Exhibit 13.1


                             SELECTED FINANCIAL DATA


STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,                                             1997           1996         1995           1994           1993
                                                                    ----           ----         ----           ----           ----
<S>                                                             <C>             <C>         <C>          <C>              <C>
Revenues:
     Product sales                                              $  2,357        $   725    $     534       $    339       $    475
     Collaborative research and development                        -                 54          300             50             33
                                                                --------        -------     --------       --------        -------
         Total revenues                                            2,357            779          834            389            508
                                                                --------        -------     --------       --------        -------
Costs and expenses:
     Cost of products sold                                         4,158          3,785        1,073            353            471
     Cost of collaborative research and development                    -             41          283             32             21
     Research and development                                      3,577          6,128        4,061          3,249          1,671
     Selling, general and administrative                           4,964          8,069        3,881          1,584            578
     Restructuring charge                                          1,215           -           -              -              -
                                                                --------        -------     --------       --------        -------
         Total costs and expenses                                 13,914         18,023        9,298          5,218          2,741
                                                                --------        -------     --------       --------        -------
Loss from operations                                            (11,557)       (17,244)      (8,464)        (4,829)        (2,233)
Other income                                                       1,673          1,394        1,014            424          -
                                                                --------      ---------    ---------       --------       --------
Net loss from continuing operations                              (9,884)       (15,850)      (7,450)        (4,405)        (2,233)
                                                               ---------      ---------    ---------       --------       --------
Discontinued operations:
     Loss from operations of discontinued business                  -           (9,550)        -              -              -
     Loss on disposal of discontinued business                      -          (15,198)        -              -              -
                                                                --------        -------     --------       --------        -------
         Net loss                                             $  (9,884)      $(40,598)     $(7,450)       $(4,405)       $(2,233)
                                                                --------        -------     --------       --------        -------
Net loss per common share - basic and diluted:
     Net loss from continuing operations                     $    (1.22)       $ (1.96)      $(1.20)        $(0.92)          -
     Loss from operations of discontinued business                  -            (1.18)        -              -              -
     Loss on disposal of discontinued business                      -            (1.88)        -              -              -
                                                                --------        -------     --------       --------        -------
         Net loss                                            $    (1.22)       $ (5.03)      $(1.20)        $(0.92)           -
                                                                --------        -------     --------       --------        -------
Weighted average number of shares of common stock
outstanding - basic and diluted:                                   8,127          8,069        6,205          4,767           -
                                                                --------        -------     --------       --------        -------

BALANCE SHEET DATA
(In thousands)

Cash and marketable securities                                $    8,156        $16,724      $47,841        $11,704        $     -
Working capital                                                    6,071         14,844       46,905         11,261            392
Total assets                                                      10,607         20,560       50,212         13,048            983
Capital lease obligations--long term                                 289            525          286             52              -
Convertible subordinated note payable--long term                   8,687          8,687            -              -              -
Stockholders' equity (deficit)                                    (1,467)         7,929       48,002         11,949            983
</TABLE>



                                       9
<PAGE>


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

Overview

         The Company was established in December 1993 as a wholly-owned
subsidiary of Sepracor Inc. ("Sepracor"). Effective as of January 1, 1994, in
exchange for 3,000,000 shares of common stock, $.01 par value, of the Company
(the "Common Stock"), Sepracor transferred to the Company its technology
relating to the manufacture, use and sale of medical devices for the separation
and purification of blood, blood products and blood components and its membrane
filter design technologies.

         In the second quarter of 1994, the Company completed the initial public
offering of its Common Stock resulting in net proceeds to the Company of
approximately $15 million. In September 1995, the Company completed a follow-on
public offering of its Common Stock. The net proceeds from that public offering
were approximately $43 million. As of January 31, 1998, Sepracor owned
approximately 33% of the outstanding Common Stock of the Company.

         Substantially all of the Company's revenues through 1995 were
attributable to sales of non- blood-related membrane filter products to
Sepracor. Revenues from these products were $13,000 and $517,000 in 1996 and
1995, respectively. In June 1995, the Company received clearance from the United
States Food and Drug Administration (the "FDA") for the LeukoNet System, a
medical device designed for the removal of contaminating leukocytes from donated
blood. Fiscal 1996 was the first full year of commercial sale of its LeukoNet
System. In February 1998, the Company determined to discontinue manufacturing
the LeukoNet System and focus on the completion of development and market
introduction of its next-generation red cell filtration product. All of the
Company's planned blood-related products are in the research and development
stage, and certain of these products may require preclinical and clinical
testing prior to submission of any regulatory application for commercial use.
The Company's success will depend on development and commercial acceptance of
these blood- related products and its ability to raise capital through strategic
partnerships, public or private equity and/or debt financing.

         Through 1995, the Company's operations were located in facilities
subleased from Sepracor for which the Company was allocated and charged a
portion of Sepracor's rent and operating costs based upon the amount of space it
occupied. During this period, Sepracor also provided support services, including
laboratory support, data processing, accounting and finance, legal and other
administrative functions. Sepracor allocated a portion of the costs of these
activities to the Company based upon its pro rata usage of such services. The
Company signed a long-term lease with a third party for its manufacturing,
laboratory, research and office space, which took effect in February 1996.
Commencing in 1996, the Company provided the necessary data processing,
accounting and finance and other support services through its own employees or
outside contractors engaged directly by the Company.

         In May 1996, the Company acquired (the "Denmark Acquisition") the
plasma product unit of Novo Nordisk A/S, a Danish company ("Novo Nordisk"), and
in January 1997, entered into a Restructuring Agreement with Novo Nordisk with
respect to the indebtedness incurred by the Company in connection with the
Denmark Acquisition. In February 1997, the Company determined to discontinue the
development and operation of its Danish plasma business due in large part to
Pharmacia & Upjohn's ("P&U") wrongful termination of the Company's planned
acquisition of P&U's plasma business in Sweden. The Company recorded a one-time
charge as a result of its exit from the plasma business of $15,200,000 in 1996.
See "-- Discontinued Business" and "-- Liquidity and Capital Resources."

Results of Continuing Operations

         Revenues were $2,357,000 in 1997, $779,000 in 1996 and $834,000 in
1995. All of the Company's revenues in 1997 were from the sale of the LeukoNet
System. Revenues from product sales to Sepracor, a related party, as a
percentage of total revenues were 2% in 1996 and 57% in 1995 and represent the
sale of membrane filter products. Product sales to Sepracor were recorded at
prices based on a pricing agreement between the Company and Sepracor. Under this
pricing agreement, product sales to Sepracor for Sepracor's use were at cost
while product sales to Sepracor for subsequent sale or lease to third parties
were at cost plus a 25% margin. Revenues in 1996 include $54,000 related to the
Company's Phase II SBIR program with the United States Department of the Army.
In 1997, 1996 and 1995, one customer represented 86%, 83% and 36% of total
revenues, respectively.

         The cost of products sold was $4,158,000 in 1997, $3,785,000 in 1996
and $1,073,000 in 1995. Cost of products sold exceeded product sales in all
periods due to the start-up costs of new product introduction and the high costs
associated with low volume production, particularly in 1996, the first full year
of production of its LeukoNet System. Cost of products sold in 1997 includes a
charge of approximately $800,000 related to the Company's determination to
discontinue manufacturing the LeukoNet System and to focus exclusively on its
next-generation red cell filter.

         The cost of collaborative research and development was $41,000 in 1996
and $283,000 in 1995. The decrease in 1996 over 1995 reflects the completion in
the first quarter of 1996 of the Company's obligations under Phase II of the
SBIR program.

         Research and development expenses were $3,577,000 in 1997, $6,128,000
in 1996 and $4,061,000 in 1995. The decrease in 1997 is primarily attributable
to a decrease in expenses associated with the Company's SteriPath


                                       10
<PAGE>


Blood Pathogen Inactivation System which program was discontinued in May 1997.
The increase in 1996 over the amounts expended in 1995 is primarily attributable
to a higher level of spending associated with development of the Company's
SteriPath Blood Pathogen Inactivation System and preparation for
commercialization of the Company's LeukoNet System.

