L)......................  2,000    20    20,334          --         --          20,354
 Issuance of common stock under
   employee benefit and incentive
   plans.........................    126     1       149          --         --             150
                                  ------  ----   -------    --------       ----        --------
Balance at December 31, 2001      12,721  $127   $80,583    $(54,860)      $ 23        $ 25,873
                                  ------  ----   -------    --------       ----        --------
</TABLE>


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

                                      43

<PAGE>

                            BIOSPHERE MEDICAL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                               For the Years Ended December 31,
                                                                               -------------------------------
                                                                                  2001         2000      1999
                                                                                --------      -------  -------
<S>                                                                            <C>           <C>       <C>
Cash flows from operating activities:
 Net loss..................................................................... $(10,345)     $(8,447)  $(4,533)
 Less: Net loss from discontinued operations..................................       --           --      (539)
                                                                                --------      -------  -------
 Net loss from continuing operations..........................................  (10,345)      (8,447)   (3,994)
                                                                                --------      -------  -------
 Adjustments to reconcile net loss from continuing operations to net cash used
   in operating activities:
   Provision for doubtful accounts............................................       83           37        --
   Depreciation and amortization..............................................      523          279       102
   Non-cash interest on minority interest obligation..........................       --           19        --
   Foreign exchange gain......................................................       --          (85)       --
   Non-cash stock-based compensation for non-employees........................       --        1,261        --
   Changes in operating assets and liabilities:
     Accounts receivable......................................................     (787)        (615)      121
     Inventories..............................................................     (527)        (250)        5
     Prepaid and other current assets.........................................     (254)        (271)        4
     Related party receivable / payable.......................................     (289)         (54)     (362)
     Accounts payable.........................................................     (233)         308       103
     Accrued compensation and other expenses..................................    1,056          801       282
                                                                                --------      -------  -------
 Net cash used in operating activities........................................  (10,773)      (7,017)   (3,739)
                                                                                --------      -------  -------
Cash flows from investing activities:
 Purchase of property and equipment...........................................   (1,245)        (533)     (382)
 Purchase of marketable securities............................................  (12,550)          --        --
 Cash paid for step acquisitions of Biosphere Medical, S.A....................     (953)        (950)       --
 Increase in other assets.....................................................       --           --        (1)
 Cash acquired through acquisition of 51% of Biosphere Medical, S.A...........       --           --       283
                                                                                --------      -------  -------
 Net cash used in investing activities........................................  (14,748)      (1,483)     (100)
                                                                                --------      -------  -------
Cash flows from financing activities:
 Proceeds from issuance of common stock, net..................................   20,354       17,716        --
 Proceeds from stock options exercised........................................      150          558        --
 Net repayments under line of credit agreements...............................       --           --    (2,000)
 Net proceeds (payments) on long-term debt and capital leases.................      271          124      (664)
                                                                                --------      -------  -------
 Net cash provided by (used in) financing activities..........................   20,775       18,398    (2,664)
                                                                                --------      -------  -------
 Effect of exchange rate changes on cash and cash equivalents.................       39           10        (7)
                                                                                --------      -------  -------
Net (decrease) increase in cash and cash equivalents..........................   (4,707)       9,908    (6,510)
Net cash provided by discontinued operations..................................       --           --     9,643
Cash and cash equivalents at beginning of year................................   15,276        5,368     2,235
                                                                                --------      -------  -------
Cash and cash equivalents at end of year...................................... $ 10,569      $15,276   $ 5,368
                                                                                --------      -------  -------
Supplemental disclosure of cash flows information:
 Cash paid for interest....................................................... $      8      $     5   $   134
                                                                                --------      -------  -------
Supplemental disclosure of non-cash investing activities (note C):
 Acquisition of Biosphere Medical, SA:
   Fair value of assets acquired.............................................. $     --      $    --   $ 1,493
   Liabilities assumed........................................................       --           --    (1,493)
   Minority interest acquisition obligation...................................       --          188       771
                                                                                --------      -------  -------
   Goodwill................................................................... $     --      $   188   $   771
</TABLE>

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

                                      44

<PAGE>

                            BIOSPHERE MEDICAL, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A - Nature of the Business

   BioSphere Medical, Inc ("we," "BioSphere" or the "Company") was incorporated
in Delaware in December 1993 under the name BioSepra Inc. During 1999, the
Company strategically refocused its business on the development and
commercialization of its proprietary Embosphere Microspheres for use in
treating hypervascularized tumors and malformations. Between February 1999 and
October 2001 we acquired all ownership interests in Biosphere Medical S.A.
("BMSA"), a French societe anonyme (See Note C). BMSA holds the license to the
embolotherapy device that is the main focus of our business. In May 1999, we
sold substantially all of our assets relating to our former core business,
chromatography, and changed our name to BioSphere Medical, Inc. On July 3,
2001, we completed an underwritten public offering of 4.0 million shares of our
common stock. Of the 4.0 million shares of our common stock offered, the
Company sold 2.0 million shares and Sepracor Inc., a selling stockholder, sold
2.0 million shares. Net proceeds to the Company were approximately $20.4
million. On August 6, 2001, Sepracor sold an additional 600,000 shares of our
common stock pursuant to exercise of the underwriter's over-allotment option.
As a result of this offering, including the sale of shares associated with the
over-allotment option, Sepracor's beneficial ownership interest in our
outstanding common stock decreased from approximately 55% to approximately 25%
(See Note D and L).

   During 2000, the Company established two wholly owned subsidiaries to pursue
the development of other microsphere applications and technologies. In May
2000, BioSphere Medical Japan, Inc., a Delaware corporation, was established to
develop and commercialize Embosphere Microspheres as well as HepaSphere SAP
Microspheres in Asia. In December 2000, BSMD Ventures, Inc., also a Delaware
corporation, was established to explore and develop alternative applications
for the Company's microsphere platform technology with a specific focus on
dermal and other tissue engineering uses.

