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

                                    FORM 10-K


     (Mark One)
     [X]          ANNUAL REPORT PURSUANT TO SECTION 13
                 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

           For the fiscal year ended December 31, 1998

                                       OR

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

 For the transition period from .................. to .........................

                          Commission file number 0-19410

                                  HemaSure Inc.
             (Exact name of registrant as specified in its charter)

              Delaware                                04-3216862    
--------------------------------                  ------------------------
 State or other jurisdiction of                   (I.R.S. Employer
 incorporation or organization                    Identification No.)

                140 Locke Drive
        Marlborough, Massachusetts                    01752   
---------------------------------------            --------------
(Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code               (508) 485-6850
                                                   ----------------------------

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class             Name of each exchange on which registered
          None                                        None
  -------------------             -----------------------------------------

           Securities registered pursuant to Section 12(g) of the Act:


816623.6

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                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of class)

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

           Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
registrant was $13,316,925 on January 31, 1999.

Number of shares  outstanding  of the  registrant's  class of common stock as of
January 31, 1999: 9,087,737.


                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for 1999 Annual Meeting of Stockholders - Part III



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                                EXPLANATORY NOTE

           This Annual Report on Form 10-K contains predictions, projections and
other  statements  about the future  that are  intended  to be  "forward-looking
statements" within the meaning of Section 21E of the Securities  Exchange Act of
1934, as amended (collectively,  "Forward-Looking Statements").  Forward-Looking
Statements  are  included  with  respect  to various  aspects  of the  Company's
strategy and  operations,  including but not limited to its product  development
efforts, including regulatory requirements and approvals;  potential development
and strategic alliances; and the Company's liquidity and capital resources. Each
Forward-Looking  Statement that the Company  believes is material is accompanied
by cautionary  statements  identifying important factors that could cause actual
results  to  differ  materially  from  those  described  in the  Forward-Looking
Statement. The cautionary statements are set forth following the Forward-Looking
Statement,  and/or in other  sections  of the  Annual  Report on Form  10-K.  IN
ASSESSING  FORWARD-LOOKING  STATEMENTS  CONTAINED IN THIS ANNUAL  REPORT ON FORM
10-K, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS -- INCLUDING
THOSE CONTAINED IN OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K.

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                                     PART I

Item 1.                        BUSINESS

           HemaSure Inc. (the  "Company") was  established in December 1993 as a
wholly-owned  subsidiary of Sepracor Inc. ("Sepracor").  Prior to that date, its
business was conducted as part of Sepracor's  bioprocessing division.  Effective
as of January 1, 1994,  in exchange for 3,000,000  shares of common  stock,  par
value $.01 per share (the "Common Stock"), of the Company,  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.

           The Company is applying its  proprietary  filtration  technologies to
develop  products to increase the safety of donated blood and to improve certain
blood  transfusion  and  collection  procedures.  The Company is developing  the
following products for use by blood centers, hospital blood banks and hospitals:

Red Cell Leukoreduction Systems

           o         The  "r\LS  System"--A  dockable  red  cell  leukoreduction
                     system designed for use by blood centers and hospital blood
                     banks to remove harmful leukocytes (white blood cells) from
                     donated red blood cells.

           o         In-Line RBC Filtersets--The  Company is in discussions with
                     manufacturers   of  blood  bag   systems  to  develop   and
                     commercialize  in-line leukocyte  reduction systems for red
                     blood cells.  In these  systems,  the filter and  receiving
                     bags are  integrated  with the collection bag and therefore
                     require  no  sterile  docking.  Currently,  the  Company is
                     evaluating   different  product  design  options,   and  is
                     discussing   potential   agreements   covering  supply  and
                     manufacturing arrangements.


Industry Background

           Individuals  suffering physical trauma or anemia,  undergoing complex
surgical procedures or hemodialysis or undergoing treatment for cancer are among
the diverse  group of patients who require blood  transfusions  in the course of
their  medical  care.  Health  risks,  such  as  transfusion  complications  and
infections,  may arise  from  contaminated  blood and blood  products,  although
infection  risks are lower today than in the recent past as a result of improved
donor  education  and selection and  implementation  of screening  procedures to
identify certain virus contaminated blood units prior to transfusion.  Moreover,
these health risks can increase in patients who receive  frequent  transfusions,
such as those  suffering from kidney and liver  disorders,  and patients who are
immune-suppressed, such as those undergoing treatment for cancer.

           The  number of units of whole  blood,  blood  components  or plasma a
patient  receives  in  a  blood  transfusion  varies  significantly.  A  patient
undergoing  routine surgery may typically  receive three or four units,  while a
cancer  patient  undergoing  platelet  transfusion  may receive in excess of 100
units over time.  The risk of infection to a patient  increases as the number of
units transfused increases.


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                                       -1-

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           The Company  expects  that the market for  leukoreduced  blood should
continue  to  expand  over the next two to five  years to near 100% of the total
blood supply from the current 20%. This is due to commitments of approximately 8
international  countries to universal  leukoreduction of blood  components,  and
committees to the FDA and the American  Association of Blood Banks  recommending
universal  leukoreduction  of the United States blood supply.  In addition,  the
Company  believes  that  operational  costs  and  patient  medical  benefits  of
pre-storage  leukoreduction  at  blood  donor  centers  will  prove  to be  more
beneficial than bedside filtration.  This is the primary reason that the Company
has targeted blood donor centers rather than hospitals as its focus market.

Transfusion Risks

           Health  risks  from   transfusions,   including   complications   and
infections,  arise from the presence of leukocytes,  viruses and other pathogens
in blood,  cellular blood components and plasma.  In addition,  autologous blood
recovery and  reinfusion  results in an  increased  risk of  contamination  of a
patient's blood.

           Leukocytes.   Leukocytes   (white  blood  cells)  may  cause  adverse
reactions  in patients  receiving  blood  transfusions,  such as fever,  chills,
immune system  suppression or development of immunological  responses that could
cause the affected patient to reject subsequent blood transfusions. In addition,
leukocytes   may  harbor   infectious   viruses  and  other  agents,   including
cytomegalovirus,  new variant CJD and human T-cell  lymphocyte virus I (HTLV-I).
The Company  believes that the demand for filtered blood for  transfusions  will
continue to increase over the next several years due to the growing  recognition
in the medical field of the benefits of leukocyte reduction.

           Pathogens.  Viruses such as HIV,  hepatitis B and  hepatitis C may be
contained  inside or outside of the  leukocytes  and may be  transmitted  during
transfusions.  Other viruses may develop or become  prevalent  over time. Of the
currently known viruses,  there has been  significant  public focus on hepatitis
and HIV.

Products and Products Under Development

Red Blood Cell Systems
----------------------

           r\LS System

           The Company's r\LS System has been designed for leukocyte  filtration
by blood centers and hospital blood banks immediately prior to blood storage,  a
process which the Company believes results in improved quality leukocyte reduced
blood.  The Company believes that the demand for filtered blood for transfusions
will  continue  to  increase  over the next  several  years  and  that,  while a
significant amount of leukocyte  filtration currently takes place at the patient
bedside, as the demand for filtered blood increases,  leukocyte removal will all
be done through centralized filtration performed at blood centers.

           The r\LS System is based on a proprietary  filter medium comprised of
multiple  fibrous  components.  Leukocytes  are  removed  by  a  combination  of
entrapment and adhesion.  With a proprietary  automatic internal prime and drain
design,  the filter device reduces  operator  intervention  and facilitates high
volume,  centralized  processing in a blood center  environment.  The Company is
focusing its marketing  efforts  exclusively on blood centers and hospital blood
banks for pre-storage leukocyte reduction.

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                                       -2-

<PAGE>



           The Company filed an application  for 510(K)  premarket  notification
clearance  with respect to its r\LS System with the United  States Food and Drug
Administration (the "FDA") in May 1998. The Company commenced  commercialization
of the r\LS System in foreign  countries in the first quarter of 1999. While the
Company  anticipates FDA approval of the  application  prior to the end of June,
1999,  there can be no assurance that the r\LS System will receive the necessary
regulatory approval or achieve market acceptance.

           While the Company  believes that the  performance  and ease-of-use of
the r\LS System will  compare  favorably  with other blood  filtration  devices,
there can be no assurance that the  performance or price of the r\LS System will
be sufficient to achieve significant sales, particularly in view of the dominant
position in the market held by Pall Corporation. See "-- Competition."

           In-Line RBC Filtersets

           The Company is in discussions with manufacturers of blood bag systems
to develop and commercialize  in-line leukocyte  reduction systems for red blood
cells.  In these systems,  the filter and receiving bags are integrated with the
collection bag and therefore require no sterile docking.  Currently, the Company
is evaluating  different  product design  options,  and is discussing  potential
agreements covering supply and manufacturing arrangements.

           LeukoNet System

           In December 1994, the Company filed a 510(k)  premarket  notification
clearance with the FDA for the LeukoNet Pre-Storage  Leukoreduction  System (the
"LeukoNet System"), the Company's first generation leukoreduction system, and in
June  1995  the  Company   received  such  clearance.   The  Company   commenced
commercialization  of the  LeukoNet  System in the United  States and in foreign
countries in the second half of 1995. Sales of the Company's  LeukoNet System to
the American Red Cross  Biomedical  Services  accounted for 86% of the Company's
total  revenues in 1997 and 83% of the  Company's  total  revenues  in 1996.  In
February 1998, the Company determined to discontinue  manufacturing the LeukoNet
System and focus on the completion of development and market introduction of the
r\LS System.

Regulatory Approval
-------------------

           The Company  believes  that its r\LS system will be  classified  as a
Class II medical device and that it will be able to secure  regulatory  approval
in the United States through a 510(k) premarket  notification clearance with the
FDA.  The  Company  believes  that the  in-line  red blood cell  system  will be
classified  as a drug by the FDA and that the  marketing of these  products will
require  preclinical  and  clinical  testing  and  FDA  approval  of a New  Drug
Application  or  Product  License  Application.  The  Company  intends to file a
Investigational  New Drug  Application  ("IND") with the United  States Food and
Drug  Administration (the "FDA") for this System in 2000. There is no assurance,
however,  that the FDA will  determine  that any of the Company's  products will
meet the requirements for its expected classification. If the FDA concludes that
any product  does not meet such  requirements,  then the  process for  obtaining
regulatory approval for such product in the United States would be significantly
lengthened. See "-- Government Regulation."




816623.6
                                       -3-

<PAGE>



Source and Availability of Raw Materials
----------------------------------------

           The Company  acquires  each of the main  components  of their product
from separate single suppliers.  However,  given that there are multiple sources
available to the Company for each such  component,  and based upon the Company's
ongoing relationship with each such supplier,  the Company does not believe that
the loss of any of their  current  supply  channels  would  result in a material
adverse affect on the Company's business or its results of operations.

Membrane Products

           Since its  inception in December  1993  through the first  quarter of
1996, the Company manufactured and sold certain non-blood related  process-scale
membrane   devices  used  for  the  separation  and   purification   of  certain
pharmaceuticals,  chemicals and biologics.  See "-- Relationship with Sepracor."
Substantially  all of the Company's  revenues  through the first quarter of 1996
were attributable to sales of these non- blood related membrane filter products.
Revenues from these products were $13,000 in 1996.

           In 1996 sales to Sepracor with respect to membrane products accounted
for  2% of the  Company's  total  revenues.  Revenues  from  the  United  States
Department of the Army related to such products  represented 7% of the Company's
revenues in 1996. The Company's  agreement with the United States  Department of
the Army concluded in 1996.

Technologies

           The  Company's   planned   products  are  based  on  its  proprietary
technologies  in the areas of  affinity  separations,  membrane  technology  and
device design and fabrication.

           Affinity Separations

           The Company has  proprietary  affinity  separations  technology  that
utilizes ligands,  which are molecules that bind to complementary  biomolecules,
in connection with the Company's various  filtration  products.  The Company has
identified a family of carbohydrate-based ligands that recognize and bind to the
cell surface receptors on leukocytes.  The Company has filed patent applications
covering the use of these carbohydrate-based ligands for removing leukocytes.

           Membrane Technology

           The  Company   believes  that,  as  a  result  of  the  research  and
development work performed at Sepracor over an eight-year period and transferred
to the Company on January 1, 1994,  the Company  has  expertise  in the field of
separations  technology using both composite matrices and flat- and hollow-fiber
membranes.  Successful  separation  of a  substance  from its source  depends on
matching the properties of that substance,  such as size,  molecular  weight and
surface characteristics, to appropriate separations media. The ability to select
and modify  the  composition  and  physical  structure  of the media is a key to
successful  separations  technology.  The Company can utilize a variety of media
compositions,  custom made structures and surface  modifications,  including the
attachment of selective  ligands,  to separate a diverse  variety of substances.
The  Company's  separations  technologies  can be  used to  separate  substances
including  particulates,  such as  cells  and  debris,  macromolecules,  such as
enzymes,  and low  molecular  weight  substances,  such as salts,  nutrients and
anti-viral chemicals. See "-- Relationship with Sepracor."