         Selling, general and administrative expenses were $4,964,000 in 1997,
$8,069,000 in 1996 and $3,881,000 in 1995. The 1996 expense includes expenses
for personnel, consultants and travel in connection with the Company's efforts
to expand into other blood-related businesses and a one-time charge of
approximately $1,500,000 in connection with the Company's efforts to acquire
P&U's plasma business. See "--Discontinued Business." These costs did not recur
in 1997 and are the primary reason for the decrease in 1997 from 1996. The
increase in 1996 over 1995 is primarily attributable to expenses associated with
preparation for commercialization of the LeukoNet System, increased costs
related to the hiring of management with specific industry experience and
administrative costs associated with being a public company. Sales and marketing
costs may increase in future periods from current levels as the Company
continues its efforts to market and launch sales of its blood filtration
products.

         In April 1997, the Company determined to focus management resources on
its core business of blood filtration technologies, consistent with its earlier
decision to exit the plasma business. In connection therewith, four officers
were relieved of their duties. The Company incurred a one-time restructuring
charge of $1,215,000 in 1997 for severance and related charges in connection
with this action. At December 31, 1997 there was a balance of $437,000 remaining
to be paid related to this charge.

         Interest income in 1997, 1996 and 1995 primarily represents interest
earned on available cash and marketable securities balances during those
periods.

         The increase in interest expense in 1997 compared to 1996 and 1995 is
primarily attributable to a convertible subordinated note payable that was not
in existence during either 1996 or 1995.

         In September 1997, the Company reached an out-of-court settlement with
P&U arising out of the alleged breach by P&U of an agreement to sell to the
Company P&U's plasma pharmaceutical business located in Stockholm, Sweden. The
terms of settlement included a cash payment to the Company and the granting of
an option to P&U to license, on a non-exclusive basis, certain intellectual
property held by the Company and its subsidiaries relating to plasma
fractionation. The cash payment was recognized as other income in 1997 and
represents the majority of the amount in other income for that year.

Discontinued Business

         In May 1996, the Company consummated the Denmark Acquisition. The
purchase price for the transaction was comprised of a combination of Promissory
Notes, Convertible Subordinated Notes (which would convert to common stock of
the Company or a subsidiary of the Company) and additional consideration payable
in 1998 in cash or Common Stock, at the option of the Company, which would not
be paid in certain events.

         The loss from operations of discontinued business of $9,550,000
reflects the loss from the date of the acquisition through December 31, 1996.
During this eight-month period, this business recorded revenues from the sale of
plasma products of $8,200,000 and cost of products sold of $13,400,000. The cost
of products sold includes a reserve for the write-down of inventories to the
lower of cost or market of approximately $2,500,000 and loss on the sale of raw
materials inventories of approximately $800,000. Operating costs of this
business during this period were approximately $4,000,000.

         In January 1997, the Company and Novo Nordisk entered into a
Restructuring Agreement of the debt related to the Denmark Acquisition. Pursuant
to the Restructuring Agreement, approximately $23,000,000 of indebtedness owed
to Novo Nordisk was restructured by way of issuance by the Company to Novo
Nordisk of a 12% convertible subordinated promissory note in the principal
amount of $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to $3,000,000 would be forgiven in
certain circumstances). Approximately $8,500,000 of the reduction of such
indebtedness was forgiven. The remainder of the reduction represented a net
amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies.

         On February 20, 1997, the Company's Board of Directors voted to
discontinue the development and operation of its Danish plasma business due in
large part to P&U's wrongful termination of the Company's planned acquisition of
P&U's plasma business in Sweden, which was part of the Company's initial
strategy to enter the plasma business, as well as other factors. In connection
with this determination, the Company recorded a one-time charge of $15,200,000
in 1996 as a result of its exit from the plasma business. The loss reflected
management's assessment of the most probable outcome from this decision, is net
of the $8,500,000 forgiveness of indebtedness and assumed the $3,000,000
forgiveness contingency. In December 1997, the Company notified the holder of
the note of its intent to convert in January 1998, $8,687,000 of debt, which it
believes was the entire amount outstanding as of the date of conversion. On
January 6, 1998, the Company converted the note, pursuant to its terms, into
shares of Common Stock at a conversion price of $10.50 per share, or 827,375
shares. The holder of the note has contested the conversion of the note,
including the forgiveness of the $3,000,000 amount. The Company believes that
such claims are without merit.



                                       11
<PAGE>


New Accounting Standards

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires the reporting and display, in a full set of
general purpose financial statements, of all items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS 130 is effective for statements issued for periods beginning after December
15, 1997 and reclassification of financial statements for earlier periods for
comparative purposes is required. Management believes that the adoption of SFAS
130 will not have a material impact on the Company's financial statements.

Litigation

         The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that the Company's manufacture, use and/or sale of the LeukoNet product
infringes upon three patents held by Pall.

         On October 14, 1996, in connection with the first action concerning
U.S. Patent No. 5,451,321 (the "'321 patent"), the Company filed a motion for
summary judgment of noninfringement. Pall filed a cross motion for summary
judgment of infringement at the same time.

         In October 1997, the Eastern District of New York granted in part
Pall's summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the filter
subject to the court's order. The court has not yet ruled on the validity of
Pall's '321 patent claims, which the Company has asserted are invalid and
unenforceable. No date has been set for the proceeding to determine the validity
and enforceability of Pall's '321 patent claims.

         With respect to the second action concerning U.S. Patent Nos. 4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"), the Company has answered
the complaint stating that it does not infringe any claim of the asserted
patents. Further, the Company has counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 patent, and a
declaratory judgment of noninfringement of the '479 patent, as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.

         The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the present LeukoNet product does not infringe
any valid enforceable claim of the three asserted Pall patents. However, there
can be no assurance that the Company will prevail in the pending litigations,
and an adverse outcome in a patent infringement action could have a material
adverse effect on the Company's financial condition and future business and
operations.

         On November 1, 1996, the Company filed a complaint in the Supreme
Court, State of New York, County of New York, against P&U. In its complaint, the
Company sought damages arising out of the alleged breach by P&U of an agreement
to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. In September 1997, the Company reached an out-of-court
settlement with P&U. The terms of settlement included a cash payment to the
Company and the granting of an option to P&U to license, on a non-exclusive
basis, certain intellectual property held by the Company and its subsidiaries
relating to plasma fractionation. The cash payment was recognized as other
income in 1997.

Liquidity and Capital Resources

         The net decrease in cash and cash equivalents in 1997 was $4,081,000.
This net decrease is attributable to net cash used in operating activities of
$8,391,000 offset in part by net cash provided by investing activities of
$4,265,000.

         Net cash used in operating activities is primarily attributable to the
net loss of $9,884,000, an increase in accounts receivable of $153,000 and a
reduction in accounts payable of $736,000 offset in part by a decrease in
inventories of $218,000, impairment of assets of $475,000 in conjunction with
the determination to discontinue manufacture of the LeukoNet System,
depreciation and amortization of $859,000, an increase in accrued expenses of
$273,000, and the receipt of $500,000 related to the net assets of discontinued
business. Net cash provided from investing activities relates to
available-for-sale marketable securities investing activities of $4,483,000
offset in part by additions to property and equipment of $220,000.

         The Company believes, based on its current operating plan, that, in
addition to its available cash balances, it will need additional financing in
order to fund the Company's operations beyond the first half of 1998. Possible
sources of capital include strategic partnerships, public or private equity
and/or debt financing, all of which the Company is pursuing. No assurance can be
given, however, that the Company will be able to obtain additional financing on
terms acceptable to the Company, if at all.

         In January 1997, the Company entered into the Restructuring Agreement
with respect to the indebtedness incurred by the Company in connection with the
Denmark Acquisition. Pursuant to the Restructuring Agreement, approximately
$23,000,000 of indebtedness owed to Novo Nordisk was restructured by way of
issuance by the Company to Novo Nordisk of a 12% convertible subordinated
promissory note in the principal amount of approximately $11,700,000, which was
due and payable on December 31, 2001, with interest payable quarterly (provided
that up to approximately $3,000,000 would be forgiven in certain circumstances).
Approximately $8,500,000 of the reduction of such indebtedness was forgiven;
such forgiveness is reflected in the 1996 Statement of Operations as a reduction
of the loss on disposal of the discontinued plasma business. The remainder of
the reduction represented a net amount due from Novo Nordisk


                                       12
<PAGE>


to the Company related to various service arrangements between the two
companies. The amount included in the balance sheet at December 31, 1997 and
1996 includes the effect of the Restructuring Agreement net of the $3,000,000
contingency amount to reflect the most probable result of the Company's decision
to exit the plasma business. All amounts outstanding under such note were
convertible by either party, commencing January 1998, into shares of Common
Stock at a conversion price equal to $10.50 per share. In December 1997, the
Company notified the holder of the note of its intent to convert in January
1998, $8,687,000 of debt, which it believes was the entire amount outstanding as
of the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of Common Stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such claims are without merit.

