<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(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, 1996

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

For the transition period from ________________________ to _____________________


                         Commission File No. 000-28324
                         -----------------------------

                           BioTransplant Incorporated
                           --------------------------
             (Exact Name of registrant as Specified in its Charter)

                    Delaware                        04-3119555
                    --------                        ----------
         (State or Other Jurisdiction of         (I.R.S. Employer
          Incorporation or Organization)        Identification No.)

      Charlestown Navy Yard, Bldg. 75, Third Avenue, Charlestown, MA 02129
      --------------------------------------------------------------------
               (Address of Principal Executive Offices)(Zip Code)

       Registrant's telephone number, including area code: (617) 241-5200

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

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

                              Title of each class
                              -------------------
                          Common Stock, $.01 par value

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                      Yes  X                         No
                          ---                           ---

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

     The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was $32,645,370, based on the last reported sale price of the
Common Stock on the Nasdaq consolidated transaction reporting system on March
17, 1997.

     Number of shares outstanding of the registrant's class of Common Stock as
of March 17, 1997:
8,562,941.

Documents incorporated by reference:
1996 Annual Report to Stockholders - Part II
Proxy Statement for the 1997 Annual Meeting of Stockholders - Part III
<PAGE>   2
                                     PART I

ITEM 1.   BUSINESS

THE COMPANY

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

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


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


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that it may have a similar efficacy profile to, and an improved side effect
profile over, OKT3, a widely used therapy for the treatment of acute rejection.

     The AlloMune System is designed to reduce or eliminate the need for
lifelong immunosuppressive therapy in human to human organ transplantation by
inducing long-term, specific transplantation tolerance through the creation of
mixed bone marrow chimerism between the donor and the recipient. Mixed bone
marrow chimerism re-educates the recipient's immune system to recognize the
donor organ as self, while maintaining the remainder of the recipient's immune
defenses. The Company is currently conducting preclinical studies in which
kidneys of intentionally mismatched donor monkeys are being transplanted into
monkey recipients which have undergone the Company's proprietary bone marrow
chimerization procedure. To date, eight out of nine recipient monkeys have
achieved mixed bone marrow chimerism with normal kidney function for periods
ranging from 6 to 36 months without the need for chronic immunosuppressive
therapy. The Company and its collaborators at the Massachusetts General Hospital
have begun a pilot trial in patients for a prototype of the AlloMune System for
re-educating the patient's immune system. The pilot trial is being conducted
under a Physician's Investigational New Drug application approved by the
hospital's Institutional Review Board. The Company is seeking to optimize the
AlloMune System through additional preclinical testing in primates prior to
filing an IND with the FDA for additional human clinical trials.

     With the XenoMune System, BioTransplant hopes to build upon the Company's
proprietary knowledge and technology developed with the AlloMune System. The
XenoMune System is designed to expand the pool of donor organs by using organs
derived from proprietary miniswine for transplantation into humans. The Company
is working to achieve mixed bone marrow chimerism between cross-species donors
and recipients. The Company has established miniswine-to-primate mixed bone
marrow chimerism for more than 300 days and has had preliminary success with
miniswine-to-primate kidney transplant survival for up to 15 days, without
evidence of hyperacute rejection (rejection that occurs immediately upon
transplantation and is the consequence of the recipient having preformed
antibodies against donor antigens). In addition, the Company is actively
pursuing the genetic manipulation of the recipient's bone marrow with an MHC
gene from the miniswine donor ("gene transduction") as an alternate means for
inducing long-term specific tolerance. The Company has entered into a strategic
alliance with Novartis Pharma Inc. ("Novartis," formerly Sandoz) to develop
xenotransplantation (transplantation of organs between different species)
products utilizing gene transduction. Pursuant to the Company's agreement with
Novartis, BioTransplant will receive research funding and license fees of $30.0
million, of which $21.0 million had been received as of December 31, 1996.
Additionally, the Company has entered into an exclusive supply agreement with
CRL for the supply of miniswine cells and organs.