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                                       -4-

<PAGE>



           Device Design and Fabrication

           The  Company   believes   that  the  benefits  of  high   performance
separations media can only be realized in a well-designed device where access to
and  placement  of the  media,  hydrodynamics  and  selection  of  biocompatible
materials  have been  optimized.  The Company has  expertise  in module  design,
including  theoretical  calculations  of mass transfer,  hydrodynamic  modeling,
prototyping, testing and manufacturing engineering.

           Drawing  from  this   expertise,   the  Company  is  integrating  its
proprietary  technologies in device design and media development with blood flow
control systems, tubing, collection containers and other assembly components, in
devices which are designed to achieve  efficiency  in  increasing  the safety of
donated blood and improving certain blood transfusion and collection procedures.
The Company  considers  its device  design and  fabrication  capabilities  to be
proprietary and intends to file patent applications where appropriate.

           The  Company  has  undertaken  preliminary  studies on the use of its
proprietary media in other  applications such as the removal of tumor cells from
peripheral stem cell preparations and in whole blood leukoreduction.

Research and Development Expenses

           Research and development expenses were $3,794,000 in 1998, $3,577,000
in 1997 and $6,128,000 in 1996.  The decrease in 1997 from the amounts  expended
in 1996 is primarily  attributable to a decrease in expenses associated with the
Company's  SteriPath  Blood  Pathogen  Inactivation  System,  which  program was
discontinued in 1997.

Plasma Pharmaceuticals

           In May 1996,  the Company  acquired,  through  its United  States and
Danish  subsidiaries,  the plasma  product  unit of Novo  Nordisk  A/S, a Danish
company ("Novo Nordisk").  See "--Agreements." The Company's plasma product unit
processed blood plasma into plasma  pharmaceutical  products.  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
division in Sweden,  which was a critical part of the Company's initial strategy
to  enter  the  plasma  business,  as well as  certain  other  factors.  See "--
Agreements," Item 3, "Legal  Proceedings" and Item 7,  "Management's  Discussion
and  Analysis of Financial  Condition  and Results of  Operations."  The Company
recorded  a  one-time  charge  of  $15,200,000  in the  fourth  quarter  of 1996
associated with its determination to exit the plasma business.

Agreements

           In September 1998, the Company  completed a $5 million revolving line
of credit  arrangement  with a commercial  bank.  As of December  31, 1998,  the
entire $5 million was outstanding  under the line. The revolving line of credit,
which  expires in August  2000,  is being  used to help  finance  the  Company's
working  capital  requirements  and  for  general  corporate  purposes.  Amounts
borrowed under the line bear interest at the bank's prime lending rate plus 1/2%
payable quarterly in arrears. The weighted average borrowing rate for the period
ended December 31, 1998 was 8.25%. For the period ended December 31,

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                                       -5-

<PAGE>



1998, the Company recorded interest expense related to borrowings under the line
of $93,000. The credit agreement requires that the Company demonstrate Year 2000
compliance  by March  31,  1999  and  contains  other  customary  covenants  and
provisions.  The bank has a first lien on all assets of the  Company,  including
its intellectual property.

           Sepracor,  the Company's largest  shareholder has guaranteed to repay
amounts  borrowed under the line of credit.  In exchange for the guarantee,  the
Company granted to Sepracor  warrants to purchase up to 1,700,000  shares of the
Company's  common stock at a price of $0.69 per share.  The warrants will expire
in the year 2003 and have  certain  registration  rights  associated  with them.
HemaSure has placed a value of $1,938,000  on the  1,700,000  warrants as of the
date of the final agreement and is amortizing this deferred  financing charge on
a  monthly  basis  over the term of the line of  credit.  For the  period  ended
December 31,  1998,  the Company  amortized  $189,000 of this  deferred  finance
charge and recorded it as interest expense in the Statement of Operations.

           In March 1999,  Sepracor purchased an additional  1,333,334 shares of
common  stock of the  Company  for $1.50 per share and in  connection  therewith
received  warrants to purchase an additional  667,000 shares at a price of $1.50
per  share  and  certain   registration  rights  in  respect  of  such  acquired
securities.

           In  1998,  the  Company  completed  a  distribution  and  development
agreement  with COBE BCT, a  business  unit of Gambro AB, to market and sell its
products worldwide,  except for in the United States and China. COBE BCT markets
and sells blood component apheresis equipment to the blood center market. COBE's
initial focus for  marketing and selling the Company's  products will be Europe,
which is moving rapidly to universal  leukoreduction  of blood  components.  The
agreement with COBE BCT  contemplates  the  development of an OEM filter for use
with COBE's Trima apheresis equipment.

           In August 1998, the Company  completed an amended and restated Master
Strategic Alliance Agreement with the American Red Cross BioMedical  Services, a
not-for-profit,  charitable  corporation  ("ARCBS"),  which  provides for, among
other  things,  the  development  and  enhancement  of a  number  of  filtration
practices  based on the  Company's  core  technology  including  red blood  cell
leukoreduction,  leukocyte recovery, platelet filtration, whole blood filtration
and  tumor  cell  filtration.  No  assurance  can be given,  however,  that such
products  will  ultimately  be  developed  or that  any  definitive  development
arrangements  with  respect to such  products  will  result  from the  strategic
alliance with ARCBS.

           Under the terms of the May 1996  agreement  relating to the Company's
acquisition   of  the  plasma   product  unit  of  Novo  Nordisk  (the  "Denmark
Acquisition"),  the purchase price to be paid for the plasma product unit was to
be comprised of three portions: (i) $1,800,000 was to be payable in 1998 in cash
or Common Stock of the Company or a subsidiary of the Company,  at the Company's
option; (ii) approximately  $13,000,000 was to be payable from time to time upon
the sale of acquired inventory (valued at approximately  $13,000,000) but in any
event no later than 1998,  provided that up to approximately  $3,000,000 of such
portion  could be forgiven  in certain  circumstances;  and (iii)  approximately
$8,000,000 was to be payable in 1998 in cash or Common Stock of the Company or a
subsidiary of the Company,  at the Company's  option,  provided that all of this
portion would be forgiven in certain circumstances. In January 1997, the Company
and Novo Nordisk  entered into a  Restructuring  Agreement  relating to the Novo
Acquisition  (the  "Restructuring  Agreement").  Pursuant  to the  Restructuring
Agreement,  approximately  $23,000,000  million  of  indebtedness  owed  to Novo
Nordisk was  restructured by way of issuance by the Company to Novo Nordisk of a
12% convertible subordinated

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                                       -6-

<PAGE>



promissory note in the principal amount of approximately $11,722,000,  which was
due and  payable on  December  31,  2001 (the  "Note"),  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.  On January 6, 1998, the Company elected
to convert all indebtedness under the Note, pursuant to the terms thereof,  into
shares of Common Stock of the Company at a conversion  price equal to $10.50 per
share,  or 827,375  shares.  Pursuant to a registration  rights  agreement,  the
Company previously granted Novo Nordisk certain registration rights with respect
to any shares of Common Stock  acquired by Novo Nordisk upon  conversion  of the
Note.  Novo Nordisk has  contested  the  conversion  of the Note,  including the
forgiveness  of the  $3,000,000  amount.  The Company  believes  such claims are
without merit.

Competition

           The Company expects to encounter significant  competition in the sale
of its proposed products.  The Company's  proposed products,  if commercialized,
will compete with other products  currently on the market as well as with future
products  developed  by  other  medical  device  companies'   biotechnology  and
pharmaceutical companies, hospital supply companies, national and regional blood
centers,   certain   governmental   organizations   and  agencies  and  academic
institutions.  Many of the  Company's  competitors  in the  field  of  leukocyte
reduction 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.  The Company's ability to compete  successfully will
depend,  in part,  on its ability to develop  and  maintain  products  which are
technically superior to and/or of lower cost than those currently on the market;
develop proprietary products;  attract and retain scientific  personnel;  obtain
patent or other proprietary protection for its products and technologies; obtain
required regulatory approvals; and manufacture, assemble and successfully market
any products it develops.  In addition,  many of the Company's  competitors have
long-standing  relationships  with the national and  regional  blood  centers to
which the Company will market its products.  There can be no assurance  that the
Company will be able to compete effectively against such companies.

           Presently   there   are   approximately   7-9   competitors   in  the
leukoreduction  filter market.  The market leader is Pall  Corporation  ("Pall")
with  approximately  a 60% share.  Pall offers  products  to all  product/market
segments,  with  an  emphasis  in  the  bedside  leukoreduction  market.  Baxter
International  ("Baxter"),   with  approximately  a  25%  share,  also  plays  a
significant role in all product/market segments. The remaining 15% of the market
is  shared  by  the  other  5-7  competitors.  The  Company  believes  that  the
competitive landscape for the leukoreduction market will level off as the market
moves toward 100%  leukoreduction  and market  participants  with smaller market
shares  realize  greater  market  penetration.  Some of these  competitors  have
long-standing  and,  in  certain  cases,  exclusive,  relationships,   including
long-term supply contracts, with the blood centers that are the Company's target
customers.  The Company  expects that the principal  competitive  factors in the
area of leukocyte removal will be removal efficiency, cost and ease of use.


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                                       -7-

<PAGE>



           The Company is  pursuing  areas of product  development  in a rapidly
growing  field in which there is a potential  for  technological  innovation  in
relatively  short  periods of time.  The  Company's  competitors  may succeed in
developing  technologies  or products that are more  effective than those of the
Company.  Technological  change  or  developments  by others  may  result in the
Company's technology or proposed products becoming obsolete or noncompetitive.

Licenses, Patents and Proprietary Information

           The Company entered into a Technology  Transfer and License Agreement
with Sepracor under which Sepracor  transferred to the Company all rights to the
technology developed by Sepracor for the development,  manufacture, use and sale
of  medical  devices  for the  separation  and  purification  of blood and blood
components, including technology relating to (1) optimization of flat membranes,
hollow  fiber  membranes  and  fibrous  supports;   (2)  specific  affinity  and
immunoaffinity  ligands;  (3)  linking  chemistries;  (4)  surface  modification
including hydrophilic polymers and coatings; (5) device designs and engineering;
(6)  fabrication  and   manufacturing   including   encapsulation  and  assembly
techniques; and (7) organic chemical synthesis.

           The Company believes that protection of the proprietary nature of its
products and technology is critical to its business. Accordingly, it has adopted
and will maintain a vigorous program to secure and maintain such protection. The
Company's  practice is to file patent  applications  with respect to technology,
inventions and improvements that are important to its business. The Company also
relies on trade secrets, unpatented know-how, continuing technological invention
and  the  pursuit  of  licensing  opportunities  to  develop  and  maintain  its
competitive   position.   There  can  be  no  assurance  that  others  will  not
independently develop substantially  equivalent  proprietary  technology or that
the Company can meaningfully protect its proprietary position.

           To date, the Company owns or has filed 18 patent  applications in the
United  States   relating  to  blood   filtration   and  pathogen   inactivation
technologies.  Corresponding  foreign patent  applications  have been filed with
respect  to  certain  of  these  United   States  patent   applications.   Where
appropriate,  the Company  intends to file,  or cause to be filed on its behalf,
additional patent applications  relating to future discoveries and improvements,
including,  among  other  things,  the  use  of  certain  ligands  for  affinity
separations.  To date, 11 patents have been issued to the Company  (which expire
at various dates from 2011 through 2015).

           The  Company's  success  depends  in part on its  ability  to  obtain
patents,  to protect  trade  secrets,  to operate  without  infringing  upon the
proprietary  rights of others  and to  prevent  others  from  infringing  on the
proprietary rights of the Company. See Item 3, "Legal Proceedings."  Proprietary
rights  relating  to the  Company's  planned  products  will be  protected  from
unauthorized  use by third  parties  only to the extent that they are covered by
valid and enforceable  patents or are maintained in confidence as trade secrets.
There can be no assurance  that any patents  owned by or licensed to the Company
will  afford  protection   against   competitors  or  that  any  pending  patent
applications now or hereafter filed by or licensed to the Company will result in
patents being issued.  Competitors,  including those with substantially  greater
resources  than the Company,  may seek to challenge  the validity of the patents
owned by or  licensed  to the  Company  or may use  their  resources  to  design
comparable  products  that do not  infringe  these  patents.  See Item 3, "Legal
Proceedings."

           There  are many  issued  third-party  patents  in the  field of blood
filtration,  including  patents held by competitors of the Company.  The Company
may need to acquire licenses to, or contest the validity of,

816623.6
                                       -8-

<PAGE>



some of such patents.  It is likely that significant  funds would be required to
defend any claim that the Company infringes a third-party  patent,  and any such
claim could adversely affect sales of the challenged  product until the claim is
resolved.  There can be no assurance  that any license  required  under any such
patent would be made  available on  acceptable  terms or that the Company  would
prevail  in  any  litigation   involving   such  patent.   See  Item  3,  "Legal
Proceedings."