   The Company believes that current working capital along with anticipated
sales of its EmboSphere Microspheres and other products, will provide liquidity
sufficient to allow the Company to meet its expected spending obligations for
the foreseeable future while also allowing the further development and testing
of other product candidates and technologies. However, no assurances can be
given that such revenues will, in fact, be realized. Should the Company not
realize some or all of its revenue projections, it may be required to secure
alternative financing arrangements, pursue additional strategic partners,
and/or defer or limit some or all of its research, development and/or clinical
projects.

B - Summary of Significant Accounting Policies

  Principles of Consolidation

   The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries BMSA, Biosphere Medical Japan,
Inc. and BSMD Ventures, Inc. All material intercompany balances and
transactions have been eliminated in consolidation.

  Translation of Foreign Currencies

   The assets and liabilities of the Company's foreign subsidiaries is
translated into U.S. dollars using the exchange rates in effect as of each
balance sheet date. Revenue and expense items are translated at average
exchange rates prevailing during each reporting period. Resulting translation
adjustments are recorded in the cumulative translation adjustment account in
stockholders' equity. Aggregate foreign exchange transaction gains and losses
are not material and are included in other income in the accompanying statement
of operations for all periods presented.

                                      45

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

B - Summary of Significant Accounting Policies (Continued)

  Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the following: (1) the reported amounts
of assets and liabilities, (2) the disclosure of contingent assets and
liabilities at the date of the financial statements and (3) the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.

  Cash, Cash Equivalents and Marketable Securities

   The Company considers all highly liquid investments with an original
maturity of ninety days or less, as of the date of purchase, to be cash
equivalents.

   In accordance with our investment policies, surplus cash is invested in
investment grade corporate and government debt and asset backed securities
typically with maturity dates of less than 180 days. The Company determines the
appropriate classification of marketable securities at each balance sheet date.
Marketable securities as of December 31, 2001, classified as held to maturity
for which we have the positive intent and ability to hold to maturity, are
reported at amortized cost, which approximates fair market value.

  Concentration of Credit Risk and Off-Balance Sheet Risk

   The Company has no significant off-balance-sheet risk or concentration of
credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of cash, cash
equivalents, marketable securities, amounts due from related parties, trade
accounts receivable, accounts payable and long-term debt obligations. The
estimated fair value of the Company's financial instruments approximate their
carrying value. BioSphere Medical places its cash, cash equivalents and
marketable securities with high credit quality financial institutions.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to a large number of customers and their dispersion across many
geographic areas.

   The Company subcontracts a key portion of its final packaging processes to
an independent third-party contract manufacturer. If such services were not
available at a reasonable cost from the existing contract manufacturer, we
would need to obtain new contracts with new providers or incur the expense of
internalizing the packaging process. Such a conversion could cause the Company
to incur additional expense in validating the process under FDA Good
Manufacturing Practices, delay the availability of finished product and limit
commercial sales of our products.

  Property and Equipment

   Property and equipment are stated at cost. The Company provides for
depreciation based upon expected useful lives using the straight-line method
over the following estimated useful lives:

<TABLE>
<S>                                    <C>
Office equipment...................... 3-5 years
Laboratory and manufacturing equipment 3-5 years
Leasehold improvements................ Shorter of lease term or estimated useful life
</TABLE>

   Maintenance and repairs are charged to expense as incurred. Upon retirement
or sale, the cost of disposed assets and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is credited or
charged to non-operating income.

                                      46

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


B - Summary of Significant Accounting Policies (Continued)

  Goodwill and Other Assets

   Goodwill represents the difference between the purchase price and the fair
value of the tangible and identifiable intangible net assets acquired in
accordance with the purchase method of accounting. Between February 1999 and
October 2001, the Company recorded goodwill upon the periodic step-acquisitions
of additional interests of BMSA. Goodwill is amortized over the shorter of an
estimated ten-year useful life or February 2009, which represents a ten-year
amortization period from the date of the original BMSA purchase agreement (See
Note C). Accumulated amortization was approximately $351,000 and $174,000 as of
December 31, 2001 and December 31, 2000, respectively.

  Impairment of Long-Lived Assets

   As of December 31, 2001, the Company has evaluated the potential impairment
of its long-lived assets with respect to events or changes in circumstances
that may indicate that the carrying amount of a recorded asset may not be
recoverable. Based on management's assessment as of December 31, 2001, the
Company has determined that no impairment of long-lived assets exists.

  Revenue Recognition

   Revenues from product sales are recognized when requested goods are shipped
to customers and collectibility is probable. Management establishes reserves
for potential sales returns and evaluates, on a monthly basis, the adequacy of
those reserves based upon realized experience. To date, returns have been
minimal and immaterial. The Company adopted the Security and Exchange
Commission's Staff Accounting Bulletin No. 101, Revenue Recognition, in the
year ended December 31, 2000, with no material impact to the Company's results
of operations.

  Research and Development

   Research and development costs are expensed in the period incurred.

  Income Taxes

   The Company uses the asset and liability accounting method whereby deferred
tax assets and liabilities are recognized based on temporary differences
between the financial statements and tax bases of assets and liabilities using
current statutory tax rates. A valuation allowance against net deferred tax
assets is recorded if, based on the available evidence, it is more likely than
not that some or all of the deferred tax assets will not be realized.
Management evaluates, on a quarterly basis, the ability to recover the deferred
tax assets and the level of the valuation allowance. At such time as it is more
likely than not that deferred tax assets are realizable, the valuation
allowance will be appropriately reduced.