         In March 1997, the Company exercised its right, under the lease
arrangement of its Marlborough, Massachusetts facility, to have a portion of its
leasehold improvements financed and received $140,000 in connection with this
arrangement. This amount will be repaid in 60 equal monthly installments at a
rate of 12% per annum. As of December 31, 1997, there was a balance of $109,000
remaining to be paid on this note.

         In April 1997, the Company determined to focus management resources on
its core business of blood filtration technologies, consistent with its earlier
decision to exit the plasma business. In connection therewith, four officers
were relieved of their duties. In connection therewith, the Company incurred a
one-time charge of $1,215,000 in 1997 related to these actions. At December 31,
1997 there was a balance of $437,000 remaining to be paid related to this
charge.

         In June 1994, the Company executed an agreement with a third party to
license certain technology. Pursuant to the terms of the agreement, the Company
committed to paying license and consulting fees of $1,200,000 payable in four
equal annual installments, and royalties for commercial sales of any product
incorporating this technology. As of December 31, 1997, all license and
consulting fees pursuant to that agreement have been paid and charged to
expense.

         In 1994, in collaboration with Sepracor and certain of its other
subsidiaries, the Company executed an equipment leasing arrangement that
provided for a total of $2,000,000 to Sepracor and certain of its other
subsidiaries for purposes of financing capital equipment. Under certain
circumstances, Sepracor is the guarantor of any amounts outstanding under this
financing arrangement. In October 1996, the Company executed a replacement
leasing arrangement for the benefit of the Company only with the same leasing
company providing $1,100,000 of equipment lease financing. This arrangement
terminated in March 1997. All amounts outstanding under the 1994 leasing
facility are being repaid under the original terms of that leasing arrangement.
There was $556,000 outstanding under all leasing arrangements as of December 31,
1997.

Future Operating Results

         Certain of the information contained in this Annual Report, including
information with respect to the development and commercialization of the
Company's products under development and the Company's other plans and strategy
for its business, consists of forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the following:

         The Company believes that the performance of its blood-related products
will be competitive with products sold by other vendors of blood filtration and
transfusion products and may encounter intense competition in the sale of such
products from biotechnology, pharmaceutical and hospital supply companies. In
the Leukoreduction field, several of the Company's competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and production staffs, and production facilities than the Company.
Moreover, some of the Company's competitors are significantly larger than the
Company, have greater experience in preclinical testing, human clinical trials
and other regulatory approval procedures. In addition, many of the Company's
competitors have access to greater capital and other resources, may have
management personnel with more experience than that of the Company and may have
other advantages over the Company in conducting certain businesses and providing
certain services. There can be no assurance that the Company will be able to
compete effectively against such companies. Pall, a principal competitor of the
Company, has filed two complaints against the Company alleging that the
manufacture, use and sale of the Company's LeukoNet System infringes certain
patents held by Pall.

         The customers for the Company's potential products are a limited number
of national and regional blood centers, which collect, store and distribute
blood and blood products. In the United States, the American Red Cross collects
and distributes approximately 45% of the nation's supply of blood products.
Other major blood centers include the New York Blood Center, Blood Centers of
America and United Blood Services, each of which distributes 6% to 12% of the
nation's supply of blood and blood products. In Europe, various national blood
transfusion services or Red Cross organizations collect, store and distribute
virtually all of their respective nation's blood and blood products supply. The
Company's principal competitors have long-standing and, in some cases, exclusive
relationships (including long-term supply contracts) with these blood centers
and there can be no assurance that the Company will be successful in marketing
its products to these centers.

         In June 1995, the Company received clearance from the FDA for the
LeukoNet System. Fiscal 1996 was the first full year of production of the
LeukoNet System and all of the Company's revenues in 1997 were from such
product. In February 1998, the Company determined to discontinue manufacturing
the LeukoNet System and


                                       13
<PAGE>


focus on the completion of development and market introduction of its
next-generation red cell filtration product. There can be no assurance however
that the Company will successfully complete the development and
commercialization of this product, or that such product will be accepted by
potential customers in the marketplace.

         All of the Company's planned blood filtration and transfusion products
are in the research and development stage. The Company will be required to
conduct significant research, development, testing and regulatory compliance
activities on these products that, together with anticipated general and
administrative expenses, are expected to result in substantial losses through
1998. The Company's ability to achieve a profitable level of operations will
depend on successfully completing development, obtaining regulatory approvals
and achieving market acceptance of its blood-related products.

         Some or all of the Company's blood filtration and transfusion products
may require preclinical and clinical testing prior to submission of any
regulatory application for commercial use. The Company expects to receive
regulatory approval for its next-generation red cell filter before the end of
1998. The Company does not expect regulatory approval for commercial sale in the
United States of any of its other planned products before the end of 1998.

         Until relatively recently, computer designs that used microprocessors
had consistently abbreviated dates by eliminating the first two digits of the
year under the assumption that these two digits would always be 19. As the year
2000 approaches, such systems will be unable to accurately process certain
date-based information. This problem is commonly referred to as "the Year 2000
Issue." Management is in the process of assessing the implications of the Year
2000 Issue on its information and other systems, and those of its vendors and
other relationships. The Company currently believes that with modifications to
existing software and/or conversions to new software, the Year 2000 Issue will
not have a significant adverse effect on its information and other systems or on
its business, nor will it result in a significant commitment of resources to
resolve potential problems associated with this event.

         The Company  believes,  based on its current  operating plan,  that, in
addition to its available cash balances,  it will need  additional  financing in
order to fund the Company's  operations beyond the first half of 1998.  Possible
sources of capital  include  strategic  partnerships,  public or private  equity
and/or debt financing, all of which the Company is pursuing. No assurance can be
given,  however, that the Company will be able to obtain additional financing on
terms  acceptable to the Company,  if at all.  Should the Company fail to obtain
any such  financing,  or to obtain  such  financing  on terms  favorable  to the
Company,  the Company may be unable to continue or complete the  development  of
its proposed products and/or market such products  successfully,  or to continue
its current  operations as presently  conducted,  if at all. The Company's  cash
requirements  may vary materially from those now planned because of factors such
as successful  development  of products,  results of product  testing,  approval
process at the FDA and similar foreign  agencies,  commercial  acceptance of its
products, patent developments and the introduction of competitive products.

         Because of the foregoing factors, past financial results should not be
relied upon as an indication of future performance. The Company believes that
period-to-period comparisons of its financial results to date are not
necessarily meaningful and expects that its results of operations may fluctuate
from period to period in the future. See "-- Overview."


                                       14
<PAGE>


Report of Independent Accountants

To the Board of Directors and Stockholders of HemaSure Inc.

         We have audited the accompanying consolidated balance sheets of
HemaSure Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HemaSure Inc. as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

         The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and has a stockholders' deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.



                                                 /s/ COOPERS & LYBRAND L.L.P.



Boston, Massachusetts
February 4, 1998

                                       15

<PAGE>



HemaSure Inc.
Consolidated Balance Sheets

December 31,
(In thousands, except par value amounts)

<TABLE>
<CAPTION>
ASSETS                                                                                    1997                  1996
                                                                                          ----                  ----
<S>                                                                                  <C>                     <C>
Current assets:
Cash and cash equivalents (Note C)                                                    $  1,274               $ 5,355
Marketable securities (Note C)                                                           6,882                11,369
Accounts receivable (Note E)                                                               436                   283
Inventories (Note F)                                                                       158                   376
Net assets of discontinued business (Note B)                                                 -                   500
Prepaid expenses and other current assets                                                  347                   380
                                                                                      --------               -------

Total current assets                                                                     9,097                18,263
Property and equipment, net (Note G)                                                     1,478                 2,245
Other assets                                                                                32                    52
                                                                                      --------               -------

Total assets                                                                         $  10,607              $ 20,560
                                                                                     =========              ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable                                                                   $       876              $  1,612
Accrued expenses (Note H)                                                                1,846                 1,573
     Current portion of note payable                                                        37                     -
Current portion of capital lease obligations (Note H)                                      267                   234
                                                                                     ---------                ------