           Much of the know-how of importance to the  Company's  technology  and
many of its processes are dependent upon the unpatentable knowledge,  experience
and skills of its key scientific and technical personnel.  To protect its rights
and  to  maintain  the   confidentiality   of  trade  secrets  and   proprietary
information,  the  Company  requires  all  of  its  employees,  consultants  and
commercial  partners  and members of its  Scientific/Medical  Advisory  Board to
agree  to  keep  the  Company's  proprietary  information  confidential.   These
agreements  generally  prohibit the  disclosure of  confidential  information to
anyone outside the Company and require  disclosure and assignment to the Company
of ideas, developments,  discoveries and inventions. There can be no assurances,
however,  that these  agreements  will  provide  meaningful  protection  for the
Company's proprietary information in the event of unauthorized use or disclosure
of such information.

Government Regulation

           Government regulations in the United States and other countries are a
significant  factor in the research,  development and  commercialization  of the
Company's  products.  The products  manufactured and marketed by the Company are
subject to regulation by the FDA and similar  authorities in foreign  countries.
The Company  believes  that its r/LS System will be  classified  as a device and
that its In-Line RBC  Filtersets  will be classified as a drug under federal law
and FDA regulations.  The process of obtaining  approvals from the FDA and other
regulatory   authorities   can  be  costly,   time   consuming  and  subject  to
unanticipated delays. There can be no assurance that the FDA will approve any of
the Company's products for marketing or, if they are approved, that they will be
approved on a timely basis.

           Among the conditions  for FDA approval of a drug,  biologic or device
is the requirement  that the  manufacturer's  quality control and  manufacturing
procedures  conform to cGMP,  which must be followed at all times.  Although the
Company's  facilities  and  manufacturing  procedures are designed to conform to
cGMP,  there can be no assurance  that the FDA will determine that they conform.
These  practices  control  every phase of  production  from  choosing  qualified
suppliers,  the incoming receipt of raw materials,  components and subassemblies
to  the  labeling  of  the  finished   product,   tracing  of  consignees  after
distribution and follow-up and reporting of complaint information.

           The Company  believes  that its r/LS System will be  classified  as a
medical  device.  All medical  devices  introduced  to the market since 1976 are
required by the FDA, as a condition of marketing in the United States, to secure
either a 510(k)  premarket  notification  clearance or an approved PMA. A 510(k)
premarket  notification  clearance  indicates FDA agreement  with an applicant's
determination   that  the  product  for  which  clearance  has  been  sought  is
substantially  equivalent to another medical device that was on the market prior
to 1976. An approved PMA application  indicates that the FDA has determined that
the  device  has been  proven,  through  the  submission  of  clinical  data and
manufacturing information, to be safe and effective for its labeled indications.
The process of obtaining a 510(k)  clearance  typically takes at least 12 months
for blood  filtration  devices,  and may take  several  years,  and involves the
submission of clinical data and  supporting  information,  while the PMA process
typically   lasts  at  least  several  years  and  requires  the  submission  of
significant quantities of clinical data and supporting information. The Company

816623.6
                                       -9-

<PAGE>



has sought 510(k) premarket  notification  clearance for its r/LS System.  There
can be no assurance  that the FDA will  conclude  that the r\LS System will meet
the requirements for 510(k) premarket notification clearance.

           The  Company  believes  that  its  In-line  RBC  Filtersets  will  be
classified  by the FDA as a drug  for  regulatory  purposes.  The  Company  must
satisfactorily  complete or perform the following  requirements  and  procedures
before the Company's products classified as a drug may be marketed in the United
States include (1) preclinical  laboratory  tests in animals and formulation and
stability  studies,  (2) the  submission  to the FDA and  approval of an IND for
human clinical  testing,  (3) adequate and well controlled human clinical trials
to prove the safety and  effectiveness  of the drug, (4) the submission of a New
Drug  Application  ("NDA"),  and (5) the  approval  by the FDA of the NDA.  This
approval process typically lasts at least several years.

           Typically,  clinical trials involve three phases of testing. In Phase
I, clinical  trials are conducted with a small number of subjects to determine a
safety  profile.  In Phase II, clinical trials are conducted with a larger group
of  patients  to  determine  preliminary  efficacy,  optimal  configuration  and
expanded evidence of safety. In Phase III, large scale, multicenter, comparative
clinical trials are conducted to provide enough data for the  statistical  proof
of efficacy and safety required by the FDA.

Manufacturing and Facilities

           The Company's  facilities consist of approximately 30,000 square feet
of leased office,  laboratory and  manufacturing  space in a modern  facility in
Marlborough,  Massachusetts.  The Company  believes  that these  facilities  are
adequate and suitable for its needs through 1999. See Item 2, "Properties."

           The leased facilities in Massachusetts  include 25,000 square-feet of
product  development  and  manufacturing  space.  This space is  expected  to be
adequate to address clinical and early commercial-scale  production requirements
of the Company  through  1999.  The  facility is designed to conform to cGMP and
other  applicable  government  standards.  The Company is currently  considering
several  alternatives to accommodate  anticipated  growing  production  capacity
requirements.  The Company's  facility will be subject to inspections by the FDA
and  foreign  regulatory  authorities  on  an  ongoing  basis  and  possibly  in
connection with the review of new products.

           In January 1998, the Company  received ISO 9001  Registration  and CE
mark  EN46001  Certification,  which  was  awarded  by  Bureau  Veritas  Quality
International.  The ISO 9000 and EN46000 Series of  international  standards was
developed  by the  International  Organization  for  Standardization  to promote
homogeneous  quality  processes  through the global  trade  community.  ISO 9001
specifically  addresses requirements for the manufacture,  design,  development,
installation  and service of products and CE EN46001  addresses the requirements
to market medical devices in the European Union.

           For manufacturing outside the United States, the Company will also be
subject to foreign  regulatory  requirements  governing  human clinical  trials,
manufacturing and marketing approval for drugs or biologics and medical devices.
The regulatory requirements may vary widely from country to country.


816623.6
                                      -10-

<PAGE>



Employees

           As of March 1, 1999,  the  Company  employed a total of 44 persons of
whom  17  were in  research  and  development,  13  were  in  manufacturing  and
development  support  and 14 were in  sales  and  administration.  Three  of the
Company's employees hold Ph.D. degrees.

Relationship with Sepracor

           The  Company  was  organized  in  December  1993  as  a  wholly-owned
subsidiary of Sepracor.  Effective  January 1, 1994,  Sepracor  transferred  its
blood  filtration and membrane filter design business to the Company in exchange
for 3,000,000  shares of Common Stock. As of March 31, 1999,  Sepracor owned 42%
of the Company's Common Stock. As of the date hereof,  two executive officers of
Sepracor serve as directors of the Company.

           In September 1998, the Company  completed a $5 million revolving line
of credit  arrangement with a commercial bank.  Sepracor has guaranteed to repay
amounts  borrowed under the line of credit.  In exchange for the guarantee,  the
Company granted to Sepracor  warrants to purchase up to 1,700,000  shares of the
Company's  common stock at a price of $0.69 per share.  The warrants will expire
in the year 2003 and have certain registration rights associated with them.

           In March 1999,  Sepracor purchased an additional  1,333,334 shares of
common  stock of the  Company  for  $1.50 per share  and  received  warrants  to
purchase an additional 667,000 shares at a price of $1.50 per share.

           Sepracor  is  entitled  to  certain   rights  with   respect  to  the
registration  under  the  Securities  Act of  1933,  as  amended,  of a total of
6,700,334 shares of Common Stock, including shares of Common stock issuable upon
exercise of outstanding warrants. These rights provide that Sepracor may require
the Company to register shares subject to certain conditions and limitations.

           Sepracor is engaged in the  business  of using  chiral  chemistry  to
develop single-isomer forms of existing, widely sold pharmaceuticals.

           Any future  arrangements  and  transactions  between  the Company and
Sepracor will continue to be on terms which the Company  determines are fair and
reasonable to the Company.

Item 2.                        PROPERTIES

           The Company's  facilities consist of approximately 30,000 square feet
of leased office,  laboratory and  manufacturing  space in a modern  facility in
Marlborough,  Massachusetts  (which lease expires in February 2004, and provides
for two five-year renewal options  thereafter).  The Company believes that these
facilities  are adequate and suitable for its needs  through  1999.  See Item 1.
"Business -- Manufacturing and Facilities."


816623.6
                                      -11-

<PAGE>



Item 3.                        LEGAL PROCEEDINGS

           The  Company is a  defendant  in two  lawsuits  brought  by 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
United  States 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 and held that the LeukoNet  product  infringes a
single claim from the '321 Patent.  The Company has terminated the  manufacture,
use,  sale and offer for sale of the filter  that is the  subject to the court's
order.  The  Company has  appealed  the  October  1997  decision to the Court of
Appeals for the Federal Circuit. Oral arguments were heard in February 1999. The
Company now awaits a decision  from the  Federal  Circuit.  Remaining  discovery
relating to the damages phase of the first action has been completed.

           With respect to the second action concerning United States Patent No.
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. Pall has amended its
Complaint to add Lydall,  Inc., whose  subsidiary  supplied filter media for the
LeukoNet product, as a co-defendant.  The Company has filed for summary judgment
of  non-infringement,   and  Pall  has  cross-filed  for  summary  judgement  of
infringement at the same time. Lydall supported the Company's motion for summary
judgment of non-infringement,  and has served a motion for summary judgment that
the asserted claims of the `572 patent are invalid as a matter of law. Discovery
has been completed in the 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 two 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 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.

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

           No  matters  were  submitted  to a vote of  security  holders  of the
Company,  through solicitation of proxies or otherwise,  during the last quarter
of the year ended December 31, 1998.


816623.6
                                      -12-

<PAGE>



                      EXECUTIVE OFFICERS OF THE REGISTRANT

           The following  table sets forth the names,  ages and positions of the
current executive officers of the Company.

<TABLE>
<CAPTION>
                     Name                             Age                          Position
<S>                                                    <C>         <C>
John F. McGuire.....................................    52          President, Chief Executive Officer and Director

James B. Murphy.....................................    42          Senior Vice President, Finance and Administration

 Peter Sutcliffe     ...............................    49          Vice President and Chief Operating Officer
</TABLE>

           John F. McGuire has served as Chief Executive  Officer and a director
of the Company since April 1997.  Prior to that time, Mr. McGuire served as Vice
President and General  Manager of Johnson & Johnson's  ("J&J") Ortho  Diagnostic
Systems Blood Bank Business Unit since January 1996.  From March 1995 to January
1996, Mr. McGuire held the position of Vice President,  Sales & Marketing, North
America for J&J. From August 1990 to March 1995,  Mr. McGuire served as Managing
Director of Ortho Diagnostic  Systems,  U.K. and Belgium for J&J. From September
1988 to August 1990, Mr. McGuire held the position of Marketing Director for the
AIDS and Hepatitis  Business Unit of J&J.  From 1977 to 1988,  Mr.  McGuire held
various  management  positions at E.I. DuPont De Nemours & Company,  the last of
which was National Sales Manager,  AIDS & Hepatitis  Business.  Mr. McGuire is a
member of the Board of Trustees of the National Blood  Foundation Trust Fund and
of the Bergen Community Blood Center.

           Mr.  Murphy  has  served  as  Senior  Vice  President,   Finance  and
Administration  since February 1996.  From April 1994 to January 1996, he served
as Vice President and Corporate  Controller of the Company.  Prior to that, from
1990 to April 1994, he served as Corporate  Controller of Sepracor.  Previously,
Mr.  Murphy held the  positions of Senior  Corporate  Accountant at BBN Inc. and
Senior Accountant at Arthur Andersen LLP.

           Mr.  Sutcliffe has served as Chief  Operating  Officer of the Company
since April 3, 1998. From May 1996 until that time, Mr. Sutcliffe served as Vice
President of  Manufacturing  Operations of the Company.  From May 1982 until May
1996, Mr. Sutcliffe held the position of Vice President Manufacturing for Cornig
Costar Incorporated.  From 1976 until 1982, he was a plant manufacturing manager
at Millipore Corporation.


816623.6
                                      -13-

<PAGE>



                                     PART II

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

           (a)   Market Information.