  Comprehensive Income /(Loss)

   Comprehensive income/(loss) is comprised of net income/(loss) and other
comprehensive income/(loss). Other comprehensive income/(loss) includes certain
changes in equity that are excluded from net income/(loss). Specifically, the
effects of foreign currency translation adjustments which are reflected
separately in stockholders' equity, are included in accumulated other
comprehensive income/(loss).

                                      47

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

B - Summary of Significant Accounting Policies (Continued)

  Net Loss Per Share

   Basic net loss per share is calculated based on the weighted average number
of common shares outstanding during the period. Diluted net loss per share
incorporates any dilutive effects of common stock equivalent options, warrants
and other convertible securities. Total warrants and options potentially
convertible into common stock as of December 31, 2001, 2000 and 1999, equaled
4,086,000, 4,147,000 and 3,783,000, respectively. All common stock equivalents
have been excluded from the calculation of weighted average number of diluted
common shares, as their effect would be antidilutive for all periods presented.

  New Accounting Pronouncements

   In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations." SFAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. Adoption of this
statement did not have a material impact on the Company's operations.

   In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." With the adoption of SFAS No. 142, goodwill and certain intangible
assets with identifiable lives will no longer be subject to amortization over
its estimated useful life, but instead goodwill is subject to at least an
annual valuation and assessment for impairment by applying a fair-value-based
test. Adoption of this statement is not expected to have a material impact on
operations other than to exclude an estimated $201,000 in goodwill amortization
from selling, general and administrative expenses in each respective year
through 2008.

   In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement
amends FASB Statement No. 19 and is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company does not expect the
adoption of this statement to have a material impact on its operations.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This statement supercedes SFAS Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
This statement requires that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company does not expect the adoption of this statement to have a material
impact on its operations.

C - Step Acquisition of Biosphere Medical S.A. and Minority Interest
Acquisition Obligation

   On February 25, 1999, the Company acquired 51% of the outstanding capital
stock of BMSA. Pursuant to a February 25, 1999 purchase agreement, the Company
acquired a this ownership interest by granting to BMSA an exclusive sales and
manufacturing license to certain patents and technology primarily relating to
the Company's

                                      48

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

C - Step Acquisition of Biosphere Medical S.A. and Minority Interest
Acquisition Obligation (Continued)

Embosphere Microspheres technology. The Company was also granted an option to
purchase the remaining 49% interest in BMSA through December 31, 2004, for an
amount equal to the product of the percentage interest to be purchased and the
sum of BMSA's rolling average twelve-month sales and worldwide Embosphere
Microspheres sales as of the date of exercise (the "Purchase Option").
Moreover, the holder of the remaining 49% interest was also granted an option
(the "Put Option") to require the Company to purchase the remaining 49%
interest from December 31, 2003 until December 31, 2004 for an amount equal to
the greater of an agreed upon price (in French Francs) for each percentage
interest to be sold or the amount payable adjusted to a rolling nine-month
sales average under the Purchase Option. The Put Option represented a
contingent purchase consideration for which the Company accreted the value of
the Put Option through October 31, 2001.

   On April 7, 2000, the Company purchased an additional 34% of BMSA for
$950,000. As a result of this step-acquisition, the Company's total ownership
interest in BMSA increased to 85%. On November 5, 2001, the Company acquired
the remaining 15% interest in BMSA for approximately $953,000. Both subsequent
step-acquisition transactions were accounted for under purchase accounting
principles whereby the fair value in excess of the net assets purchased is
treated as an increase to goodwill. Net goodwill, comprised entirely of the
unamortized purchase price paid in excess of the net BMSA assets acquired,
equaled $1.4 million and $1.1 million as of December 31, 2001 and December 31,
2000, respectively.

D - Related Party Transactions

   Receivable from related party at December 31, 2001 represents the portion of
expenses that Sepracor has agreed to pay as a result of Sepracor's
participation in the July 2001 secondary offering of 4.0 million shares of the
Company's common stock. Total related party receivables are offset by $83,000
due to Sepracor for certain administrative services provided by Sepracor as of
December 31, 2001. Total administration fees, including rent through April
2000, charged by Sepracor for services rendered in the years ended December 31,
2001, 2000 and 1999 were $20,000, $111,000 and $119,000, respectively.

   Sepracor is also entitled to certain rights with respect to the registration
under the Securities Act of a total of 1,400,000 shares of BioSphere's Common
Stock. These rights provide that Sepracor may require BioSphere Medical to
register shares, subject to certain conditions and limitations. As of December
31, 2001, Sepracor has not exercised such rights.

E - Marketable Securities

   Cash and cash equivalents include $10.2 million and $15.2 million of
commercial paper and money market funds as of December 31, 2001 and 2000,
respectively. The Company's cash, cash equivalents and marketable securities as
of December 31, 2001 are as follows:

<TABLE>
<CAPTION>
                                                            December 31,
                                                                2001
                                                           --------------
                                                           (in thousands)
      <S>                                                  <C>
      Cash and money market funds.........................    $  7,569
      Commercial paper....................................       3,000
      Asset-backed government securities..................      12,550
                                                              --------
       Total..............................................      23,119
      Less amounts classified as cash and cash equivalents     (10,569)
                                                              --------
      Total marketable securities.........................    $ 12,550
                                                              ========
</TABLE>

                                      49

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


E - Marketable Securities (Continued)

   As the maturity dates on all marketable securities held as of December 31,
2001 were less than 90 days, amortized cost approximates fair market value. No
realized gains or losses on held to maturity securities were recognized during
the twelve-month period ended December 31, 2001.