Total current liabilities                                                                3,026                 3,419
Capital lease obligations (Note H)                                                         289                   525
Note payable                                                                                72                     -
Convertible subordinated note payable (Note I)                                           8,687                 8,687
                                                                                      --------                ------

Total liabilities                                                                       12,074                12,631
                                                                                       -------                ------
Commitments and contingencies (Notes H and I)
Stockholders' equity (deficit): (Note K)
Preferred stock, $0.01 par value, 1,000 shares
  authorized, none issued and outstanding in 1997 and 1996
Common stock, $0.01 par value, authorized 20,000 shares
  in 1997 and 1996, issued and outstanding 8,164 shares
       in 1997 and 8,098 shares in 1996                                                     82                    81
Additional paid-in capital                                                              60,878                60,702
Unearned compensation                                                                      (89)                 (398)
Unrealized holding loss of available-for-sale marketable securities                         (1)                   (3)
Accumulated deficit                                                                    (62,337)              (52,453)
                                                                                       --------              --------
Total stockholders' equity (deficit)                                                    (1,467)                7,929
                                                                                       --------              -------

Total liabilities and stockholders' equity (deficit)                                   $10,607               $20,560
                                                                                       =======               =======
</TABLE>

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



                                       16
<PAGE>


HemaSure Inc.
Consolidated Statements of Operations


<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts)                                      1997               1996              1995
                                                                              ----               ----              ----
<S>                                                                        <C>                 <C>              <C>
Revenues:
Product sales                                                             $  2,357            $   712           $    20
Product sales to related parties (Note C)                                        -                 13               514
Collaborative research and development (Note C)                                  -                 54               300
                                                                         ---------            -------            ------
Total revenues                                                               2,357                779               834
                                                                         ---------          ---------          --------
Costs and expenses:
Cost of products sold                                                        4,158              3,772               662
Cost of products sold to related parties (Note C)                                -                 13               411
Cost of collaborative research and development                                   -                 41               283
Research and development                                                     3,577              6,128             4,061
Selling, general and administrative                                          4,964              8,069             3,881
     Restructuring charge                                                    1,215              -                 -
                                                                         ---------          ---------          --------
Total costs and expenses                                                    13,914             18,023             9,298
                                                                         ---------          ---------          --------
Loss from operations                                                       (11,557)           (17,244)           (8,464)
Other income (expense):
     Interest income                                                           577              1,679             1,052
     Interest expense                                                       (1,401)              (105)              (38)
     Other income (expense)                                                  2,497               (180)             -
                                                                         ---------          ---------          --------
Net loss from continuing operations                                         (9,884)           (15,850)           (7,450)
                                                                         ---------          ---------          --------
Discontinued operations: (Note B)
Loss from operations of discontinued business                                -                 (9,550)            -
Loss on disposal of discontinued business                                    -                (15,198)            -
                                                                         ---------          ---------          --------
Net loss                                                                 $  (9,884)          $(40,598)          $(7,450)
                                                                         =========          =========          ========
Net loss per share - basic and diluted:
Net loss from continuing operations                                      $   (1.22)          $ (1.96)          $  (1.20)
Loss from operations of discontinued business                                 -                (1.18)                 -
Loss on disposal of discontinued business                                     -                (1.88)                 -
                                                                         ---------          ---------          --------
Net loss                                                                 $  (1.22)          $  (5.03)          $  (1.20)
                                                                         =========          =========          ========
     Weighted average number of shares of common stock
     outstanding - basic and diluted                                        8,127              8,069              6,205
</TABLE>



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


                                       17

<PAGE>



HemaSure Inc.
Consolidated Statements of Stockholders' Equity (Deficit)

     Year ended
     December 31, 1997, 1996
     and 1995 (In thousands)

<TABLE>
<CAPTION>

                                          Common                   Additional
                                          Stock                     Paid-in        Unearned                     Accumulated
                                          Shares       Amount        Capital     Compensation      Other          Deficit
                                         --------      ------       ---------    ------------      -----         ---------
<S>                                         <C>       <C>            <C>            <C>            <C>            <C>
BALANCE AT DECEMBER 31, 1994                   5,501   $      55        $17,093     $     (794)             -    $    (4,405)

Issuance of common stock to
   employees under stock plans                    30                         95

Unearned compensation amortization                                                          199

Issuance of common stock in follow-on
   offering (net of expenses totaling
   $3,041)                                     2,500          25         43,184

Net loss                                                                                                              (7,450)
                                            --------   ---------        --------     ----------    ----------     -----------

BALANCE AT DECEMBER 31, 1995                   8,031          80         60,372           (595)                      (11,855)

Issuance of common stock to employees
   under stock plans                              67           1            330

Unearned compensation amortization                                                          197

Other                                                                                               $     (3)

Net loss                                                                                                             (40,598)
                                            --------   ---------        --------     ----------    ----------     -----------

BALANCE AT DECEMBER 31, 1996                   8,098          81         60,702           (398)           (3)        (52,453)

Issuance of common stock to employees
   under stock plans                              66           1            176

Unearned compensation amortization                                                          309

Other                                                                                                       2

Net loss                                                                                                              (9,884)
                                            --------   ---------        --------     ----------    ----------     -----------
                                               8,164   $      82        $60,878      $     (89)    $      (1)     $  (62,337)
                                            ========   =========        ========     ==========    ==========     ===========
BALANCE AT DECEMBER 31, 1997
</TABLE>


                                                          Total
                                          Common      Stockholders'
                                          Stock          Equity
                                          Shares        (Deficit)
                                         --------       ---------

BALANCE AT DECEMBER 31, 1994                   5,501     $    11,949

Issuance of common stock to
   employees under stock plans                    30              95

Unearned compensation amortization                               199

Issuance of common stock in follow-on
   offering (net of expenses totaling
   $3,041)                                     2,500          43,209

Net loss                                                     (7,450)
                                            --------     -----------

BALANCE AT DECEMBER 31, 1995                   8,031          48,002

Issuance of common stock to employees
   under stock plans                              67             331

Unearned compensation amortization                               197

Other                                                            (3)

Net loss                                                    (40,598)
                                            --------     -----------

BALANCE AT DECEMBER 31, 1996                   8,098           7,929

Issuance of common stock to employees
   under stock plans                              66             177

Unearned compensation amortization                               309

Other                                                              2

Net loss                                                     (9,884)
                                            --------     -----------
BALANCE AT DECEMBER 31, 1997                   8,164     $   (1,467)
                                            ========     ===========


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



                                       18
<PAGE>



HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)

<TABLE>
<CAPTION>
                                                                             1997                1996                  1995
                                                                             ----                ----                  ----
<S>                                                                   <C>                 <C>                      <C>
Cash flows from operating activities:
Net loss                                                                $ (9,884)            $(40,598)              $(7,450)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discontinued business                                                           -              24,748                     -
          Impairment of assets                                                475                   -                     -
Depreciation and amortization                                                 859                 819                   468
Accretion of marketable securities discount                                     4                 (24)                 (173)
Loss on disposal of equipment                                                   -                 176                     -
Changes in operating assets and liabilities:
Net assets of discontinued business                                           500                (500)                    -
Accounts receivable                                                         (153)                (201)                  (72)
Inventories                                                                   218                 380                  (434)
Prepaid expenses                                                               33                (174)                   66
Accounts payable                                                            (736)                 317                   591
          Accrued expenses                                                    273               1,051                   200
(Increase) decrease in other assets                                            20                  45                   (18)
                                                                        ---------            ---------              -------
Net cash used in continuing operations                                    (8,391)             (13,961)               (6,822)
Net cash used in discontinued business                                      -                 (11,969)                 -
                                                                        ---------            ---------              -------
Net cash used in operating activities                                     (8,391)             (25,930)               (6,822)
                                                                        ---------            ---------              -------
Cash flows from investing activities:
Purchases of marketable securities                                       (99,752)            (219,933)              (28,140)
Maturities of marketable securities                                       104,235             233,401                 3,500
Acquisition of business net of cash acquired                                    -              (4,092)                    -
     Unrealized holding loss of available for sale
     marketable securities                                                      2                  (3)                    -
Additions to property and equipment                                         (220)              (1,213)                 (516)
                                                                        ---------            ---------              -------

Net cash provided by (used in) investing activities                         4,265               8,160               (25,156)
                                                                        ---------            ---------              -------
Cash flows from financing activities:
Net proceeds from issuance of common stock                                    177                 331                43,304
     Borrowing from notes payable arrangements                                140                   -                     -
Repayment of notes payable                                                   (31)                   -                     -
Repayments of capital lease obligations                                     (241)                (178)                  (58)
                                                                        ---------            ---------              -------