           The Common Stock of the Company has been  included  for  quotation on
the OTC  bulletin  board under the symbol  HMSR since  January  14,  1998.  From
October 28, 1997 until  January 13,  1998,  the Common  Stock was  included  for
quotation on The Nasdaq SmallCap Market under the symbol HMSRC. Prior to October
28, 1997 and since April 7, 1994,  the Common  Stock of the Company was included
for  quotation on the Nasdaq  National  Market  under the symbol HMSR.  Prior to
April 7, 1994, the Company's Common Stock was not publicly traded. The following
table  sets  forth  for the  periods  indicated  the  range  of high and low bid
information  per share of the Common  Stock as  included  for  quotation  on the
Nasdaq National Market or The Nasdaq SmallCap Market, as the case may be.


            1998                        High                        Low
            ----                        ----                        ---
      First Quarter                     2 3/16                      3/8
      Second Quarter                    2 1/16                      7/16
      Third Quarter                     2 15/32                     1 3/16
      Fourth Quarter                    2 15/16                     7/8

            1997                        High                        Low
            ----                        ----                        ---
      First Quarter                     8                           3 3/4
      Second Quarter                    4 1/16                      1 9/16
      Third Quarter                     4 5/8                       2 1/4
      Fourth Quarter                    4 1/4                       11/16

           (b)  Holders.

           On  March  12,  1999,   the  Company's   Common  Stock  was  held  by
approximately  140 stockholders of record.  On March 12, 1999, the last reported
sale price of the Company's Common Stock on the OTC bulletin board was $1 9/16.

           (c)  Dividend Information.

           The Company has never paid dividends on its Common Stock. The Company
currently intends to reinvest its earnings,  if any, for use in the business and
does not expect to pay cash dividends in the foreseeable future.

816623.6
                                      -14-

<PAGE>



           (d) Sales of Securities.

           In each case, the securities  were issued to Sepracor  pursuant to an
exemption from the registration requirements of the Securities Act under Section
4 (2).

           Sepracor,  the Company's largest  shareholder has guaranteed to repay
amounts  borrowed  under  the  Company  line  of  credit.  In  exchange  for the
guarantee,  the Company granted to Sepracor warrants to purchase up to 1,700,000
shares of the Company's common stock at a price of $0.69 per share. The warrants
will expire in the year 2003 and have  certain  registration  rights  associated
with them.  HemaSure has placed a value of $1,938,000 on the 1,700,000  warrants
as of the date of the final  agreement.  In March 1999,  Sepracor  purchased  an
additional  1,333,334  shares of common stock of the Company for $1.50 per share
and in connection  therewith received warrants to purchase an additional 667,000
shares at a price of $1.50 per share and certain  registration rights in respect
of such acquired securities.

Item 6.                        SELECTED FINANCIAL DATA


STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,                                    1998             1997             1996              1995             1994
                                                           ----             ----             ----              ----             ----
Revenues:

<S>                                                 <C>                 <C>               <C>             <C>               <C>     
    Product sales                                   $        25         $  2,357          $   725         $     534         $    339

    Collaborative research and development                -                -                   54               300               50
                                                    -----------      -----------         --------          --------         --------

        Total revenues                                       25            2,357              779               834              389
                                                     ----------         --------          -------          --------         --------

Costs and expenses:                                                                                                  

    Cost of products sold                                   657            4,158            3,785             1,073              353

    Cost of collaborative research and                                                                                              
        development                                           -                -               41               283               32

    Research and development                              3,794            3,577            6,128             4,061            3,249

    Legal expense related to patents                      3,340              506              744               152              134

    Selling, general and administrative                   4,201            4,458            7,325             3,729            1,450

    Restructuring charge                                 -                 1,215             -                -                -
                                                    -----------         --------        ---------       -----------       ------

        Total costs and expenses                         11,992           13,914           18,023             9,298            5,218
                                                       --------         --------          -------          --------          -------

Loss from operations                                   (11,967)         (11,557)         (17,244)           (8,464)          (4,829)

Other (expense) income                                    (203)            1,673            1,394             1,014              424
                                                     ----------         --------        ---------         ---------         --------

Net loss from continuing operations                    (12,170)          (9,884)         (15,850)           (7,450)          (4,405)
                                                      ---------        ---------        ---------         ---------         --------

Discontinued operations:

    Loss from operations of discontinued business          -                -             (9,550)             -                -

    Loss on disposal of discontinued business              -                -            (15,198)             -                -
                                                    -----------      -----------         --------        ----------          ------

        Net loss                                     $ (12,170)       $  (9,884)        $(40,598)          $(7,450)         $(4,405)
                                                     ----------       ----------        ---------          --------         --------

Net loss per common share - basic and diluted:

    Net loss from continuing operations             $    (1.35)      $    (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                                    $    (1.35)      $    (1.22)         $ (5.03)          $ (1.20)         $ (0.92)
                                                    -----------      -----------         --------          --------         --------




816623.6
                                      -15-

<PAGE>





Weighted average number of shares of common                                                                                         
stock outstanding - basic and diluted:                   9,025            8,127            8,069             6,205            4,767
                                                    ----------       ----------         --------          --------         --------


BALANCE SHEET DATA                                                                                                                  
(In thousands)                                                                                                                      



Cash and marketable securities                      $    1,827       $    8,156          $16,724           $47,841          $11,704

Working capital                                             37            6,071           14,844            46,905           11,261

Total assets                                             5,655           10,607           20,560            50,212           13,048

Capital lease obligations long term                         68              289              525               286               52

Convertible subordinated note payable long term              -            8,687            8,687                 -                -

Stockholders' equity (deficit)                         (2,832)          (1,467)            7,929            48,002           11,949

</TABLE>


Item 7.              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  March  31,  1999,   Sepracor  owned
approximately 42% 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 in 1996. 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.

           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

816623.6
                                      -16-

<PAGE>



development  and operation of its Danish plasma business due in large part P&U's
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  $25,000 in 1998,  $2,357,000  in 1997 and $779,000 in
1996.  All of the Company's  revenues in 1998 and 1997 were from the sale of the
LeukoNet  System.  The decrease in fiscal 1998 revenues  from those  recorded in
fiscal 1997 is related to the Company's  decision to discontinue the manufacture
and sale of its LeukoNet  System.  Revenues  from product  sales to Sepracor,  a
related  party,  as a percentage of total revenues were 2% in 1996 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.  Revenues
in 1996 include  $54,000 related to the Company's Phase II SBIR program with the
United  States  Department  of the  Army.  In 1998,  1997 and 1996 one  customer
represented 53%, 86% and 83% of total revenues,  respectively. Also in 1998, one
other customer represented 10% of total revenues.

           The cost of products  sold was $657,000 in 1998,  $4,158,000  in 1997
and  $3,785,000 in 1996.  Cost of products  sold  exceeded  product sales in all
periods due to the high costs  associated with low volume  production and to the
start-up costs of new product introduction, 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. The Company  completed its  obligations  under Phase II of an SBIR program
with the Department of the Army in the first quarter of 1996.

           Research and development expenses were $3,794,000 in 1998, $3,577,000
in 1997 and  $6,128,000 in 1996.  The increase in 1998 over amounts  expended in
1997 is attributable to costs  associated with development of the Company's next
generation  red cell filter system,  the r\LS system.  The decrease in 1997 from
1996 is primarily  attributable  to a decrease in expenses  associated  with the
Company's  SteriPath  Blood  Pathogen  Inactivation  System  which  program  was
discontinued in May 1997.

           Legal expense related to patents were $3,340,000 in 1998, $506,000 in
1997 and  $744,000 in 1996.  The  increase  in 1998 as compared to all  previous
periods is due to costs  associated with defending the Company's patent position
in  its  outstanding   litigation  with  Pall.  In  1998  the  Company  incurred
significant  expenses in connection  with expert  witness and discovery  related
activities  associated  with its  outstanding  litigation with Pall. The Company
does not expect to continue  to incur such costs at the same rate  during  1999,
however there can be no assurance  that such costs will not continue at the same
rate as that experienced in 1998. See "--Litigation."

           Selling, general and administrative expenses were $4,201,000 in 1998,
$4,458,000 in 1997 and $7,325,000 in 1996.  The decrease in the amount  expended
in 1998  from 1997 is  primarily  due to a lower  level of sales  and  marketing
expense  associated  with the lower  revenues in 1998 compared to 1997. 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

816623.6
                                      -17-

<PAGE>



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.  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.  In connection therewith,
the Company incurred a one-time  restructuring  charge of $1,215,000 in 1997 for
severance  and  related   charges  in  connection   with  executive   management
departures. At December 31, 1998 all amounts related to this charge were paid.

           Interest income in 1998, 1997 and 1996 primarily  represents interest
earned  on  available  cash and  marketable  securities  balances  during  those
periods.

           The  decrease  in  interest  expense  in  1998  compared  to  1997 is
primarily related to a convertible subordinated note payable which was converted
to common stock in 1998 and lower average capital lease obligation balances. The
increase in interest expense in 1997 compared to 1996 is primarily  attributable
to the convertible  subordinated  note payable that was not in existence  during
1996.

           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

816623.6
                                      -18-

<PAGE>



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's Danish subsidiary was
placed in  bankruptcy  and 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.

New Accounting Standards

           In 1998,  the  Company  adopted  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.  This  statement  establishes
rules  for  the   reporting  of   comprehensive   income  and  its   components.
Comprehensive  income consists of net income and changes in unrealized gains and
losses on marketable securities,  net of reclassification  adjustments for gains
and losses  realized  in income  from the sale of  securities.  For all  periods
presented,  net  income  and  comprehensive  income  are  the  same  due  to the
realization  of all previously  unrealized  gains and losses in the statement of
operations.

           In February 1998,  the Financial  Accounting  Standards  Board issued
Statement  of  Financial  Account  Standards  No.  132 (SFAS  132),  "Employees'
Disclosure  about  Pension  and  Other  Post  retirement   Benefits."  SFAS  132
standardizes  the  disclosure  requirements  for  pension  and  post  retirement
benefits,  and is effective  for the Company's  fiscal year ending  December 31,
1999.  SFAS 132  relates to  disclosure  only and will not affect the  Company's
financial position or results of operations.

           In  June  1998,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),  "Accounting for
Derivative  Instruments  and Hedging  Activities."  This  statement  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives),  and for hedging  activities.  The statement requires companies to
recognize all derivatives as either assets or liabilities,  with the instruments
measured  at fair value.  The  accounting  for  changes in fair value,  gains or
losses  depends  on the  intended  use  of  the  derivative  and  its  resulting
designation.  The statement is effective for all fiscal quarters of fiscal years
beginning  after June 15,  1999.  The Company  will adopt SFAS 133 on January 1,
2000,  but does not  expect  such  adoption  to have a  material  impact  on its
financial statements.


816623.6
                                      -19-

<PAGE>



           In  February  1998,  The  Accounting  Standards  Executive  Committee
("AcSEC"),  issued Statement of Position ("SoP") 98-1,  "Accounting for Costs of
Computer Software  Developed or Obtained for Internal Use." SoP 98-1 establishes
the  accounting  for costs of  software  products  developed  or  purchased  for
internal use, including when such costs should be capitalized.  The Company does
not expect SoP 98-1,  which is effective  for the Company  beginning  January 1,
1999,  to have a material  effect on its  financial  position  or  results  from
operations.

           In April 1998, the AcSEC issued SoP 98-5,  "Reporting on the Costs of
Start-Up  Activities." Start-up activities are defined broadly as those one-time
activities  related  to opening a new  facility,  introducing  a new  product or
service, conducting business in a new territory,  conducting business with a new
class of customer,  commencing  some new  operation or  organizing a new entity.
Under SoP 98-5, the cost of start-up  activities should be expensed as incurred.
SoP 98-5 is effective for the Company  beginning January 1, 1999 and the Company
does not expect its adoption to have a material effect on its financial position
or results of operations.

Litigation

           The  Company is a  defendant  in two  lawsuits  brought  by 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
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 and held that the LeukoNet  product  infringes a
single claim from the '321 Patent.  The Company has terminated the  manufacture,
use,  sale and offer for sale of the filter  subject to the court's  order.  The
Company has appealed  the October 1997  decision to the Court of Appeals for the
Federal  Circuit.  Oral  arguments  were heard in February 1999. The Company now
awaits a decision from the Federal Circuit.  Remaining discovery relating to the
damages phase of the first action has been completed.

           With respect to the second  action  concerning  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.
Pall has amended its Complaint to add Lydall,  Inc.  whose  subsidiary  supplied
filter media for the LeukoNet product, as a co-defendant.  The Company has filed
for summary judgment of  non-infringement,  and Pall has cross-filed for summary
judgement of  infringement  at the same time.  Lydall  supported  the  Company's
motion for  summary  judgment of  non-infringement,  and has served a motion for
summary  judgment  that the asserted  claims of the 1572 patent are invalid as a
matter of law. Discovery has been completed in the 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 two 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

816623.6
                                      -20-

<PAGE>



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 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 increase in cash and cash  equivalents  in 1998 was $553,000.
This net increase is attributable  to net cash provided by investing  activities
of $6,441,000 and cash provided by financing  activities of $4,821,000 offset in
part by net cash used in operating activities of $10,709,000.