F - Inventories

   Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following as of:

<TABLE>
<CAPTION>
                                          December 31,
                                         --------------
                                           2001   2000
                                          ------  ----
                                         (In thousands)
                        <S>              <C>      <C>
                        Raw material.... $  185   $156
                        Work in progress    269     78
                        Finished goods..    657    405
                                          ------  ----
                         Total inventory $1,111   $639
                                          ======  ====
</TABLE>

G - Property and Equipment

   Property and equipment consists of the following as of:

<TABLE>
<CAPTION>
                                                     December 31,
                                                    -------------
                                                     2001   2000
                                                    ------  -----
                                                    (In thousands)
             <S>                                    <C>     <C>
             Office equipment...................... $  827  $ 469
             Laboratory and manufacturing equipment  1,056    425
             Leasehold improvements................    272     45
                                                    ------  -----
              Total property and equipment.........  2,155    939
             Less: accumulated depreciation........   (585)  (245)
                                                    ------  -----
              Net property and equipment........... $1,570  $ 694
                                                    ======  =====
</TABLE>

   Depreciation expense was $341,000, $161,000 and $49,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

H - Debt and Other Obligations

   Debt consists of the following as of:

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                              -------------
                                                                               2001   2000
                                                                              ----    ----
                                                                              (In thousands
<S>                                                                           <C>     <C>
5.4% French Franc term loan payable to a bank in monthly installments through
  March 2005, secured by the net assets of BMSA.............................. $ 92    $124
Capital lease obligations (see note I).......................................  296      --
Less: current portion........................................................  (85)    (27)
                                                                               ----   ----
Total long-term debt and capital lease obligations........................... $303    $ 97
                                                                               ====   ====
</TABLE>

   As a co-borrower under Sepracor's commercial bank facility, we had
availability to borrow up to $2.0 million through a line of credit agreement.
As a result of our July 2001 secondary public offering, Sepracor's ownership of
our outstanding common stock was reduced to less than 50%, thereby
automatically terminating the co-borrowing arrangement. Because we are no
longer a party to the loan agreement, which had no outstanding balance as of
December 31, 2001, the bank released Sepracor's guaranty of our obligations to
the bank and Sepracor terminated its related security interest in our assets.

                                      50

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


I - Commitments

   The Company leases approximately 13,000 square feet of office and lab space
at its Rockland facility under an operating lease expiring in February 2005 for
approximately $139,000 per year.

   BMSA leases approximately 18,150 square feet of manufacturing and office
space in Roissy, France through December 2009 for approximately (Euro)157,000
per year (approximately $139,000 as of December 31, 2001). BMSA also has
several operating leases covering certain pieces of manufacturing and office
equipment through March 2005.

   During fiscal year 2001, the Company entered into several non-cancelable
capital lease agreements in connection with the acquisition of certain
manufacturing and computer equipment. The leases have initial terms of 30 to 60
months with interest rates of 5.4% to 13.4%. All corresponding leased equipment
serves as pledged capital.

   Future minimum lease payments under non-cancellable operating leases and
capital leases in effect as of December 31, 2001, are as follows:

<TABLE>
<CAPTION>
Period                                              Operating Leases Capital Leases
------                                              ---------------- --------------
                                                            (In thousands)
<S>                                                 <C>              <C>
2002...............................................      $  502           $ 76
2003...............................................         501             76
2004...............................................         480             76
2005...............................................         223             69
2006...............................................         139             47
Thereafter.........................................         475             --
                                                         ------           ----
Total lease commitments............................      $2,320           $344
                                                         ======
Less amount representing interest..................                        (48)
                                                                          ----
Present value of net minimum capital lease payments                       $296
                                                                          ====
</TABLE>

   Total rental expense for the years ended December 31, 2001, 2000 and 1999
was approximately $464,000, $245,000 and $81,000, respectively.

J - Income Taxes

   As of December 31, 2001, the Company had federal and state net operating
loss (NOL) carryforwards of approximately $43.6 million, which will expire
through the year 2021. As of December 31, 2001, research and experimentation
credit carryforwards approximated $281,000, which will expire through the year
2015. The components of the Company's net deferred tax asset are as follows at:

<TABLE>
<CAPTION>
                                               December 31,
                                            ------------------
                                              2001      2000
                                            --------  --------
                                              (In thousands)
                <S>                         <C>       <C>
                Assets
                 Domestic NOL carryforwards $ 14,813  $ 11,470
                 Tax credit carryforwards..      281       281
                 Property and equipment....        5       (44)
                 Other.....................      755       138
                                            --------  --------
                Subtotal...................   15,854    11,845
                 Valuation allowance.......  (15,854)  (11,845)
                                            --------  --------
                Net deferred tax asset..... $     --  $     --
                                            ========  ========
</TABLE>

                                      51

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


J - Income Taxes (Continued)

   The Company has established a full valuation allowance against its deferred
tax asset as of December 31, 2001 as it considers the realizable value of any
tax benefit against future taxable income to be uncertain.

K - Segment Information

   The Company develops microspheres for use in the treatment of
hypervascularized tumors and malformations. The Company operates exclusively in
the medical device business, which the Company considers as one business
segment. Financial information by geographic area is as follows:

<TABLE>
<CAPTION>
                                                 For the years ended December 31,
                                                 -------------------------------
                                                    2001         2000      1999
                                                  --------      -------  -------
                                                          (In thousands)
 <S>                                             <C>           <C>       <C>
 Revenue
  United States.................................
    Unaffiliated customers...................... $  6,018      $ 1,266   $    --
    Licensing fees..............................      250           --        --
  France and other Europe territories...........
    Unaffiliated customers - (Primarily French).    2,324        2,183     1,949
    Intercompany................................    3,504        1,405        --
    Transfer to other geographic areas..........      410          512       317
                                                  --------      -------  -------
                                                   12,506        5,366     2,266
  Intercompany eliminations.....................   (3,504)      (1,405)       --
                                                  --------      -------  -------
  Total revenue................................. $  9,002      $ 3,961   $ 2,266
                                                  ========      =======  =======
 Operating losses
  United States................................. $(11,561)     $(8,976)  $(3,965)
  Europe........................................      613         (149)     (144)
                                                  --------      -------  -------
  Total operating loss.......................... $(10,948)     $(9,125)  $(4,109)