Net cash provided by financing activities                                      45                 153                43,246
                                                                        ---------            ---------              -------

Net (decrease) increase in cash and cash equivalents                      (4,081)             (17,617)               11,268
Cash and cash equivalents at beginning of period                            5,355              22,972                11,704
                                                                        ---------            ---------              -------

Cash and cash equivalents at end of period                              $ 1,274              $  5,355               $22,972
                                                                        =========            ========               =======

Supplemental schedule of cash flow information:
Cash paid during the year for interest                                    $ 1,072            $     87               $    38

Noncash investing and financing activities:
Acquisition of fixed assets financed by capital leases                    $    38            $   544                $   378
Reconciliation of assets acquired and liabilities assumed:
Fair value of assets acquired                                                                $ 27,092
Liabilities assumed                                                                            23,000
                                                                                             --------
Cash paid for acquisition                                                                    $  4,092
</TABLE>


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


                                       19
<PAGE>



HemaSure Inc.
Notes to Consolidated Financial Statements

A.   The Company

Nature of the Business

     HemaSure Inc.  (the  "Company")  is utilizing  its  proprietary  filtration
technologies to develop  products to increase the safety of donated blood and to
improve certain blood transfusion procedures.  The Company's  currently-marketed
blood  filtration  products are  designed for use by blood  centers and hospital
blood banks worldwide. From the Company's inception through the first quarter of
fiscal 1996,  HemaSure has sold non-blood  related filter products  primarily to
Sepracor Inc.  ("Sepracor"),  a related  party,  for use in chemical  processing
applications.  Subsequently  and  throughout  1997,  the  Company's  revenue was
derived from the  commercial  sales of its  LeukoNet  System,  a medical  device
designed for the removal of  contaminating  leukocytes  from donated  blood.  In
February 1998, the Company determined to discontinue  manufacturing the LeukoNet
System and focus on the completion of development and market introduction of its
next-  generation  red cell  filtration  product.  The  Company's  collaborative
research and  development  efforts in 1995 and 1996 were with the United  States
Department of the Army for blood filtration-related practices.

     The  Company  is  subject  to risks  common  to  companies  in the  medical
technology industry,  including,  but not limited to, development by the Company
or  its  competitors  of  new  technological  innovations,   dependence  on  key
personnel, protection of proprietary technology, and compliance with regulations
of the United States Food and Drug Administration and similar foreign regulatory
authorities and agencies.

     Since its  inception,  the  Company  has  suffered  recurring  losses  from
operations,  accumulated  deficits  and at  December  31, 1997 had a net capital
deficiency.  These  conditions  raise  substantial  doubt  about its  ability to
continue as a going  concern.  The ultimate  success of the Company is dependent
upon its ability to raise  capital  through  strategic  partnerships,  public or
private  equity  and/or debt  financing and the proposed  introduction  of a new
product into the market.  However, the Company's capital requirements may change
depending  upon  numerous   factors,   including   compliance   with  regulatory
requirements,  the time necessary to  commercialize  the Company's  proposed new
product and the demand for the Company's  proposed product.  No assurance can be
given that the  Company  will be able to obtain  additional  financing  on terms
acceptable  to the  Company,  if at all, or that the Company  will  successfully
develop or effect the new product  introduction  into the market.  The financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

     In view of the Company's current financial condition,  the Company plans to
manage  aggressively  its working  capital and expenses while  pursuing  product
sales opportunities, as well as strategic or other business relationships.

     Certain prior year amounts have been reclassified to be consistent with the
current year presentation.

B.   Discontinued Business

     In May 1996, the Company acquired the plasma product unit of Novo Nordisk
A/S, a Denmark corporation ("Novo Nordisk"), through its Danish subsidiary,
HemaSure A/S (the "Denmark Acquisition"). The purchase price for the transaction
was comprised of a combination of Promissory Notes, Convertible Subordinated
Notes (which would convert to common stock of the Company or a subsidiary of the
Company) and additional consideration payable in 1998 in cash or stock, at the
option of the Company, which would not be paid in certain events. The
acquisition was accounted for under the purchase method of accounting. Results
of operations performed for the Denmark Acquisition have not been presented
because the subsequent decision to discontinue the business (as described below)
eliminates any comparable continuing impact on the Company's financial
statements.

     The loss from  operations  of  discontinued  business of $9,550,000 in 1996
reflects  the loss from the date of the  acquisition.  During  this  eight-month
period,  this business  recorded  revenues  from the sale of plasma  products of
$8,200,000 and cost of products sold of  $13,400,000.  The cost of products sold
includes a reserve for the  write-down  of  inventories  to the lower of cost or
market  of  approximately  $2,500,000  and  loss on the  sale  of raw  materials
inventories of approximately  $800,000.  Operating costs of this business during
this period were approximately $4,000,000.

     In January 1997, the Company and Novo Nordisk  entered into a Restructuring
Agreement  of the debt  related  to the  Denmark  Acquisition.  Pursuant  to the
Restructuring Agreement,  approximately $23,000,000 of indebtedness owed to Novo
Nordisk was  restructured by way of issuance by the Company to Novo Nordisk of a
12%  convertible  subordinated  promissory  note  in  the  principal  amount  of
approximately $11,700,000,  which was due and payable on December 31, 2001, with
interest payable quarterly  (provided that up to approximately  $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such  indebtedness  was forgiven;  such forgiveness was reflected in the 1996
Statement  of  Operations  as a  reduction  of  the  loss  on  disposal  of  the
discontinued plasma business.  The remainder of the reduction  represented a net
amount  due  from  Novo  Nordisk  to the  Company  related  to  various  service
arrangements  between the two companies.  See Note I  (Convertible  Subordinated
Note Payable) below.


                                       20
<PAGE>


     On February 20, 1997, the Company's Board of Directors voted to discontinue
the development and operation of its Danish plasma business due in large part to
Pharmacia & Upjohn's  ("P&U")  wrongful  termination  of the  Company's  planned
acquisition of P&U's plasma business in Sweden,  which was part of the Company's
initial  strategy to enter the plasma  business,  as well as other  factors.  In
connection  with its exit from the  plasma  business,  the  Company  recorded  a
one-time  charge  of  $15,200,000  in  1996.  The  loss  reflected  management's
assessment  of the most  probable  outcome from this  decision and is net of the
$8,500,000  forgiveness of indebtedness  and assumed the $3,000,000  forgiveness
contingency.

     In April 1997, the Company determined to focus management  resources on its
core  business of blood  filtration  technologies,  consistent  with its earlier
decision to exit the plasma  business.  In connection  therewith,  four officers
were relieved of their  duties.  The Company  incurred a one-time  restructuring
charge of $1,215,000  in 1997 for  severance  and related  charges in connection
with this  determination.  At December  31, 1997 there was a balance of $437,000
remaining to be paid related to this charge.

C.   Summary of Significant Accounting Policies

Cash and Cash Equivalents

     The Company  considers all demand  deposits,  money market  instruments and
repurchase  agreements  to be cash and cash  equivalents.  Cash  equivalents  of
$1,025,000 and $5,407,000 at December 31, 1997 and 1996,  respectively,  consist
of repurchase  agreements  with a commercial  bank and money market  instruments
with a financial management  institution.  The carrying amount approximates fair
value because of the short maturity of those instruments.

Marketable Securities

     Management determines the appropriate  classification of its investments in
debt and equity  securities  at the time of  purchase.  At December 31, 1997 and
1996, all marketable  securities  have been classified as available for sale and
are  carried  at fair  value,  with the  unrealized  gains and  losses,  if any,
reported as a separate component of stockholders' equity.

     The amortized cost of debt  securities  classified as available for sale is
adjusted for accretion of discounts to maturity.  Such  accretion is included in
interest  income.  Realized  gains and losses are  included  in other  income or
expense.  The cost of  securities  sold is based on the specific  identification
method.

     The  following  is a  summary  of the  fair  value  of  available  for sale
marketable securities at December 31:


                                           1997                     1996
                                           ----                     ----

U.S. Government Agency Obligations      $6,882,000              $11,369,000

     The  unrealized  holding loss of available for sale  marketable  securities
approximated $1,200 as of December 31, 1997 and $2,600 as of December 31, 1996.