           Net  cash   provided   by   investing   activities   relates  to  net
available-for-sale  marketable  securities  investing  activities  of $6,862,000
offset in part by  additions to property  and  equipment  of $422,000.  Net cash
provided  by  financing  activities  relates  to  borrowings  from note  payable
arrangements  of  $5,000,000  offset  in part by  repayments  of  capital  lease
obligations  of  $260,000.  Net cash used in operating  activities  is primarily
attributable to the net loss of $12,170,000, and a reduction in accrued expenses
of  $297,000  offset in part by  non-cash  charges to  operating  activities  of
$189,000 related to warrant financing costs and depreciation and amortization of
$479,000,  a decrease in  accounts  receivable  of  $436,000  and an increase in
accounts payable of $726,000.

           In March 1999, Sepracor purchased an additional 1,333,334 shares in a
private  placement  of  Common  Stock of the  Company  for  $1.50  per share and
received  warrants to purchase an additional  667,000 shares at a price of $1.50
per share.  The financing  agreement  contains certain  registration  rights and
warrant exercise provisions.

           The Company  believes,  based on its current operating plan, that the
financing  provided  by Sepracor  in March 1999 will be  sufficient  to fund the
Company's  operations for approximately two months from the date of funding. The
Company will need additional financing in order to fund the Company's operations
beyond this two month period and is currently  seeking such financing.  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.

           In September 1998, the Company  completed a $5 million revolving line
of credit  arrangement  with a commercial  bank.  As of December  31, 1998,  the
entire $5 million was outstanding under the line. The

816623.6
                                      -21-

<PAGE>



revolving  line of credit,  which  expires in August 2000, is being used to help
finance the Company's  working capital  requirements  and for general  corporate
purposes.  Amounts  borrowed  under the line bear  interest at the bank's  prime
lending  rate plus 1/2%  payable  quarterly  in arrears.  The  weighted  average
borrowing rate for the period ended December 31, 1998 was 8.25%.  For the period
ended  December 31,  1998,  the Company  recorded  interest  expense  related to
borrowings  under the line of $93,000.  The credit  agreement  requires that the
Company  demonstrate  Year 2000  compliance by March 31, 1999 and contains other
customary  covenants and provisions.  The bank has a first lien on all assets of
the Company including its intellectual property.

           Sepracor,  the Company's largest  shareholder has guaranteed to repay
amounts  borrowed under the line of credit.  In exchange for the guarantee,  the
Company granted to Sepracor  warrants to purchase up to 1,700,000  shares of the
Company's  common stock at a price of $0.69 per share.  The warrants will expire
in the year 2003 and have  certain  registration  rights  associated  with them.
HemaSure has placed a value of $1,938,000  on the  1,700,000  warrants as of the
date of the final agreement and is amortizing this deferred  financing charge on
a  monthly  basis  over the term of the line of  credit.  For the  period  ended
December 31, 1998 the Company amortized $189,000 of this deferred finance charge
and recorded it as interest expense in the Statement of Operations.

           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 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's  Danish
subsidiary was placed in bankruptcy  and 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, 1998,  there was a balance of $100,000
remaining to be paid on this note.


816623.6
                                      -22-

<PAGE>



           In April 1997, the Company  determined to focus management  resources
on its core business of blood filtration technologies.  In connection therewith,
the Company incurred a one-time  restructuring  charge of $1,215,000 in 1997 for
severance  and  related   charges  in  connection   with  executive   management
departures. At December 31, 1998 all amounts related to this charge were paid.

           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 $296,000 outstanding under all leasing arrangements as of December 31,
1998.

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 significant 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 Company  believes,  based on its current operating plan, that the
financing  provided  by Sepracor  in March 1999 will be  sufficient  to fund the
Company's  operations for approximately two months from the date of funding. The
Company will need additional financing in order to fund the Company's operations
beyond this two month period and is currently  seeking such financing.  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

816623.6
                                      -23-

<PAGE>



testing,  approval process at the FDA and similar foreign  agencies,  commercial
acceptance  of  its  products,  patent  developments  and  the  introduction  of
competitive products.

           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,  America's Blood Centers 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 1998 and 1997 were from
such  product.   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.  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
1999.  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
1999. 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 1999.

Readiness for Year 2000

           The "Year 2000" issue  results from the use in computer  hardware and
software of two digits  rather than four digits to define the  applicable  year.
When computer  systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing  ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system.  These errors or failures may
have  limited  effects,  or the  effects  may be  widespread,  depending  on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and  telecommunications  systems in the United States and  throughout the world.
Because  of this  interdependence,  the  failure  of one  system may lead to the
failure of many other systems even though the other systems are themselves "Year

816623.6
                                      -24-

<PAGE>



2000  compliant."  The Company has reviewed the Year 2000 issue as it may affect
the Company's business activity.

           The Company is a developer  and  supplier of medical  devices for the
blood  transfusion  industry.  Currently,  the  Company  has  only  one  product
available  for sale  outside of the United  States and is awaiting  approval for
sale in the United States The Company is reliant on a small number of vendors to
supply the  critical  components  for making this  product,  but has  identified
alternative suppliers as a contingency plan. Only final assembly of this product
is done at the Company's  Marlborough,  MA facility. The Company sells primarily
to  blood  centers  and  hospital  blood  banks  and  through  an  international
distributor, and therefore there are a limited number of customers. For internal
systems,  the Company uses  standardized  software  from large  well-established
software  providers  on PCs for  inventory  management,  financial  systems  and
general communications purposes.

           The Company has  implemented  a Year 2000 plan (the "Plan")  which is
designed  to cover all of the  Company's  activities,  which will be modified as
circumstances  change.  Under  the  Plan,  the  Company  is  using a  five-phase
methodology  for  addressing the issue.  The phases are  Awareness,  Assessment,
Correction,  Validation and Implementation.  A heightened emphasis on completion
will continue  through the second  quarter.  Awareness  consists of defining the
Year 2000 problem and gaining  executive level support and  sponsorship.  A Year
2000 program team has been established and an overall strategy  created.  During
Assessment,  all internal systems,  products and supply chain partners have been
inventoried  and  prioritized  for  renovation.  The  Company  believes  it  has
completed a majority of the Awareness and Assessment  phases,  however,  ongoing
work will be required in these areas as the Company  completes its assessment of
existing supply chain partners and enters into new supply chain relationships in
the ordinary course of business.  Renovation consists of converting,  replacing,
upgrading  or  eliminating  systems  that have Year  2000  problems.  Validation
involves  ensuring that  hardware and software  fixes will work properly in 1999
and beyond and can occur both before and after  implementation.  Validation will
continue  through June 1999 to allow for thorough  testing before the Year 2000.
Implementation is the installation of hardware and software components in a live
environment.

           The  Company  has   completed   the   installation   of  an  upgraded
manufacturing system, which is Year 2000 compliant. Validation of this system is
ongoing.  Installation of its Year 2000 compliant internal communications system
has also been completed.  The Company's  financial  reporting  system is already
Year 2000 compliant. The Company continues to assess all of its internal systems
for operational effectiveness and efficiency beyond Year 2000 concerns.

           The impact of Year 2000 issues on the Company will depend not only on
corrective actions that the Company takes but also on the way in which Year 2000
issues are addressed by governmental agencies,  business and other third parties
that provide  services or data to, or receive services or data from the Company,
or whose  financial  condition  or  operational  capability  is important to the
Company.  To reduce  this  exposure,  the  Company  has an  ongoing  process  of
identifying  and  contacting  mission-critical  third  party  vendors  and other
significant  third parties to determine  their Year 2000 plans and target dates.
To date,  the  Company is not aware of any  critical  vendors or  customers  who
either are not  addressing the Year 2000 issue or have indicated that there will
be a problem.

           Risks  associated  with any such third  parties  located  outside the
United States may be higher insofar as it is generally  believed that non-United
States  businesses  may not be addressing  their Year 2000 issues on as timely a
basis as United States businesses.  Notwithstanding the Company's efforts, there
can

816623.6
                                      -25-

<PAGE>



be no assurance that the Company,  mission-critical third party vendors or other
significant third parties will adequately address their Year 2000 issues.

           The Company is developing  contingency  plans for  implementation  in
event  that  the  Company,   mission-critical   third  party  vendors  or  other
significant  third  parties fail to  adequately  address Year 2000 issues,  Such
plans  principally   involve   identifying   alternative   vendors  or  internal
remediation.  There can be no assurance  that any such plans will fully mitigate
any  such   failures  or   problems.   Further   more,   there  may  be  certain
mission-critical third parties, such as utilities,  telecommunication companies,
or material  vendors where  alternative  arrangements  or sources are limited or
unavailable.

           Although it is difficult to estimate the total costs of  implementing
the Plan,  through June 1999 and beyond, the Company's  preliminary  estimate is
that such  costs will total less than  $100,000.  However,  although  management
believes  its  estimates  are  reasonable,  there can be no  assurance,  for the
reasons stated in the next paragraph,  that the actual costs of implementing the
Plan would not differ  materially  from the  estimated  costs.  The  Company has
incurred  approximately $30,000 through December 31, 1998 on this project, which
does not include the costs to re-deploy existing staff.

           The Company does not believe that the  redeployment of existing staff
will have a material  adverse  effect on its business,  results of operations or
financial  position.  Incremental  expenses related to the Year 2000 project are
not  expected to  materially  impact  operating  results in any one period.  The
extent and  magnitude  of the Year 2000  problem as it will affect the  Company,
both before and for some period after January 1, 2000,  are difficult to predict
or  quantify  for a number  of  reasons.  Among the most  important  are lack of
control  over  systems  that are used by third  parties who are  critical to the
Company's operation,  dependence on third party software vendors to deliver Year
2000 upgrades in a timely manner, complexity of testing inter-connected networks
and  applications  that  depend  on third  party  networks  and the  uncertainty
surrounding  how  others  will deal with  liability  issues  raised by Year 2000
related failures.  There can be no assurance,  for example, that systems used by
third parties will be adequately  remediated so that they are Year 2000 ready by
January  1,  2000,  or by some  earlier  date,  so as not to  create a  material
disruption  to  the  company's  business.   Moreover,  the  estimated  costs  of
implementing  the Plan do not take into account the costs, if any, that might be
incurred  as a result of Year 2000  related  failures  that  occur  despite  the
Company's implementation of the Plan.

           Although the Company is not aware of any material  operational issues
associated  with  preparing its internal  systems for the Year 2000, or material
issues with respect to the adequacy of mission-  critical  third party  systems,
there  can be no  assurance  that  the  Company  will  not  experience  material
unanticipated  negative  consequences and/or material costs caused by undetected
errors or defects  in such  systems or by the  Company's  failure to  adequately
prepare for the results of such  errors or defects,  including  costs of related
litigation,  if any.  The  impact of such  consequences  could  have a  material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.  For a more complete discussion of risks and uncertainties involving
the Company's business, please see the risks factors described under the heading
"Factors That May Affect Future Results of Operations."

           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."


816623.6
                                      -26-

<PAGE>



Item 8.                        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The financial  statements filed as part of this Annual Report on Form
10-K are provided under Item 14 below.

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

           Not applicable.

                                    PART III

Items 10-13.

           The  information  required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's  definitive proxy statement
for the Company's 1999 Annual Meeting of Stockholders.  Such information will be
contained in the sections of such proxy statement  captioned "Stock Ownership of
Certain  Beneficial Owners and Management,"  "Election of Directors," "Board and
Committee Meetings,"  "Compensation for Directors,"  "Compensation for Executive
Officers"  and "Certain  Relationships  and Related  Transactions."  Information
regarding  executive officers of the Company is also furnished in Part I of this
Annual  Report  on Form  10-K  under  the  heading  "Executive  Officers  of the
Registrant."

                                     PART IV

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


           a (1)             Financial Statements
                             HemaSure Inc. Consolidated  Financial Statements as
                             of  December  31,  1998 and for  each of the  three
                             years in the period ended  December  31, 1998.  See
                             pages F-1 through F-7, which are included herein.

           a (2)             Financial Statement Schedules
                             All  schedules   are  omitted   because  their  are
                             inapplicable,  not required or the  information  is
                             included in the consolidated  financial  statements
                             or the notes thereto.

           a (3)             Exhibits
                             The   exhibits   listed   in  the   Exhibit   Index
                             immediately  preceding  the  exhibits  are filed as
                             part of this Annual Report on Form 10-K.

            (b)              No  Current  Reports  on Form 8-K were filed by the
                             Company  during  the  last  quarter  of the  period
                             covered by this report.

The  following  trademarks  are  mentioned  in this Annual  Report on Form 10-K:
HemaSure r/LS, LeukoNet and LeukoVir.