 Long-lived assets as of December 31,
                                                    2001         2000
                                                  --------      -------
  United States................................. $  2,803      $ 2,241
  Europe........................................      904          412
  Eliminations..................................     (320)        (528)
                                                  --------      -------
  Total long-lived assets....................... $  3,387      $ 2,125
                                                  ========      =======
</TABLE>

L - Capital Stock

  Common Stock

   The Company's authorized capital stock includes 25,000,000 shares of common
stock, par value $0.01 per share. As of December 31, 2001, 3.22 million shares,
or approximately 25%, of the Company's common stock outstanding is held by
Sepracor. The common stock has no preemptive, subscription, redemption or
conversion rights.

  Preferred Stock

   The Company's authorized capital stock includes 1,000,000 shares of
preferred stock, par value $0.01 per share, with such rights, restrictions and
specifications as the Board of Directors may determine. As of December 31, 2001
and 2000, no shares of preferred stock have been issued.

                                      52

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

L - Capital Stock (Continued)

  Common Stock Financing

   In February 2000, the Company completed a private equity placement of common
stock and warrants for net proceeds of approximately $5.9 million. Investors
purchased 653,887 shares of the Company's common stock at a price of $9.00 per
share, which included warrants to purchase up to an additional 163,468 shares
of common stock. Of the total 653,887 common shares sold, unrelated third-party
institutional investors purchased 609,445, or 93%, and 44,442, or 7%, were
purchased by executive officers and members of the Company's Board of
Directors. The warrants have an exercise price equal to $20.00 per share and
expire on February 4, 2005. Using the Black-Scholes option-pricing model, the
Company valued the warrants at approximately $929,000 and included such amount
as a component of additional paid-in capital.

   In July 2000, the Company completed an additional private equity placement
of common stock for net proceeds of approximately $11.8 million. Investors
purchased 1,214,900 shares of common stock at $11.00 per share. Of the total
shares sold, Sepracor Inc., which was at the time of the private placement the
Company's parent company, purchased 454,545 shares, after which its majority
ownership decreased to 55%.

   On July 3, 2001, the Company completed an underwritten public offering of
4.0 million shares of its common stock at $11.00 per share. Of the 4.0 million
shares of common stock offered, the Company sold 2.0 million shares and
Sepracor sold 2.0 million shares. Net proceeds to the Company were
approximately $20.4 million. On August 6, 2001, Sepracor sold an additional
600,000 shares of our common stock pursuant to exercise of the underwriters'
over-allotment option. As a result of this offering, including the sale of
shares pursuant to exercise of the over-allotment, Sepracor's beneficial
ownership interest in the Company's outstanding common stock decreased from
approximately 55% to approximately 25% as of December 31, 2001.

M - Stock Plans and Warrants

  Stock Option Plans

   The 1994 stock option plan (the "1994 Plan") provides for the grant of both
incentive stock options ("ISOs") and non-statutory stock options ("NSOs") to
officers, directors, advisors and key employees of the Company. The 1994 Plan
also provides for the grant of NSOs to consultants of the Company. The exercise
price for ISOs must be at least equal to the fair market value of the Company's
common stock on the date of grant and the exercise price of NSOs must be at
least equal to 50% of the fair market value of the Company's common stock on
the date of grant. Options generally become exercisable in five equal annual
installments beginning on the first anniversary of the date of grant. ISOs have
a maximum term of ten years from the date of grant. A total of 1.0 million
shares were approved for issuance under the 1994 Plan and as of December 31,
2001, approximately 303,000 shares were available for issuance.

   The Company's 1997 Stock Option Plan, as amended, (the "1997 Plan") provides
for the grant of both ISOs and NSOs to officers, directors, advisors and key
employees of the Company. The 1997 Plan also provides for the grant of NSOs to
consultants of the Company. In September 2000, the Company's Board of Directors
approved an amendment to the 1997 Stock Incentive Plan to increase the number
of shares of common stock available for issue from 3,125,000 shares to
5,000,000 shares. As of December 31, 2001, approximately 1,582,000 shares under
the 1997 plan were available for issuance. Options generally become exercisable
in five equal annual installments beginning on the first anniversary of the
date of grant.

                                      53

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


M - Stock Plans and Warrants (Continued)

   The Director Option Plan (the "Director Plan"), as amended, provides for the
granting of NSOs to directors of the Company who are not officers or employees
of the Company or of any subsidiary of the Company. A total of 300,000 shares
of common stock may be issued under the Director Plan subject to adjustments as
provided therein. The exercise price per share will equal the fair market value
of a share of Company's common stock on the date on which the option is
granted. Options granted under the Director Plan will vest in either two or
five equal installments beginning on the first anniversary of the date of the
grant depending on the nature of the grant. As of December 31, 2001, there were
116,000 options available for issuance under the Director Plan.