     All debt  securities  available  for sale at December 31, 1997 and 1996 are
due in three months or less.

     The  Company's  policy is to diversify the  investment  portfolio to reduce
risk to principal from credit and  investment  sector risk. At December 31, 1997
and  1996,  investments  were  placed  with a  variety  of high  credit  quality
financial institutions or other issuers.

Inventories

     Inventories  are  stated  at the  lower of cost  (first-in,  first-out)  or
market.

Property and Equipment

     Property and  equipment  are stated at cost.  Costs of major  additions and
betterments  are  capitalized;  maintenance  and repairs which do not improve or
extend the life of the respective assets are charged to operations. On disposal,
the related cost and accumulated  depreciation or amortization  are removed from
the  accounts  and any  resulting  gain or loss is  included  in the  results of
operations.  Depreciation  is computed using the  straight-line  method over the
estimated useful lives of the assets.  All laboratory,  manufacturing and office
equipment have estimated useful lives of three to 10 years.

Revenue Recognition

     Revenues from product sales are recognized when goods are shipped. Revenues
for research and  development  contracts  are recorded  under the  percentage of
completion  method  wherein  costs and  estimated  gross  margin are recorded as
revenue as the work is performed.


                                       21
<PAGE>


Product Sales to Related Parties

     Revenues for product sales to Sepracor are recorded at prices based on a
pricing agreement between the Company and Sepracor. Under this agreement,
product sales to Sepracor for Sepracor's use are at cost while product sales to
Sepracor for subsequent sale or lease to third parties are at cost plus a 25%
margin. Revenues for product sales to Sepracor subsidiaries are recorded at
prices that reflect transactions made on an arm's length basis.

Research and Development

      Research and development costs are expensed in the year incurred.

Net Loss Per Share

     Net loss per common share is based on the weighted average number of shares
of common stock  outstanding  during each period.  Common share equivalents have
not been  included  because the effect would be  antidilutive.  The common share
equivalents  of  the  Company  consist  of  stock  options  (see  Note  K) and a
convertible subordinated note payable (see Note I).

     The  Financial  Accounting  Standards  Board  (FASB)  issued  Statement  of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
was effective for financial  statements issued for periods ending after December
15, 1997. SFAS 128 established  standards for computing and presenting  earnings
per share  ("EPS").  This  statement  simplifies  the  standards  for  computing
earnings per share previously  found in Accounting  Principles Board Opinion No.
15,  "Earnings  Per  Share,"  and makes them  comparable  to  international  EPS
standards.  It replaces the  presentation  of primary EPS with a presentation of
basic EPS.  This  statement  requires  restatement  of all prior period EPS data
presented.  The Company adopted SFAS 128 in December of 1997, which did not have
a  significant  effect on its  financial  statements  for the  current  or prior
periods.

Income Taxes

     Deferred  income  taxes are  accounted  for  under the asset and  liability
method.  Deferred tax assets and  liabilities  reflect the estimated  future tax
consequences  attributable  to  tax  benefit  carryforwards  and  to  "temporary
differences"  between amounts of assets and liabilities for financial  reporting
purposes  and such  amounts as  measured  by tax laws.  A  valuation  reserve is
established  if it is more likely than not that all or a portion of the deferred
tax asset will not be realized.

     Net operating  losses of the Company incurred while operating as a division
of Sepracor are not available for carryforward because the Company's results for
those periods were included in the tax returns of Sepracor.  Additionally, based
upon the Internal Revenue Code and changes in company ownership,  utilization of
the Company's net operating loss may be subject to an annual limitation.

Use of Estimates in the Preparation of Financial Statements

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of contingent  assets and  liabilities  at December 31, 1997 and 1996
and the  reported  amounts of  revenues  and  expenses  during  the years  ended
December  31,  1997,  1996 and 1995.  Actual  results  could  differ  from those
estimates.

Other

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 requires the reporting and display, in a full set of general
purpose financial statements, of all items that are required to be recognized
under accounting standards as components of comprehensive income. SFAS 130 is
effective for statements issued for periods beginning after December 15, 1997
and reclassification of financial statements for earlier periods for comparative
purposes is required. Management believes that the adoption of SFAS 130 will not
have a material impact on the Company's financial statements.

D.    Allocations from and Agreements with Sepracor

     The Company was  formerly a  wholly-owned  subsidiary  of  Sepracor.  As of
January 31, 1998, Sepracor owned 33% of the common stock, $.01 par value, of the
Company ("Common  Stock").  Since the Company's  inception  through December 31,
1995,   all  facilities   and  support   services  of  the  Company,   including
administrative  support,  were provided by Sepracor.  For these  facilities  and
services,  the Company was charged $771,000 for 1995. These charges represent an
allocation of the Company's  proportionate  share of Sepracor's  overhead  costs
using  formulas  developed by  management


                                       22
<PAGE>


based upon the Company's use of such facilities and services. All costs incurred
by the Company prior to the Company's initial public offering in April 1994,
including payroll costs, were paid by Sepracor on behalf of the Company.

     Under a  Corporate  Services  Agreement,  effective  from  January  1, 1994
through  December 31, 1995, the Company  received certain basic support services
from Sepracor in exchange for a fixed monthly payment,  adjusted  annually.  The
Company  recorded an expense of $244,000 for these services in 1995. These basic
services  included  laboratory  support  as  well  as  assistance  with  certain
administrative  services,  including  recruiting  and  benefits  administration,
purchasing, data processing, risk management, corporate communications,  patents
and legal, accounting,  finance and treasury activities.  Effective in 1996, the
Company provided these services through its own employees or outside contractors
engaged directly by the Company.

     Under Sublease Agreements, the Company leased certain laboratory,  research
and office space from  Sepracor  through 1995 in exchange for fixed monthly rent
payments which  increased at various dates and which  approximate  the Company's
proportionate  share of Sepracor's  cost of providing the  facilities  including
building maintenance, cleaning, and certain utilities and other operating costs.
The Company signed a long-term  lease with a third party for its  manufacturing,
laboratory, research and office space in February 1996 (see Note H below).

     Under a Technology Transfer and License Agreement,  Sepracor transferred to
the Company all  technology  owned or  controlled by Sepracor,  including  trade
secrets,  patents  and  patent  applications,  that  relates  to and is  used in
researching,  developing  or  manufacturing  products  in the  Company  Field as
defined in the agreement.  Further, Sepracor had granted an exclusive license to
the Company  for any  improvements  to the  transferred  technology,  which were
developed, or otherwise acquired, by Sepracor during the period beginning on the
date of the  Technology  Transfer and License  Agreement and  terminating on the
earlier of January 1, 1998 or the  acquisition  of Sepracor or the Company  (the
"Effective Period"). The Company had granted to Sepracor an exclusive license to
the transferred technology for the development,  manufacture, use or sale of any
products  within  the  field of chiral  synthesis,  chiral  separations  and the
development,   manufacture,  use  or  sale  of  chiral  drugs  and  chiral  drug
intermediates,  as well as a non-exclusive license to the transferred technology
for the  development,  manufacture,  use or sale of any products  outside of the
Company  Field.  All licenses were  royalty-free.  Sepracor had also granted the
Company a right of first  refusal to any  product,  which  Sepracor  proposed to
sell,  or license a third party to sell  during the  Effective  Period,  for use
within the Company Field. The Technology  Transfer and License Agreement expired
on January 1, 1998  pursuant to its terms and the  Company  does not expect such
termination  to have a  material  effect  upon its  business,  future  operating
results or financial condition.

     In addition, beginning in April 1998, Sepracor will be entitled to certain
rights with respect to the registration under the Securities Act of 1933, as
amended, of a total of 3,000,000 shares of Common Stock. These rights provide
that Sepracor may require the Company, on two occasions, to register shares
having an aggregate offering price of at least $5,000,000, subject to certain
conditions and limitations.

E.    Accounts Receivable

     The Company's 1997 and 1996 trade receivables  primarily  represent amounts
due for product  sales.  The  allowance  for  doubtful  accounts was $25,000 and
$10,000 at December 31, 1997 and 1996, respectively.

     The Company  performs  ongoing  credit  evaluations  of its  customers  and
generally does not require collateral.