816623.6
                                      -27-

<PAGE>



<TABLE>



<S>                                                                                                                           <C>   
                                                Index to Financial Statements                                                  Page
                                                -----------------------------                                                  ----
Report of Independent Accountants............................................................................................. F-1
Consolidated Balance Sheets at December 31, 1998 and 1997..................................................................... F-2
Consolidated Statements of Operations for the Years                                                                                 
Ended December 31, 1998, 1997 and 1996........................................................................................ F-3
Consolidated Statements of Stockholders' Equity (Deficit)                                                                           
for the Years Ended December 31, 1998, 1997 and 1996.......................................................................... F-4
Consolidated Statements of Cash Flows for the Years                                                                                 
Ended December 31, 1998, 1997 and 1996........................................................................................ F-5
Notes to Consolidated Financial Statements.................................................................................... F-7
</TABLE>



816623.6
                                      -28-

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of HemaSure Inc.:

           In our opinion, the accompanying  consolidated balance sheets and the
related  consolidated  statements of operations,  stockholders' equity (deficit)
and cash flows present fairly, in all material respects,  the financial position
of  HemaSure  Inc.  at  December  31,  1997 and  1998,  and the  results  of its
operations  and its cash flows for each of the three  years in the period  ended
December 31, 1998, in conformity with generally accepted accounting  principles.
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 of these  statements in accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

           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 which raises 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/ PricewaterhouseCoopers LLP

Boston, Massachusetts
January 29, 1999, except for Note P which is as of March 23, 1999


816623.6
                                       F-1

<PAGE>




HemaSure Inc.
Consolidated Balance Sheets

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

<TABLE>
<CAPTION>

ASSETS                                                                                1998                 1997
                                                                                      ----                 ----

Current assets:

<S>                                                                                 <C>                <C>     
      Cash and cash equivalents (Note C)                                            $  1,827           $  1,274

      Marketable securities (Note C)                                                       -              6,882

      Accounts receivable (Note E)                                                         -                436

      Inventories (Note F)                                                               206                158

      Deferred financing costs (Note I)                                                1,024                  -

      Prepaid expenses and other current assets                                          326                347
                                                                                 -----------        -----------



      Total current assets                                                             3,383              9,097



Property and equipment, net (Note G)                                                   1,505              1,478

Deferred financing costs long-term (Note I)                                              725                  -

Other assets                                                                              42                 32
                                                                                 -----------        -----------



             Total assets                                                          $   5,655          $  10,607
                                                                                   =========          =========



LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:



      Accounts payable                                                             $   1,542        $       876

      Accrued expenses (Note H)                                                        1,549              1,846

      Current portion of notes payable (Note I )                                          27                 37

      Current portion of capital lease obligations (Note H)                              228                267
                                                                                   ---------          ---------



             Total current liabilities                                                 3,346              3,026



Capital lease obligations (Note H)                                                        68                289

Notes payable (Note I )                                                                5,073                 72

Convertible subordinated note payable (Note J)                                             -              8,687
                                                                                ------------           --------

             Total liabilities                                                         8,487             12,074
                                                                                   ---------            -------



Commitments and contingencies (Notes H, I and J)

Stockholders' deficit (Note L):

      Preferred stock, $0.01 par value, 1,000 shares authorized, none issued and
         outstanding in 1998 and 1997

      Common stock, $0.01 par value, authorized 20,000                                    91                 82
         shares in 1998 and 1997, issued and outstanding
         9,088 in 1998 and 8,164 in 1997

      Additional paid-in capital                                                      71,584             60,878

      Unearned compensation                                                                -               (89)

      Unrealized holding loss of available-for-sale                                        -                (1)
         marketable securities

      Accumulated deficit                                                           (74,507)           (62,337)
                                                                                   ---------           --------



      Total stockholders' deficit                                                    (2,832)            (1,467)
                                                                                   ---------           --------



         Total liabilities and stockholders' deficit                               $   5,655            $10,607
                                                                                   =========            =======
</TABLE>


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

816623.6
                                       F-2

<PAGE>



HemaSure Inc.
Consolidated Statements of Operations

<TABLE>
<CAPTION>
Year Ended December 31,                                                                                      
(In thousands, except per share amounts)                                        1998                  1997                 1996
                                                                                ----                  ----                 ----



Revenues:

      <S>                                                                <C>                      <C>                   <C>    
      Product sales                                                      $        25              $  2,357              $   712



      Product sales to related                                                 -                     -                       13
         parties (Note C)



      Collaborative research and                                               -                     -                       54
                                                                        ------------          ------------             --------
         development (Note C)



      Total revenues                                                              25                 2,357                  779
                                                                         -----------             ---------              -------



Costs and expenses:

      Cost of products sold                                                      657                 4,158                3,772

      Cost of products sold to related parties (Note C)                            -                     -                   13

      Cost of collaborative research and development                               -                     -                   41

      Research and development                                                 3,794                 3,577                6,128

      Legal expense related to patents                                         3,340                   506                  744

      Selling, general and administrative                                      4,201                 4,458                7,325

      Restructuring charge                                                      -                    1,215                -
                                                                        ------------             ---------          -------

      Total costs and expenses                                                11,992                13,914               18,023
                                                                           ---------              --------              -------



Loss from operations                                                        (11,967)              (11,557)             (17,244)

Other income (expense):

      Interest income                                                            169                   577                1,679

      Interest expense                                                         (372)               (1,401)                (105)

      Other income (expense)                                                   -                     2,497                (180)
                                                                        ------------              --------           ----------

Net loss from continuing operations                                         (12,170)               (9,884)             (15,850)
                                                                           --------                ------              --------



Discontinued operations (Note B):

      Loss from operations of discontinued business                           -                     -                   (9,550)

      Loss on disposal of discontinued business                               -                     -                  (15,198)
                                                                       -------------           -----------             --------



Net Loss                                                                   $(12,170)             $ (9,884)            $(40,598)
                                                                           =========             =========            =========



Net loss per share - basic and diluted:



      Net loss from continuing operations                                 $   (1.35)            $   (1.22)          $    (1.96)

      Loss from operations of discontinued business                             -                     -                  (1.18)

      Loss on disposal of discontinued business                                 -                     -                  (1.88)
                                                                          ----------            ----------               ------



      Net Loss                                                            $   (1.35)            $   (1.22)          $    (5.03)
                                                                          ==========            ==========          ===========



      Weighted average number of shares of common stock                       9,025                 8,127                8,069
      outstanding - basic and diluted
</TABLE>


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


816623.6
                                       F-3

<PAGE>



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

Year ended
December 31, 1998, 1997
and 1996 (In thousands)

<TABLE>
<CAPTION>

                                                                                                                                    
                                      Common                        Additional                                        Accumulate    
                                       Stock                          Paid-in            Unearned                         d         
                                      Shares         Amount           Capital          Compensation       Other        Deficit      
                                     --------        ------          ---------         ------------       -----       ---------     

BALANCE AT                                                                                                                          
<S>                                         <C>        <C>                <C>              <C>           <C>           <C>          
      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) 
                                         --------   -----------         -----------       ------------  -----------    ------------


BALANCE AT                                                                                                                          
    DECEMBER 31, 1997                       8,164            82              60,878               (89)          (1)        (62,337) 


Issuance of common stock to                                                                                                         
    employees under stock plans                97             1                  89                                                 


Issuance of common stock for debt             827             8               8,679                                                 


Issuance of warrants                                                          1,938                                                 


Unearned compensation                                                                                                               
    amortization                                                                                    89                              


Other                                                                                                             1                 


Net loss                                                                                                                   (12,170) 
                                         --------   -----------         -----------       ------------  -----------   -------------



BALANCE AT                                  9,088     $      91          $   71,584       $       -     $      -       $   (74,507) 
    DECEMBER 31, 1998                    ========     =========          ==========       ============  ===========    ============ 
</TABLE>


                                          Total
                                       Stockholders
                                          Equity
                                        (Deficit)
                                        ---------

BALANCE AT                                             
      DECEMBER 31, 1995                      $  48,002



Issuance of common stock to                            
      employees under stock plans                  331



Unearned compensation                                  
      amortization                                 197



Other                                              (3)



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



BALANCE AT                                             
      DECEMBER 31, 1996                          7,929


Issuance of common stock to                            
    employees under stock plans                    177


Unearned compensation                                  
    amortization                                   309


Other                                                2


Net loss                                       (9,884)
                                     


BALANCE AT                                             
    DECEMBER 31, 1997                          (1,467)


Issuance of common stock to                            
    employees under stock plans                     90


Issuance of common stock for debt                8,687


Issuance of warrants                             1,938


Unearned compensation                                  
    amortization                                    89


Other                                                1


Net loss                                      (12,170)
                                     



BALANCE AT                                $    (2,832)
    DECEMBER 31, 1998                     ============


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

816623.6
                                       F-4

<PAGE>



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

<TABLE>
<CAPTION>

                                                        1998                  1997                  1996
                                                        ----                  ----                  ----

Cash flows from operating activities:



<S>                                                   <C>                   <C>                   <C>      
    Net loss                                          $ (12,170)            $ (9,884)             $(40,598)

    Adjustments to reconcile net loss to net 
    cash used in operating activities:

         Discontinued business

         Financing costs related to warrants                   -                    -                24,748

         Impairment of assets                                189                    -                     -

         Depreciation and amortization                         -                  475                     -

         Accretion of marketable securities discount         479                  859                   819

         Loss on disposal of equipment                        20                    4                  (24)

    Changes in operating assets and liabilities:               5                    -                   176

         Net assets of discontinued business                   -                  500                 (500)

         Accounts receivable                                 436                (153)                 (201)

         Inventories                                        (48)                  218                   380

         Prepaid expenses                                     21                   33                 (174)

         Accounts payable                                    666                (736)                   317

         Accrued expenses                                  (297)                  273                 1,051

         (Increase) decrease in other assets                (10)                   20                    45
                                                       ---------              -------               -------

    Net cash used in continuing operations              (10,709)              (8,391)              (13,961)

    Net cash used in discontinued business                    -                    -               (11,969)
                                                    ------------            ---------              --------



Net cash used in operating activities                   (10,709)              (8,391)              (25,930)
                                                     -----------           ----------              --------



Cash flows from investing activities:



    Purchases of marketable securities                  (20,255)             (99,752)             (219,933)

    Maturities of marketable securities                   27,117              104,235               233,401

    Acquisition of business net of cash acquired               -                    -               (4,092)

    Unrealized holding loss of available for sale              1                    2                   (3)
         marketable securities

    Additions to property and equipment                    (422)                (220)               (1,213)
                                                      ---------            ---------              ---------



Net cash provided by (used in) investing activities        6,441                4,265                 8,160
                                                       ---------             --------              --------



Cash flows from financing activities:



    Net proceeds from issuance of common stock                90                  177                   331

    Borrowing from notes payable arrangements              5,000                  140                     -

    Repayment of notes payable                               (9)                 (31)                     -

    Repayments of capital lease obligations                (260)                (241)                 (178)
                                                       ---------            ---------               -------



Net cash provided by financing activities                  4,821                45                      153
                                                      ----------         ------------                ------





816623.6
                                       F-5

<PAGE>



                                                                 1998                  1997                  1996
                                                                 ----                  ----                  ----



Net (decrease) increase in cash and cash equivalents                553              (4,081)              (17,617)

Cash and cash equivalents at beginning of period                  1,274                5,355                22,972
                                                              ---------            ---------               -------



Cash and cash equivalents at end of period                      $ 1,827              $ 1,274              $  5,355
                                                                =======              =======              ========



Supplemental schedule of cash flow information:                $    503              $ 1,072               $    87
    Cash paid during the year for interest



Noncash investing and financing activities:

    Acquisition of fixed assets financed by capital          $        -             $     38               $   544
    leases

    Common stock issued for convertible subordinated
    note                                                        $ 8,687            $       -             $       -

    Warrants issued for guaranteed line of credit               $ 1,938            $       -             $       -



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.


816623.6
                                       F-6

<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 product is 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, 1998 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

816623.6
                                       F-7

<PAGE>



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  for the  Denmark  Acquisition  for the  period  from the date of
acquisition to the date of  discontinuation  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.

           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 (See Note J.).

           In April 1997, the Company  recorded a one-time  charge of $1,215,000
for  severance  and related  charges in  connection  with  executive  management
departures  pursuant  HemaSure's  decision to focus on its core blood filtration
business. At December 31, 1998 all amounts related to this charge were paid.

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
$2,138,000 and $1,025,000 at December 31, 1998 and 1997,  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.

816623.6
                                       F-8

<PAGE>




Marketable Securities

           Management   determines  the   appropriate   classification   of  its
investments in debt and equity  securities at the time of purchase.  At December
31, 1997, all marketable  securities  were  classified as available for sale and
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  fair  value  of  available  for sale  marketable  securities  at
December 31, 1997 was $6,882,000 and represented United States Government Agency
Obligations.  The  unrealized  holding  loss of  available  for sale  marketable
securities approximated $1,200 as of December 31, 1997.