   The following table summarizes all stock option activity under the three
stock option plans for the three years ended December 31, 2001:

<TABLE>
<CAPTION>
                                            Options issued under the Plans
                                          -----------------------------------
                                                                  Average
                                             Shares           Price Per Share
                                          ------              ---------------
                                          (In thousands, except option price)
         <S>                              <C>                 <C>
         Outstanding at December 31, 1998 1,582                   $ 2.37
          Granted........................ 2,549                     0.94
          Canceled.......................  (393)                    2.15
                                          -----                   ------
         Outstanding at December 31, 1999 3,738                   $ 1.42
          Granted........................   516                    14.88
          Exercised......................  (266)                    2.09
          Canceled.......................   (44)                    2.79
                                          -----                   ------
         Outstanding at December 31, 2000 3,944                   $ 3.12
          Granted........................   200                    12.19
          Exercised......................  (122)                    1.04
          Canceled.......................  (139)                   16.29
                                          -----                   ------
         Outstanding at December 31, 2001 3,883                   $ 3.18
</TABLE>

   The following options and their respective average prices per share were
outstanding and exercisable at December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                        Average               Average
                                         Price                 Price
                           Outstanding Per Share Exercisable Per Share
                           ----------- --------- ----------- ---------
                               (In thousands, except option price)
         <S>               <C>         <C>       <C>         <C>
         December 31, 2001    3,883      $3.18      1,818      $2.85
         December 31, 2000    3,944       3.12      1,147       2.11
         December 31, 1999    3,738       1.42      1,016       2.39
</TABLE>

                                      54

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


M - Stock Plans and Warrants (Continued)

   Options vest at various rates over periods of up to five years and may be
exercised within ten years from the date of grant. The following table
summarizes information about total stock options under the three plans,
outstanding and exercisable as of December 31, 2001:

                               Options Outstanding     Options Exercisable
                              --------------------- --------------------------
                                           Weighted
                               Remaining   Average                 Weighted
     Range of       Number    Contractual  Exercise   Number       Average
  Exercise Prices Outstanding Life (Years)  Price   Exercisable Exercise Price
  --------------- ----------- ------------ -------- ----------- --------------
                    (In thousands except per share amounts)
  $ 0.81  -  1.25    2,180        7.13     $  0.84       634       $   0.84
   1.26  -  1.89       351        5.97        1.79       345           1.80
   1.90  -  2.85       651        4.25        2.20       567           2.19
   2.86  -  4.30        90        4.56        3.37        90           3.37
   4.31  -  6.50        40        3.82        5.15        40           5.15
   6.51  -  9.75        46        9.78        7.75        --             --
   9.76  - 14.50       332        8.82       11.93        61          11.66
  14.51  - 21.75       163        8.75       17.27        67          17.64
  21.76  - 27.25        30        8.13       27.25        14          27.25
                     -----                 -------     -----       --------
                     3,883                 $  3.18     1,818       $   2.85

   The Company applies the principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its Plans. Accordingly, no compensation expense has been
recognized for its employee stock-based compensation plans. Had compensation
costs for the Company's stock-based compensation been determined based on the
fair value at the grant dates as calculated in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's reported net loss and
net basic and diluted loss per common share for the years ended December 31,
2001, 2000 and 1999 would have been adjusted to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                          For the years ended December 31,
                                          -------------------------------
                                             2001         2000      1999
                                           --------      -------  -------
                                                   (In thousands,
                                             except per share amounts)
         <S>                              <C>           <C>       <C>
         Net Loss
          As reported.................... $(10,345)     $(8,447)  $(4,533)
          Pro forma......................  (12,017)      (9,227)   (7,612)

         Basic and diluted loss per share
          As reported....................    (0.89)       (0.87)    (0.53)
          Pro forma......................    (1.03)       (0.95)    (0.90)
</TABLE>

                                      55

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


M - Stock Plans and Warrants (Continued)

   The average fair value of options granted, $10.05, $12.39, and $0.82 for
fiscal years 2001, 2000, and 1999, respectively, was estimated using the
Black-Scholes option-pricing model using the following weighted-average
assumptions:

<TABLE>
<CAPTION>
                                       2001      2000      1999
                                     --------- --------- ---------
             <S>                     <C>       <C>       <C>
             Dividend Yield.........   None      None      None
             Volatility.............   113%      110%      106%
             Risk-free interest rate 4.0%-5.0% 5.5%-6.2% 4.9%-6.7%
             Expected life (years)..     5         5         7
</TABLE>

   The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the use of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based compensation.

  Employee Stock Purchase Plans

   Under the 1997 employee stock purchase plan (the "1997 ESPP"), an aggregate
of 50,000 shares of common stock may be purchased by employees at 85% of the
fair market value on the first or last day of each six month offering period,
whichever is lower. An eligible employee may elect to have up to a maximum of
10% deducted through payroll deductions from his or her regular salary. During
2001, 2000 and 1999, there were 0, 0, and 4,876 shares of the Company's common
stock, respectively, were issued under the 1997 ESPP.

   In June 2000, stockholders approved the 2000 employee stock purchase plan
(the "2000 ESPP") to replace the Company's 1997 Plan. Under the 2000 ESPP, an
aggregate of 50,000 shares of common stock may be purchased by employees at 85%
of the fair market value on the first or last day of each six month offering
period, whichever is lower. During each offering period, the maximum number of
shares which may be purchased by a participating employee is determined on the
first day of the offering period and is equal to the number of shares of common
stock determined by dividing $12,500 by the last reported sale price of the
common stock on the Nasdaq National Market on the first day of the offering. An
eligible employee may elect to have up to a maximum of 10% deducted through
payroll deductions from his or her regular salary. During 2000, no shares were
issued under the 2000 ESPP. During 2001, 3,683 shares of the Company's common
stock were issued under the 2000 ESPP.

  Stock-Based Compensation to Non-Employees

   In connection with stock options previously issued to non-employees, the
Company's Board of Directors authorized the Company to accelerate the vesting
of all non-employee advisors' stock options subject to variable accounting
principles. Accordingly, $1,261,000 in non-cash compensationexpensewas recorded
and presented as a separate line item within the statement of operations for
the year ended December 31, 2000. The recorded $1,261,000 aggregate fair value
of the non-employee stock options was derived from the Black-Scholes
option-pricing model.