F.    Inventories

      Inventories consist of the following at December 31:

(In thousands)                          1997             1996
                                        ----             ----

Raw materials                             -             $ 240
Work in progress                          -               122
Finished goods                           158               14
                                       -----            -----

                                       $ 158            $ 376
                                       =====            =====


                                       23
<PAGE>


G.    Property and Equipment

      Property and equipment consists of the following at December 31:

(In thousands)                          1997             1996
                                        ----             ----
Laboratory and
      manufacturing
      equipment                        $ 894          $ 1,308

Leased laboratory and
      manufacturing
      equipment                          842              889

Office equipment                         742              723

Leasehold improvements                   698              698
                                      ------            -----

                                       3,176            3,618

Accumulated depreciation
      and amortization                (1,771)          (1,421)
                                      -------          -------

                                       1,405            2,197
Construction in progress                  73               48
                                      ------               --

                                     $ 1,478          $ 2,245
                                     -------          -------

     Depreciation and amortization expense was $548,000,  $622,000 and $269,000,
in 1997, 1996 and 1995,  respectively.  In conjunction with its determination to
discontinue  manufacture  of the LeukoNet  System,  provision for  impairment of
$475,000 for manufacturing and related assets was recorded.

     Accumulated amortization of assets under lease was $481,000 and $278,000 as
of December 31, 1997 and 1996, respectively.

H.    Commitments, Contingencies and Accrued Expenses

      Accrued Expenses consist of the following at December 31:

                                                1997         1996
      (In thousands)

      Compensation                            $  440       $  344
      Fees                                       185          300
      Interest on notes payable                  347          -
      Customer refunds                           170          162
      Services                                   500          767
      Miscellaneous                              204          -
                                              ------       ------
                 Total Accrued Expenses       $1,846       $1,573
                                              ------       ------

      Lease Obligations

     The Company  leased  certain  laboratory,  research  and office  space from
Sepracor  through 1995. In 1995, the Company executed a lease for these facility
requirements which commenced in February 1996 and extends through February 2004.
The lease  provides  for two five year renewal  options.  Under the terms of the
lease, the Company is required to pay its allocated share of taxes and operating
costs in addition to the base annual rent. In March 1997, the Company  exercised
its right,  under the lease,  to have a portion  of its  leasehold  improvements
financed and received $140,000 in connection with this arrangement.  This amount
will be repaid in 60 equal monthly installments with an interest rate of 12% per
annum.  As of December 31, 1997 there was a balance of $109,000  remaining to be
paid on this note.

     In 1994,  the Company,  in  collaboration  with Sepracor and certain of its
other subsidiaries,  executed an equipment leasing arrangement that provided for
a total of  $2,000,000  to these  companies  for purposes of  financing  capital
equipment.  In October 1996, the Company executed a separate follow-on equipment
leasing  arrangement  that provided  $1,100,000 of equipment  financing  through
March 31, 1997.  The Company also  executed a leasing  arrangement  with another
leasing  company that  provides for a total of $100,000 of equipment  financing.
The Company  leases various  laboratory,  manufacturing  and computer  equipment
under noncancellable  capital leases. Terms of arrangements with the two leasing
companies  contain  bargain  purchase  provisions at the expiration of the lease
term which range from 24 months to 42 months. In some instances,  the Company is
required to make a deposit of 20% of the original  equipment  cost,  which earns
interest at an annual rate of 4%. Under certain  circumstances,  Sepracor is the
guarantor of debt incurred to acquire  equipment  under the leasing  facilities.
The interest  rate charged on the  Company's  capital  leases ranges from 14% to
21%.



                                       24
<PAGE>



     Future  minimum  payments  under  all  noncancellable  leases  in effect at
December 31, 1997 are as follows:

                   (In thousands)                   Operating            Capital
                   Year                                Leases             Leases

                   1998                               $   214            $   310
                   1999                                   234                257
                   2000                                   236                 79
                   2001                                   236                 -
                   2002                                   236                 -
                   Thereafter                             279                 -
                                                     --------           -------

                   Total minimum
                     lease payments                    $1,435                646
                                                       ------

                   Less amount
                     representing interest                                    90
                   Present value of minimum                               ------
                     lease payments                                       $  556
                                                                          ------

Based on the  borrowing  rates  currently  available  to the Company for capital
leases  with  similar  terms and average  maturities,  the fair value of capital
leases approximates the carrying value.

     The total charged to rent expense for all  noncancellable  leases including
amounts  for  building  maintenance,  utilities  and other  operating  costs was
$803,000, $903,000 and $527,000, in 1997, 1996 and 1995, respectively.

     In June 1994,  the  Company  executed  an  agreement  with a third party to
license  certain  technology.  The Company  agreed to pay license and consulting
fees of $1,200,000 payable in four equal annual installments,  and royalties for
commercial sale of any product  incorporating this technology to the third party
pursuant to the terms of the agreement. As of December 31, 1997, all license and
consulting  fees  pursuant  to that  agreement  have  been paid and  charged  to
expense.

I.    Convertible Subordinated Note Payable

     In January 1997, the Company entered into a Restructuring Agreement of the
debt related to the Denmark Acquisition. Pursuant to the Restructuring
Agreement, approximately $23,000,000 of indebtedness owed to Novo Nordisk was
restructured by way of issuance by the Company to Novo Nordisk of a 12%
convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven. The remainder of the reduction represented a
net amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies. The amount included in the balance sheet
at December 31, 1997 and 1996 includes the effect of the Restructuring Agreement
net of the $3,000,000 contingency amount to reflect the most probable result of
the Company's decision to exit the plasma business. In December 1997, the
Company notified the holder of the note of its intent to convert in January
1998, $8,687,000 of debt, which it believes was the entire amount outstanding as
of the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of Common Stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such claims are without merit.

J.    Segment Information

     The Company operates exclusively in the blood purification business,  which
the Company considers to be one business segment.

Revenues from significant unaffiliated customers are as follows:

Year Ended December 31:                1997            1996            1995
                                       ----            ----            ----

A.                                     -               -                36%
B.                                      86%             83%            -


K.    Stockholders' Equity (Deficit)

Stock Option Plans

     Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based  Compensation,"  (SFAS No.  123),  encourages,  but does not require
companies to record  compensation  cost for  stock-based  employee  compensation
plans


                                       25
<PAGE>


at fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.

      The Company has two stock options plans currently in effect under which
future grants may be issued: the 1994 Stock Option Plan, as amended, and the
1994 Director Option Plan, as amended (collectively, the "Plans"). A total of
2,750,000 shares has been authorized by the Company for grants of options or
shares, of which 639,000 are still available for grant. Stock Options granted
during 1997 and 1996 generally have a maximum term of ten years and vest ratably
over a period of two to five years.

     A summary  of the  Company's  stock  option  activity  for the years  ended
December 31 follows:

<TABLE>
<CAPTION>
                                                       Number of Options                     Weighted Average
                                                          (In thousands)                       Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                                <C>
Outstanding at
      December 31, 1994                                              660                                 $  3.53
Granted                                                              467                                 $  4.50
Exercised                                                            (19)                                $  2.00
Terminated                                                          (158)                                $  8.27
                                                                  -------                                -------

Outstanding at
      December 31, 1995                                              950                                 $  3.25
Granted                                                            1,478                                 $ 12.87
Exercised                                                            (49)                                $  3.12
Terminated                                                            (6)                                $  2.88
                                                                 --------                                -------

Outstanding at
      December 31, 1996                                            2,373                                $   9.24
Granted                                                            1,262                                $   3.02
Exercised                                                            (24)                               $   2.25
Terminated                                                        (1,592)                                $ 12.06
                                                                  -------                                -------

Outstanding at
      December 31, 1997                                            2,019                                $   3.25
</TABLE>


     At December  31, 1997,  1996 and 1995,  respectively,  there were  521,000,
277,000 and 144,000 options  exercisable  with a weighted average exercise price
of $3.42,  $2.88 and $2.47.  The following  table  summarizes  the status of the
Company's stock options at December 31, 1997:

<TABLE>
<CAPTION>
                              OPTIONS OUTSTANDING                                                   OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------------------------------------------
                                                                                               Number
                                           Number           Weighted       Weighted        Exercisable          Weighted
                                       Outstanding As        Average       Average            As of              Average
                                         Of 12/31/97        Remaining      Exercise          12/31/97           Exercise
        Range of Exercise Prices       (In thousands)   Contractual Life    Price         (In thousands)          Price
<S>     <C>                   <C>          <C>               <C>             <C>               <C>                 <C>
       $  1.75    -      $   2.06            398              6.1         $  2.00              216               $  2.00
       $  2.56    -      $   3.38            981              8.6         $  2.85              223               $  3.28
       $  3.50    -      $   5.50            573              9.3         $  3.52               53               $  3.73
       $  8.38    -      $  16.25             67              8.1          $13.44               29                $14.14
                                          ------              ---          ------            -----               -------
                                           2,019              8.3         $  3.23              521               $  3.42
</TABLE>

     The weighted average fair value at date of grant for options granted during
1997,  1996 and 1995 was $2.04,  $8.77 and $2.98 per option,  respectively.  The
fair  value  of  these  options  at  date  of  grant  was  estimated  using  the
Black-Scholes  model with the following  weighted average  assumptions for 1997,
1996 and 1995,  respectively:  risk-free interest rate of 5.5%, 6.20% and 6.30%;
dividend  yields of 0% for all years;  volatility  factor of the expected market
price of the Company's common stock of 75% for all years; and a weighted average
expected life of the options of 5.5 years.