           The Company's  policy when  applicable is to diversify the investment
portfolio to reduce risk to principal from credit and investment sector risk. At
December 31, 1997, 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  is
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.

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.


816623.6
                                       F-9

<PAGE>



Net Loss Per Share

           The Company follows Statement of Financial  Accounting  Standards No.
128,  "Earnings  Per  Share"  ("SFAS  128"),  which  established  standards  for
computing and presenting  earnings per share ("EPS").  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 common stock  warrants (See Note D, I and P), stock options (see Note
K) and a  convertible  subordinated  note  payable (see Note I). The Company had
4,214,000,  2,846,000 and 3,200,000 common share  equivalents as of December 31,
1998,  1997  and  1996,  respectively.  The  convertible  subordinated  note was
converted into 827,375 shares of common stock of the Company in January 1998.

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.

Comprehensive Income

           In 1998,  the  Company  adopted  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.  This  statement  establishes
rules  for  the   reporting  of   comprehensive   income  and  its   components.
Comprehensive  income consists of net income and changes in unrealized gains and
losses on marketable securities,  net of reclassification  adjustments for gains
and losses  realized  in income  from the sale of  securities.  For all  periods
presented,  net  income  and  comprehensive  income  are  the  same  due  to the
realization  of all previously  unrealized  gains and losses in the statement of
operations.

New Accounting Standards

           In February 1998,  the Financial  Accounting  Standards  Board issued
Statement  of  Financial  Account  Standards  No.  132 (SFAS  132),  "Employees'
Disclosure   about  Pension  and  Other   Postretirement   Benefits."  SFAS  132
standardizes  the  disclosure   requirements  for  pension  and   postretirement
benefits,  and is effective  for the Company's  fiscal year ending  December 31,
1999.  SFAS 132  relates to  disclosure  only and will not affect the  Company's
financial position or results of operations.

           In  June  1998,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),  "Accounting for
Derivative  Instruments  and Hedging  Activities."  This  statement  establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives),  and for hedging  activities.  The statement requires companies to
recognize all derivatives as either assets or liabilities,  with the instruments
measured at fair value. The accounting for changes in fair

816623.6
                                      F-10

<PAGE>



value,  gains or losses  depends on the intended use of the  derivative  and its
resulting  designation.  The statement is effective  for all fiscal  quarters of
fiscal years  beginning  after June 15, 1999. The Company will adopt SFAS 133 on
January 1, 2000, but does not expect such adoption to have a material  impact on
its financial statements.

           In  February  1998,  The  Accounting  Standards  Executive  Committee
("AcSEC"),  issued Statement of Position ("SoP") 98-1,  "Accounting for Costs of
Computer Software  Developed or Obtained for Internal Use." SoP 98-1 establishes
the  accounting  for costs of  software  products  developed  or  purchased  for
internal use, including when such costs should be capitalized.  The Company does
not expect SoP 98-1,  which is effective  for the Company  beginning  January 1,
1999,  to have a material  effect on its  financial  position  or  results  from
operations.

           In April 1998, the AcSEC issued SoP 98-5,  "Reporting on the Costs of
Start-Up  Activities." Start-up activities are defined broadly as those one-time
activities  related  to opening a new  facility,  introducing  a new  product or
service, conducting business in a new territory,  conducting business with a new
class of customer,  commencing  some new  operation or  organizing a new entity.
Under SoP 98-5, the cost of start-up  activities should be expensed as incurred.
SoP 98-5 is effective for the Company  beginning January 1, 1999 and the Company
does not expect its adoption to have a material effect on its financial position
or results of operations.


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, 1998 and 1997
and the  reported  amounts of  revenues  and  expenses  during  the years  ended
December 31, 1998, 1997 and 1996. Actual results could differ from those 
estimates.

D.         AGREEMENTS WITH SEPRACOR:

           The Company was formerly a wholly-owned subsidiary of Sepracor. As of
March 31, 1999,  Sepracor owned 42% of the common stock,  $.01 par value, of the
Company ("Common Stock").

           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

           In  addition,  beginning  in April  1998,  Sepracor  was  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

816623.6
                                      F-11

<PAGE>



related to the  technology  transfer and  establishment  of the Company in 1993.
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.

           In September 1998, the Company  completed a $5 million revolving line
of credit  arrangement with a commercial bank.  Sepracor has guaranteed to repay
amounts  borrowed under the line of credit.  In exchange for the guarantee,  the
Company granted to Sepracor  warrants to purchase up to 1,700,000  shares of the
Company's  common stock at a price of $0.69 per share.  The warrants will expire
in the year 2003 and have certain registration rights associated with them. (See
Notes I and P)

E.         ACCOUNTS RECEIVABLE:

           The Company's  1998 and 1997 trade  receivables  primarily  represent
amounts due for product  sales.  The allowance for doubtful  accounts was $7,000
and $25,000 at December 31, 1998 and 1997, 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)          1998                1997
                        ----                ----

Raw materials           $ 206                $-
Finished goods            -                   158 
                        ------               -----

                         $206                $158 
                         ====                =====

G.         PROPERTY AND EQUIPMENT

           Property and equipment consists of the following at December 31:

(In thousands)                     1998                 1997
                                   ----                 ----
Laboratory and
           manufacturing
           equipment               $ 874                $ 894

Leased laboratory and
           manufacturing
           equipment                 505                  842

Office equipment                     759                  742

Leasehold improvements               766                  698
                                     ---                 ----

                                    2,904                3,176
Accumulated depreciation
           and amortization        (1,849)              (1,771)
                                   -------              -------


816623.6
                                      F-12

<PAGE>



Construction in progress             1,055                1,405

                                       450                   73
                                   -------              -------

                                   $ 1,505              $ 1,478
                                   -------              -------

           Depreciation  and  amortization  expense was  $391,000,  $548,000 and
$622,000,  in  1998,  1997  and  1996,  respectively.  In  conjunction  with its
determination  to  discontinue  manufacture  of the LeukoNet  System in February
1998,  a provision  for  impairment  of $475,000 for  manufacturing  and related
assets was recorded for the period ended December 31, 1997.

           Accumulated  amortization  of assets  under  lease was  $395,000  and
$481,000 as of December 31, 1998 and 1997, respectively.

H.         ACCRUED EXPENSES AND COMMITMENTS AND CONTINGENCIES:

           Accrued Expenses consist of the following at December 31:

                                                 1998                      1997
                                                 ----                      ----
           (In thousands)

           Compensation                      $     43                    $  440
           Fees                                   104                       185
           Interest on notes payable               26                       347
           Customer refunds                       175                       170
           Services                               750                       500
           Miscellaneous                          451                       204


                  Total Accrued Expenses       $1,549                    $1,846
                                               ------                    ------

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 extend 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 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 has leased  various  laboratory,  manufacturing  and
computer  equipment under  noncancelable  capital leases.  Terms of arrangements
with the leasing company contain bargain  purchase  provisions at the expiration
of the lease term,  which range from 36 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%. As of  December  31,  1998 the
Company  had  $177,000  on deposit at the  leasing  company  under this  leasing
arrangement.  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%.

816623.6
                                      F-13

<PAGE>



           Future minimum payments under all  noncancelable  leases in effect at
December 31, 1998 are as follows:

    (In thousands)                          Operating                   Capital
    Year                                       Leases                    Leases

    1999                                          234                       253
    2000                                          236                        71
    2001                                          236                        -
    2002                                          236                        -
    2003                                          236                        -
    Thereafter                                     43                        - 
                                             --------                  --------

    Total minimum                             -------                    ------
    lease payments                            $ 1,221                       324
                                              -------                    ------

    Less amount
    representing interest                                                    28
    Present value of minimum
    lease payments                                                       $  296
                                                                         ------

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  noncancelable  leases
including amounts for building maintenance,  utilities and other operating costs
was $833,000, $803,000, and $903,000, in 1998, 1997 and 1996, respectively.

I.         NOTES PAYABLE

           Notes payable consist of the following at December 31:

(In thousands)                                1998                      1997
                                              ----                      ----

Leasehold improvements financing        $      100                   $   109
Revolving line of credit                     5,000                       -  
                                            ------                   -------

                                             5,100                       109
Less current portion                            27                        37
                                         ---------                  --------

                                         $   5,073                  $     72
                                         =========                  ========


           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.

           In September 1998, the Company  completed a $5 million revolving line
of credit  arrangement  with a commercial  bank.  As of December  31, 1998,  the
entire $5 million was outstanding  under the line. The revolving line of credit,
which  expires in August  2000,  is being  used to help  finance  the  Company's
working  capital  requirements  and  for  general  corporate  purposes.  Amounts
borrowed under the line bear

816623.6
                                      F-14

<PAGE>



interest  at the  bank's  prime  lending  rate plus 1/2%  payable  quarterly  in
arrears.  The weighted average  borrowing rate for the period ended December 31,
1998 was 8.25%.  For the period ended  December 31, 1998,  the Company  recorded
interest  expense  related to borrowings  under the line of $93,000.  The credit
agreement  requires that the Company  demonstrate  Year 2000 compliance by March
31, 1999 and contains other customary  covenants and provisions.  The bank has a
first lien on all assets of the Company including its intellectual property.

           Sepracor,  the Company's largest  shareholder has guaranteed to repay
amounts  borrowed under the line of credit.  In exchange for the guarantee,  the
Company granted to Sepracor  warrants to purchase up to 1,700,000  shares of the
Company's  common stock at a price of $0.69 per share,  The warrants will expire
in the year 2003 and have  certain  registration  rights  associated  with them.
HemaSure has placed a value of $1,938,000  on the  1,700,000  warrants as of the
date of the final agreement and is amortizing this deferred  financing charge on
a  monthly  basis  over the term of the line of  credit.  For the  period  ended
December 31, 1998 the Company amortized $189,000 of this deferred finance charge
and recorded it as interest expense in the Statement of Operations.

J.         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.

K.         Segment Information

           In 1998, the Company adopted SFAS 131, "Disclosures about Segments of
an Enterprise  and related  information",  which  specifies new  guidelines  for
determining  a  company's  operating  segments  and  related   requirements  for
disclosure.

           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:       1998                1997                 1996
                              ----                ----                 ----

A.                            10%                 -                    -
B.                            53%                 86%                  83%


816623.6
                                      F-15

<PAGE>



L.         STOCKHOLDERS' 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 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 have been authorized by the Company for grants of options or
shares,  of which 144,000 are still  available for grant.  Stock Options granted
during 1998 and 1997 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:


                                      Number of Options     Weighted Average
                                       (In thousands)        Exercise Price
--------------------------------------------------------------------------------
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

Granted                                       2,029              $ 0.72

Exercised                                         -                   -

Terminated                                   (1,534)             $ 3.06
                                             -------             ------


Outstanding at                                                          
      December 31, 1998                       2,514              $1.31
                                              -----              -----




           At  December  31,  1998,  1997 and  1996,  respectively,  there  were
339,000,  521,000  and  277,000  options  exercisable  with a  weighted  average
exercise price of $3.85,  $3.42 and $2.88.  The following  table  summarizes the
status of the Company's stock options at December 31, 1998:



816623.6
                                      F-16

<PAGE>



<TABLE>

                                  OPTIONS OUTSTANDING                                                       OPTIONS EXERCISABLE
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                        Weighted                                  Number         
                                                Number                  Average             Weighted           Exercisable 
                                            Outstanding As             Remaining             Average              As of    
                                             Of 12/31/98              Contractual           Exercise             12/31/98  
             Range of Exercise Prices       (In thousands)                Life                Price           (In thousands)



<S>                   <C>                     <C>                         <C>          <C>                         <C>     
$   .63       -      $     .84                1,732                       9.1          $    .63                    1       

$  1.25        -      $   2.00                  565                       7.4           $  1.62                  210       

$  3.37        -      $   5.50                  169                       6.7           $  3.46                   91       

$ 12.38        -      $  16.25                   48                       7.3            $14.74                   37       
                                             ------                       ---            ------                -----       

                                              2,514                       8.5           $  1.31                  339       
</TABLE>


OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
                  
    Weighted
    Average
    Exercise
     Price



$    .81

 $  1.99

 $  3.49

  $15.46
 -------

 $  3.85

           The weighted  average fair value at date of grant for options granted
during 1998, 1997 and 1996 was $.72,  $2.04 and $8.77 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 1998,
1997 and 1996,  respectively:  risk-free  interest rate of 5.5%,  5.5% and 6.2%;
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
$89,000, $309,000 and $197,000 in 1998, 1997 and 1996, respectively,  related to
these options.

           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
250,000  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  96,695 shares for a total of $88,000 during the year ended December
31, 1998 and 42,183 shares for a total of $47,000 during the year ended December
31, 1997. At December 31, 1998,  82,468 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 1998,  1997
and 1996  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.