  Stock Warrants

   In 1997, the Company issued a warrant to purchase 45,000 shares of the
Company's common stock at $3.00 per share. The warrant expires on June 5, 2002.
As of December 31, 2000, the warrant had vested with respect to 40,000 shares.
The remaining 5,000 shares are not exercisable due to the failure of the holder
to satisfy certain vesting requirements.

                                      56

<PAGE>

                            BIOSPHERE MEDICAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


N - Employees Savings Plan

   The Company has a 401(k) savings plan for all domestic employees pursuant to
which eligible employees may voluntarily contribute up to 15% of their
compensation subject to statutory limitations. In addition, the Company matches
in cash 50% of the first $3,000 contributed by employees up to a $1,500 maximum
per employee. Employer cash matching contributions amounted to approximately
$44,000, $18,000, $11,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.

O - Discontinued Operations

   On May 17, 1999, the Company sold substantially all of the assets of its
business, for approximately $11.0 million ($9.6 million, net) in cash and the
assumption of certain liabilities. Upon the consummation of the sale, BioSepra,
Inc. changed its name to BioSphere Medical, Inc. The Company utilized a portion
of the proceeds to pay approximately $880,000 of transaction costs, to repay
approximately $2.0 million of outstanding bank debt, and to repay approximately
$143,000 due to Sepracor.

   The net assets included in the sale had a net book value of approximately
$10.5 million on May 17, 1999, which was included in calculating a net loss on
the sale of approximately $70,000. The operations of the business have been
presented in accordance with disposal of a segment of a business and
discontinued operations accounting principles in the accompanying consolidated
financial statements. Accordingly, the operating results of the discontinued
business for the year ended December 31, 1999 have been segregated from the
continuing operations and reported as a separate line item on the consolidated
statements of operations.

P - Valuation and Qualifying Accounts

   The Company monitors the credit worthiness of its trade customers based upon
historical payment experience. A rollforward of the allowance for doubtful
accounts for the years ended December 31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>
                                   Balance,   Charged to            Balance,
                                 Beginning of Costs and              End of
                                    Period     Expenses  Deductions  Period
                                 ------------ ---------- ---------- --------
                                               (In thousands)
    <S>                          <C>          <C>        <C>        <C>
    Year ended December 31, 2001     $ 29        $83       $  (7)     $105
    Year ended December 31, 2000     $ --        $37       $  (8)     $ 29
    Year ended December 31, 1999     $106         --       $(106)       --
</TABLE>

Q - Quarterly Financial Data (Unaudited)

   The following is a summary of quarterly financial results:

<TABLE>
<CAPTION>
                                  Fourth        Third   Second    First
                                  Quarter      Quarter  Quarter  Quarter
                                  -------      -------  -------  -------
                                  (In thousands except per share amounts)
           <S>                    <C>          <C>      <C>      <C>
           Net revenue
            2001................. $ 2,725      $ 2,017  $ 2,413  $ 1,847
            2000.................   1,356        1,016      815      774
                                  -------      -------  -------  -------
           Gross profit
            2001.................   2,024        1,470    1,824    1,328
            2000.................     956          641      411      492
                                  -------      -------  -------  -------
           Net loss
            2001.................  (2,487)      (3,075)  (2,282)  (2,501)
            2000.................  (2,371)      (2,453)  (2,147)  (1,476)
                                  -------      -------  -------  -------
           Diluted loss per share
            2001.................   (0.20)       (0.24)   (0.22)   (0.24)
            2000.................   (0.23)       (0.24)   (0.23)   (0.17)
</TABLE>

                                      57

<PAGE>

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

   During 2001 and 2000, there were no disagreements with our independent
accountants on accounting and financial disclosure matters.

                                   PART III

ITEMS 10-13.

   The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 2002 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management", "Election of Directors", "Board and
Committee Meetings", "Compensation for Directors", "Compensation of Executive
Officers", "Compliance with Section 16 Reporting Requirements", and "Certain
Relationships and Related Transactions". Information regarding executive
officers of the Company is also furnished in Part I of this Annual Report on
Form 10-K under the heading "Executive Officers."

                                      58

<PAGE>

                                    PART IV

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

(a) The following documents are included as part of this Annual Report on Form
    10-K.

    1. The Schedule listed below and the Reports of Independent Accountants on
       financial statement schedules are filed as part of this Annual Report on
       Form 10-K.

       All other schedules are omitted as the information required is
       inapplicable or the information is presented in the consolidated
       financial statements or the related notes.

    2. The Exhibits listed in the Exhibit Index immediately preceding the
       Exhibits are filed as a part of this Annual Report on Form 10-K.

(b) Current Reports on Form 8-K filed during the last quarter of the fiscal
    year.

   On December 7, 2001, the Company filed a report on Form 8-K to report,
   pursuant to Item 5, that the Company had issued a press release on November
   29, 2001 announcing the resignation of Jean-Marie Vogel as a director and as
   chairman of the Board of Directors and the acquisition of an outstanding
   minority interest in Biosphere Medical S.A.


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


                                      59

<PAGE>

                                 Exhibit Index

<TABLE>
<CAPTION>
Exhibit No.                                             Description
-----------                                             -----------
<C>         <S>

    3.1     Certificate of Incorporation, as amended, of the Company. (Incorporated herein by reference to the
            Company's Registration Statement on Form S-8. (File No. 333-83639))

    3.2     By-Laws of the Company. (Incorporated herein by reference to the Company's Registration
            Statement on Form S-1, as amended (File No. 33-75212)).