     During 1994 and prior to the Company's initial public offering,  options to
purchase  482,000  shares of Common  Stock  were  granted  under the Plans at an
exercise  price of $2.00 per share.  The estimated fair market value on the date
of grant was $4.00 per  share.  The  Company  recorded  compensation  expense of
$309,000, $197,000 and $199,000 in 1997, 1996 and 1995, respectively, related to
these options.


                                       26
<PAGE>


     In January 1998, the Company adopted a Stock Option Exchange Program.  Upon
employee  consent,  the program provides for the grant to each employee of a new
stock option in exchange for the  cancellation of the old stock option.  The new
stock  option,  granted at fair market  value at date of  issuance,  will become
exercisable for a number of shares of Common Stock equal to the number of shares
covered by the old stock option.

     In 1995,  the Company  adopted the 1995 Employee  Stock  Purchase Plan (the
"Stock Purchase  Plan").  Under the Stock Purchase Plan, an aggregate of 100,000
shares of Common  Stock may be  purchased by employees at 85% of market value on
the first or last day of each six month  offering  period,  whichever  is lower,
through   accumulation  of  payroll   deductions  ranging  from  1%  to  10%  of
compensation as defined, subject to certain limitations.  Options were exercised
to purchase  42,183 shares for a total of $47,000 during the year ended December
31,  1997 and  17,793  shares  for a total of  $165,000  during  the year  ended
December 31, 1996.  At December  31,  1997,  29,163  shares of Common Stock were
reserved for future issuance under the plan.

     Had compensation  cost for the Company's stock option plans been determined
based on the fair  value at the grant  date for  awards  in 1997,  1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net income and net
income per share  would have been  reduced  to the pro forma  amounts  indicated
below.  The  application  of SFAS No. 123 to this employee  stock  purchase plan
would not  result in a  significant  difference  from  reported  net  income and
earnings per share.

<TABLE>
<CAPTION>
                                                                       1997             1996                  1995
                                                                       ----             ----                  ----
<S>                                                              <C>                 <C>                 <C>
Net loss - as reported                                              $ (9,884)        $(40,598)             $(7,450)
Net loss - pro forma                                                $(10,415)        $(43,280)             $(7,750)
Net loss per share - as reported - basic and diluted                  $(1.22)        $  (5.03)             $ (1.20)
Net loss per share - pro forma - basic and diluted                    $(1.28)        $  (5.36)             $ (1.25)
</TABLE>

     The  pro  forma  effect  on net  income  for  1997,  1996  and  1995 is not
representative  of the pro forma effect on net income in future years because it
does not take into  consideration  pro forma  compensation  expense  related  to
grants made prior to 1995.

     In connection with the initial public offering,  the Company granted to the
underwriter an option to purchase  217,500 shares of Common Stock at an exercise
price equal to 150% of the initial  public  offering price or $10.50 and subject
to adjustment in certain circumstances. The option is exercisable at any time or
from time to time after April 14, 1995 and before April 14, 1999. The option may
be transferred in whole or in part at any time under specific conditions.

L.    Income Taxes

     The components of the Company's  deferred tax assets and liabilities are as
follows at December 31:


 (In thousands)                                      1997                1996
                                                     ----                ----

Deferred taxes:
   Assets
     Net operating loss carryforwards             $17,596             $10,505
     Loss on disposal of discontinued business          -               6,120
     Research and development expense
         capitalization                             3,271                   -
     Tax credit carryforwards                         762                 429
     Inventory reserves                               252                 326
     Deferred compensation                             36                 239
     Accrued charges not paid                         410                 193
     Other                                             23                  23
   Liabilities
     Property and equipment                          (153)                (78)
                                                 ---------            --------
                                                   22,197              17,757
Valuation allowance                               (22,197)            (17,757)
                                                 --------             --------
Net deferred taxes                               $     -              $      -
                                                 ========             ========


                                       27
<PAGE>


Due to  the  uncertainty  surrounding  the  realization  of  the  favorable  tax
attributes in future tax returns,  the Company has placed a valuation  allowance
against its otherwise recognizable net deferred tax assets.

     The Company's statutory and effective tax rates were 34% and 0%,
respectively, for both 1997 and 1996. The effective tax rate was 0% due to a net
operating loss and the non-recognition of any net deferred tax asset. At
December 31, 1997, the Company had federal and state tax net operating loss
carryforwards (NOLs) of approximately $43,000,000 and $42,000,000, respectively,
to offset future regular taxable earnings. The federal and state NOLs expire at
various dates through 2012 and 2002, respectively. Federal and state tax credit
carryforwards of approximately $443,000 and $319,000, respectively, expire at
various dates from 2009 through 2012. Based upon the Internal Revenue Code and
changes in company ownership, utilization of the Company's NOLs may be subject
to an annual limitation.

M.    Employees' Savings Plan

     The  Company  has a  401(k)  plan for all  domestic  employees.  Under  the
provisions of the plan, employees may voluntarily  contribute up to 15% of their
compensation subject to statutory limitations. In addition, the Company can make
a  matching  contribution  at its  discretion.  In 1997 and  1996,  the  Company
provided approximately $34,000 and $90,000 of matching contributions. There were
no employer contributions to the plan in 1995.

N.    Litigation

     The  Company is a defendant  in two  lawsuits  brought by Pall  Corporation
("Pall").  In complaints  filed in February 1996 and November 1996, Pall alleged
that  the  Company's  manufacture,  use  and/or  sale  of the  LeukoNet  product
infringes upon three patents held by Pall.

     On October 14, 1996, in connection  with the first action  concerning  U.S.
Patent No. 5,451,321 (the "'321 Patent"), the Company filed a motion for summary
judgment of  noninfringement.  Pall filed a cross motion for summary judgment of
infringement at the same time. In October 1997, the Eastern District of New York
granted in part Pall's summary judgment motion relating to the '321 patent.  The
Company has agreed to terminate the manufacture, use, sale and offer for sale of
the filter  subject  to the  court's  order.  The court has not yet ruled on the
validity of Pall's '321 patent  claims,  which HemaSure has asserted are invalid
and  unenforceable.  No date has been set for the  proceeding  to determine  the
validity and enforceability of Pall's '321 patent claims.

     With respect to the second action  concerning  U.S.  Patent Nos.  4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"),  the Company has answered
the  complaint  stating  that it does not  infringe  any  claim of the  asserted
patents.  Further,  the Company has counterclaimed  for declaratory  judgment of
invalidity,  noninfringement  and  unenforceability  of the '572  patent,  and a
declaratory  judgment of  noninfringement  of the '479 patent,  as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.

     The  Company  believes,  based on  advice  of its  patent  counsel,  that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the LeukoNet product does not infringe any valid
enforceable claim of the three asserted Pall patents.  However,  there can be no
assurance  that the  Company  will  prevail in the pending  litigations,  and an
adverse outcome in a patent  infringement  action would have a material  adverse
effect on the Company's financial condition and future business and operations.

     On November 1, 1996, the Company filed a complaint in the Supreme Court,
State of New York, County of New York, against P&U. In its complaint, the
Company sought to receive damages arising out of the alleged breach by P&U of an
agreement to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. The complaint sought compensatory, consequential and punitive
damages. In September 1997, the Company reached an out-of-court settlement with
P&U. The terms of settlement included a cash payment to the Company and the
granting of an option to P&U to license, on a non-exclusive basis, certain
intellectual property held by the Company and its subsidiaries relating to
plasma fractionation. The cash payment was recognized as other income in 1997.


                                       28
<PAGE>