                              1998                   1997                  1996
                              ----                   ----                  ----


Net loss - as reported     $ (12,170)           $  (9,884)              $(40,598



816623.6
                                      F-17

<PAGE>




<TABLE>
<S>                                                           <C>                  <C>                    <C>      
Net loss - pro forma                                          $(12,610)            $(10,415)              $(43,280)

Net loss per share - as reported - basic and diluted         $   (1.35)           $   (1.22)             $   (5.03)

Net loss per share - pro forma - basic and diluted           $   (1.40)           $   (1.28)             $   (5.36)
</TABLE>


           The pro forma  effect on net  income  for 1998,  1997 and 1996 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 or anticipated future option activity.

           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.

M.         INCOME TAXES

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

<TABLE>
<CAPTION>
 (In thousands)                                                       1998                         1997
                                                                      ----                         ----



Deferred taxes:

     Assets

<S>                                                                  <C>                        <C>    
     Net operating loss carryforwards                                $21,463                    $17,596

     Research and development expense capitalization                   3,892                       3271

     Tax credit carryforwards                                            999                        762

     Inventory reserves                                                   43                        252

     Deferred compensation                                               284                         36

     Accrued charges not paid                                            466                        410

     Other                                                                21                         23

     Liabilities

     Property and equipment                                              (16)                       (153)
                                                                      ------                   ---------

                                                                      27,152                      22,197

Valuation allowance                                                  (27,152)                    (22,197)
                                                                     --------                    -------

Net deferred taxes                                                $     -                    $     -   
                                                                  ==========                 ==========
</TABLE>


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 1998,  1997 and 1996.  For all three years 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, 1998, the Company had federal and state tax
net  operating  loss  carryforwards  (NOLs)  of  approximately  $54,000,000  and
$52,000,000,  respectively,  to offset  future  regular  taxable  earnings.  The
federal  and  state  NOLs  expire  at  various  dates  through  2013  and  2003,
respectively.  Federal  and  state tax  credit  carryforwards  of  approximately
$570,000 and $429,000,  respectively,  expire at various dates from 2010 through
2013.  Based upon the Internal  Revenue  Code and changes in company  ownership,
utilization of the Company's NOLs may be subject to an annual limitation.


816623.6
                                      F-18

<PAGE>

N.         EMPLOYEES' SAVINGS PLAN

           The Company has a 401(k) plan for all 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,  the  Company  provided
approximately  $34,000  of  matching  contributions.   There  were  no  employer
contributions to the plan in 1998.

O.          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
United  States 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 and held that the LeukoNet  product  infringes a
single claim from the '321 Patent.  The Company has terminated the  manufacture,
use,  sale and offer for sale of the filter  subject to the court's  order.  The
Company  appealed  the  October  1997  decision  to the Court of Appeals for the
Federal  Circuit.  Oral  arguments  were heard in February 1999. The Company now
awaits a decision from the Federal Circuit.  Remaining discovery relating to the
damages phase of the first action has been completed.

           With respect to the second action concerning United States Patent No.
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. Pall has amended its
Complaint to add Lydall,  Inc. whose  subsidiary  supplied  filter media for the
LeukoNet product, as a co-defendant.  The Company has filed for summary judgment
of  non-infringement,   and  Pall  has  cross-filed  for  summary  judgement  of
infringement at the same time. Lydall supported the Company's motion for summary
judgment of non-infringement,  and has served a motion for summary judgment that
the asserted claims of the '572 Patent are invalid as a matter of law. Discovery
has been completed in the 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 two 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.


816623.6
                                      F-19

<PAGE>


P.         SUBSEQUENT EVENT

           In March 1999,  Sepracor purchased an additional  1,333,334 shares of
common  stock of the  Company  for  $1.50 per share  and  received  warrants  to
purchase  an  additional  667,000  shares  at a price of $1.50  per  share.  The
warrants  will  expire in the year  2004 and have  certain  registration  rights
associated with them. In certain circumstances, HemaSure may require Sepracor to
exercise these warrants.



816623.6
                                      F-20

<PAGE>



                                   SIGNATURES


           Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 31st day of
March, 1999.

                        HEMASURE INC.


Date:  March 31, 1999   By:        /s/ John F. McGuire                  
                                  --------------------------------------
                                  John F. McGuire, President
                                  and Chief Executive Officer

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

<TABLE>
<CAPTION>

                    Signature                                          Title                                   Date

<S>                                                <C>                                                <C>
/s/ John F. McGuire                                President, Chief Executive                         March 31,1999
-----------------------                            Officer and Director (Principal                              
John F. McGuire                                    Executive Officer)
                                                                     

/s/ James B. Murphy                                Senior Vice President, Finance                     March 31,1999
-----------------------                            and Administration (Principal                                   
James B. Murphy                                    Financial Officer)           
                                                                     

                                                   Director                                           March __,1999
------------------------                                                                                           
Timothy J. Barberich

/s/ David S. Barlow                                Director                                           March 31,1999
------------------------                                                                                             
David S. Barlow

/s/ Justin E. Doheny                               Director                                           March 31,1999
------------------------                                                                                             
Justin E. Doheny

/s/ Rolf S. Stutz                                  Director                                           March 31,1999
------------------------                                                                                            
Rolf S. Stutz
</TABLE>


816623.6
                                       S-1

<PAGE>



                                  Exhibit Index

           The  following  exhibits  are filed as part of this Annual  Report on
Form 10-K.


<TABLE>
<CAPTION>
Exhibit No.                                  Description
-----------                                  -----------
<S>                           <C>                                                                                     <C>    
2.1(7)                        Heads of Agreement, dated as of January 31, 1996, between the Company
                              and Novo Nordisk A/S.

3.1(2)                        Certificate of Incorporation of the Company.

3.2(2)                        By-Laws of the Company.

4.1(2)                        Specimen  Certificate  for shares of Common Stock,
                              $.01 par value, of the Company.

4.2(10)                       Registration Rights Agreement, dated January 23, 1997, by and among the
                              Company and Novo Nordisk A/S

4.3(12)                       Registration Rights Agreement, dated as of September 15, 1998, between
                              the Company and Sepracor.

4.4(12)                       Warrant Agreement, dated as of September 15, 1998,
                              between the Company and Sepracor.

4.5(12)                       Warrant  Certificate,  dated as of  September  15,
                              1998, between the Company and Sepracor.

4.6                           Registration Rights Agreement, dated as of  March 23, 1999, between the
                              Company and Sepracor.

4.7                           Warrant  Agreement,  dated  as of  March 23,  1999, between the
                              Company and Sepracor.

4.8                           Warrant Certificate, dated  as of  March  23,  1999, between the Company
                              and Sepracor.

10.1(10)                      1994)Stock Option Plan, as amended.

10.2(10)                      1994)Director Option Plan.

10.3(2)                       Form of Technology Transfer and License Agreement between the
                              Company and Sepracor Inc.

10.4(7)                       Lease Agreement for 140 Locke Drive,  Marlborough,
                              MA, dated as of November 1995, between the Company
                              and First Marlboro Development Trust.

10.5(3)                       Purchase  Agreement,  dated  as of  September  14,
                              1994,  between  the  Company  and Lydall  Central,
                              Inc./Westex Division.

10.6(3)                       Letter of Intent,  dated as of  February  2, 1995,
                              between the Company and DRK-Niederschsen.

10.7(4)                       Amendment of Solicitation/Modification of Contract
                              issued by the United States Army Medical  Research
                              Acquisition Activity effective March 15, 1995.


816623.6
                                       I-1

<PAGE>

10.8(5)+                      Purchase  Agreement,  dated July 28, 1995,  by and
                              between the Company and Blood Centers of America.

10.9(5)                       Employment Agreement between the Company and Dr. Hans Heiniger,
                              dated January 10, 1994.

10.10(7)+                     Purchase Agreement between the Company and American Red Cross
                              Biomedical Services, dated March 11, 1996.

10.11(7)                      Employment Agreement between the Company and Steven H. Rouhandeh,
                              dated February 16, 1996.

10.12(7)+                     Cooperation  Agreement  dated  February  26,  1996
                              between the Company and the German Red Cross.

10.13(6)+                     Purchase  Agreement  between the Company and Blood
                              Centers of America, dated September 11, 1995.

10.14(8)                      Asset Purchase  Agreement  dated as of May 2, 1996
                              between the Company,  HemaPharm Inc., HemaSure A/S
                              and Novo Nordisk A/S.

10.15(10)                     Employment Agreement between the Company and Jeffrey B. Davis,
                              dated May 23, 1996.

10.16(9)                      Restructuring  Agreement,  dated January 23, 1997,
                              between the Company,  HemaPharm Inc., HemaSure A/S
                              and Novo Nordisk A/S.

10.17(10)                     Convertible Subordinated Note Due December 31, 2001 in the amount of
                              U.S. $11,721,989, issued by the Company to Novo Nordisk A/S, dated
                              January 23, 1997.

10.18(10)                     Master Strategic Alliance Agreement, dated June 5,
                              1996,  by and between the Company and American Red
                              Cross BioMedical Services.

10.19(10)                     Amendment to the Company's  1994  Director  Option
                              Plan, dated June 25, 1996.

10.20(10)                     Amendment to the Company's  1994  Director  Option
                              Plan, effective as of May 16, 1996.

10.21(10)                     Amendment to the Company's 1994 Stock Option Plan,
                              dated June 25, 1996.

10.22(10)                     Amendment to the Company's 1994 Stock Option Plan, effective as of
                              May 16, 1996.

10.23(10)                     Sublease  Agreement,  between the Company and Novo
                              Nordisk A/S,  dated May 2, 1996,  for the Premises
                              (Denmark), as amended.

10.24(10)                     Sublease  Agreement  between  the Company and Novo
                              Nordisk A/S,  dated May 2, 1996, for the Warehouse
                              (Denmark), as amended.

10.25(1)                      Employment Agreement between the Company and John F. McGuire,
                              dated April 1, 1997.



816623.6
                                       I-2

<PAGE>




10.26(1)                      Settlement Agreement, dated September 1997, by and
                              among the Company,  HemaSure AB,  HemaPharm  Inc.,
                              Pharmacia & Upjohn Inc.
                              and Pharmacia & Upjohn AB.

10.27(11)                     1995 Employee Stock Purchase Plan, as amended.

10.28(12)                     Revolving Credit and Security Agreement,  dated as
                              of  September  15,  1998,  between the Company and
                              Fleet National Bank.

10.29(12)                     Intellectual Property Security Agreement, dated as
                              of  September  15,  1998,  between the Company and
                              Fleet National Bank.

10.30(12)                     Promissory Note, dated as of September 15, 1998, made by the Company
                              in favor of Fleet National Bank.

10.31(12)                     Exclusive Distribution Agreement, dated as of August 14, 1998, between
                              the Company and COBE BCT, Inc.

10.32(12)                     Amended and Restated Master Strategic Alliance Agreement between the
                              Company and the American Red Cross.

10.33                         Securities Purchase Agreement, dated as of  March 23, 1999, between the
                              Company and Sepracor.

21.1(13)                      Subsidiaries of the Company.

23.1                          Consent of PricewaterhouseCoopers  LLP

27.1                          Financial Data Schedule.
</TABLE>

<TABLE>
-----------------------
<S>                   <C>                                                                             
(1)                   Management contract or other contract or arrangement filed as an exhibit to this
                      Form pursuant to Items 14(a) and 14(c) of Form 10-K.

(2)                   Incorporated herein by reference to the Company's Registration Statement on Form
                      S-1, as amended (File No. 33-75930).

(3)                   Incorporated herein by reference to the Company's Annual Report on Form 10-K for
                      the year ended December 31, 1994.

(4)                   Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q
                      for the quarter ended March 31, 1995.

(5)                   Incorporated herein by reference to the Company's Registration Statement on Form
                      S-1, as amended (File No. 33-95540).

(6)                   Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q
                      for the quarter ended September 30, 1994.

(7)                   Incorporated herein by reference to the Company's Annual Report on Form 10-K for
                      the year ended December 31, 1995.

(8)                   Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
                      quarter ended March 31, 1996.




816623.6
                                                                      I-3

<PAGE>



(9)                   Incorporated by reference to the Company's Current Report on Form 8-K filed with
                      the Securities and Exchange Commission on February 27, 1997.

(10)                  Incorporated by reference to the Company's Annual Report on Form 10-K for the
                      year ended December 31, 1996.

(11)                  Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
                      quarter ended June 30, 1998.

(12)                  Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
                      quarter ended September 30, 1998.

(13)                  Incorporated by reference to the Company's Annual Report on Form 10-K for the
                      year ended December 31, 1997.

+                     Confidential treatment requested as to certain portions.
</TABLE>





816623.6
                                       I-4

<PAGE>