    4       Specimen Certificate for shares of Common Stock, $.01 par value, of the Company. (Incorporated
            herein by reference to the Company's Form 10-K for the year ended December 31, 1999)

   10.1(1)  1994 Director Option Plan. (Incorporated herein by reference to the Company's Registration
            Statement on Form S-1, as amended (File No. 33-75212))

   10.2     Form of Technology Transfer and License Agreement dated as of January 1, 1994 between the
            Company and Sepracor Inc. (Incorporated herein by reference to the Company's Registration
            Statement on Form S-1, as amended (File No. 33-75212))

   10.3     Share Purchase Agreement by and between Marie-Paula Leroy-Landercy and the Company dated
            December 31, 1998. (Incorporated herein by reference to the Company's Form 10-K for the year
            ended December 31, 1999)

   10.4+    Joint Ownership Contract between the Company and L'Assistance Publique Hopitaux de Paris
            dated January 5, 1998, together with amendment dated February 10, 2000 (translated from
            French). (Incorporated herein by reference to the Company's Form 10-K for the year ended
            December 31, 1999)

   10.5*    Rider No. 2 dated June 20, 2000 to the Joint Ownership Contract between the Company and
            L'Assistance Publique Hopitaux de Paris dated January 5, 1998.

   10.6+*   Exclusive License Agreement between Dr. Shin-ichi Hori and the Company dated May 8, 2000.

   10.7+    Exclusive License and Know How Agreement No. L99037 by and between Le Centre National de
            la Recherche Scientifique, L'Universite Louis Pasteur Strasbourg and the Company dated July 15,
            1999 (translated from French). (Incorporated herein by reference to the Company's Form 10-K for
            the year ended December 31, 1999)

   10.8     Form of Stock and Warrant Purchase Agreement dated as of February 4, 2000, between the
            Company (together with schedule of purchasers thereto). (Incorporated herein by reference to the
            Company's Form 10-K for the year ended December 31, 1999)

   10.9     Form of Warrant Agreement dated as of February 4, 2000, between the Company and certain
            purchasers (together with schedule of purchasers thereto). (Incorporated herein by reference to the
            Company's Form 10-K for the year ended December 31, 1999)

   10.10    Sublease Agreement between Guerbet S.A. and BiosphereMedical, S.A. (translated from French to
            English). (Incorporated herein by reference to the Company's Form 10-K for the year ended
            December 31, 1999)

   10.11    Lease Agreement dated January 7, 2000 by and between 1050 Hingham Street Realty Trust and
            the Company. (Incorporated herein by reference to the Company's Form 10-K for the year ended
            December 31, 1999)

   10.12    First Amendment to Lease Agreement dated June 27, 2000 by and between 1050 Hingham Street
            Realty Trust and the Company. (Incorporated herein by reference to the Company's Form 10-K
            for the year ended December 31, 1999)

   10.13    Stock Purchase Agreement dated July 28, 2000. (Incorporated herein by reference to the
            Company's Form 10-Q for the quarter ended June 30, 2000)
</TABLE>

                                      60

<PAGE>

<TABLE>
<CAPTION>
Exhibit No.                                          Description
-----------                                          -----------
<C>         <S>

  10.14     Registration Rights Agreement dated July 28, 2000. (Incorporated herein by reference to the
            Company's Form 10-Q for the quarter ended June 30, 2000)

  10.15     Lease Agreement dated October 19, 2000 by and between Biosphere Medical S.A. and
            Salamandre S.A (translated from French to English). (Incorporated herein by reference to the
            Company's Form 10-K for the year ended December 31, 2000)

  10.16+*   Exclusive Distribution Agreement dated January 24, 2002 by and between BioSphere Medical
            S.A. and Terumo Europe NV/SA, as amended on January 28, 2002.

  21        Subsidiaries of the Company. (Incorporated herein by reference to the Company's Form 10-K for
            the year ended December 31, 2000)

  23*       Consent of Arthur Andersen LLP.

  99*       Letter to Commission Pursuant to Temporary Note 3T - Confirmation of Arthur Andersen
            Representations
</TABLE>
--------
(1) Management contract or compensatory plan or arrangement filed as an exhibit
    to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K.
+  Confidential treatment requested as to certain portions.
*  Filed herewith.

                                      61

<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, thereunto duly authorized.

                                          BIOSPHERE MEDICAL, INC.

                                          By:         /S/  JOHN M. CARNUCCIO
                                              ----------------------------------
                                                     John M. Carnuccio
                                               President and Chief Executive
                                                          Officer

   Date: March 28, 2002

         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.

<TABLE>
<CAPTION>
          Signature                               Title                           Date
          ---------                               -----                           ----
<S>                           <C>                                            <C>

   /s/  JOHN M. CARNUCCIO                                                    March 28, 2001
-----------------------------   President, Chief Executive Officer, Director
      John M. Carnuccio         (Principal Executive
                                Officer)

  /s/   ROBERT M. PALLADINO   Chief Financial Officer                        March 28, 2001
-----------------------------   (Principal Financial and
     Robert M. Palladino        Accounting Officer)

 /s/   TIMOTHY J. BARBERICH   Director                                       March 28, 2001
-----------------------------
    Timothy J. Barberich

/s/   WILLIAM M. COUSINS, JR. Director                                       March 28, 2001
-----------------------------
   William M. Cousins, Jr.

----------------------------- Director
Alexander M. Klibanov, Ph.D.

    /s/   PAUL A. LOONEY      Director                                       March 28, 2001
-----------------------------
       Paul A. Looney

  /s/   RICCARDO PIGLIUCCI    Director                                       March 28, 2001
-----------------------------
     Riccardo Pigliucci

  /s/   DAVID P. SOUTHWELL    Director                                       March 28, 2001
-----------------------------
     David P. Southwell
</TABLE>

                                      62