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OVERVIEW OF ORGAN TRANSPLANTATION

     Organ Transplant Market

     During the last two decades organ transplantation has become an established
therapy for end-stage organ disease due to the significant progress that has
been made since the introduction of cyclosporine by Sandoz (now Novartis) in
1983. In 1995, over 35,000 organ transplants were performed in patients
suffering from end-stage kidney, liver, heart and lung disease in the United
States and Western Europe. The Company estimates that over $5 billion is spent
annually in the United States on organ transplantation. However, the success of
these procedures is frequently limited by the rejection of the transplanted
organ by the recipient's immune system. To prevent rejection of the transplanted
organ, recipients must maintain a lifelong regimen of immunosuppressive therapy.
Over half of the costs of organ transplantation on a patient by patient basis
are attributable to care subsequent to the transplant, including lifelong
immunosuppressive therapy and hospitalizations due to complications resulting
from the chronic use of immunosuppressive drugs, infections and transplant
rejections. Other treatments for end-stage organ disease, such as kidney
dialysis, are even more expensive. Accordingly, improvements in transplantation
technology that reduce the wait for suitable organs and minimize infections and
other complications, including retransplantation and the chronic use of
immunosuppressive drugs, can be expected to lower the overall cost of treating
end-stage organ disease.

     There is a critical shortage of organs worldwide and waiting lists have
been established for potential organ transplant recipients. Over 50,000 patients
in the United States suffering from end-stage organ disease were on waiting
lists for a lifesaving organ transplant in 1996, based on data provided by the
United Network for Organ Sharing ("UNOS"). This number has more than doubled
since 1988, and the number of deaths of people on the waiting list has increased
proportionately. If an adequate supply of transplant organs were available and
the complications of transplantation minimized, the Company estimates that an
additional 100,000 critically ill patients each year could benefit from organ
transplantation as a replacement for disease damaged organs and as an
alternative to artificial devices.

     Efforts to ease this organ shortage through public campaigns and
advertisements to enlarge the pool of potential organ donors have been only
moderately successful. Increased automotive safety has adversely affected the
donation rate. The potential for allotransplantation (transplantation of organs
between different individuals of the same species) to spread infectious disease
has also limited the potential donor pool. While the number of cadaveric donors
has increased in the last ten years, the demand for organs has increased more
rapidly. Advances have been made in obtaining multiple organs from a single
donor and in organ preservation techniques, but a severe shortage of organs
still exists and the backlog of patients awaiting transplantation continues to
grow. The shortage of donor organs restricts the number of transplant procedures
performed


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and forces many patients to undergo costly and less effective alternatives to
transplantation for as long as possible. This delay renders transplant
candidates much sicker than they would have been if the organ transplant had
been possible sooner.

     Transplantation Biology

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

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

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

     There are two primary types of immune response to transplanted foreign
tissue -- hyperacute and acute rejection. Hyperacute rejection occurs
immediately upon transplantation and results from the reactivity of preexisting
antibodies with antigens presented by the donor tissue. In hyperacute rejection,
the donor organ is destroyed within minutes to hours and no treatment is
currently available. Acute rejection occurs after transplantation of an organ
when T cells recognize the histocompatibility antigens of the donor as foreign,
become activated and, over a period of days or weeks, initiate a rejection
response which may lead to the ultimate loss of the organ. The current approach
to preventing acute organ rejection in transplant patients is to administer a
combination of immunosuppressive medications which non-specifically suppress the


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ability of T cells to recognize and respond to antigens. These medications,
however, not only inhibit T cells from recognizing histocompatibility antigens
of donor organs, but also block the patient's T cells from recognizing other
foreign antigens. As a result, the transplant recipient is rendered vulnerable
to viral, bacterial and fungal infections. In addition, long-term use of these
immunosuppressive drugs can lead to cardiovascular disease, kidney and liver
damage, as well as an increased incidence of certain types of cancer such as
skin and lip cancer and lymphomas. Most importantly, despite the administration
of various immunosuppressive medications, instances of organ rejection still
occur frequently and may necessitate increased doses of immunosuppressive drugs
or inclusion of other anti-rejection therapies, thus compounding unwanted side
effects and complications. If the rejection cannot be controlled, the rejected
organ must be removed and another transplant will be required, or in the case of
heart, liver or lung transplantation, the patient may die.

     Current Transplantation Procedures

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

     Once a potential donor is found, a cross-match test is performed in order
to determine whether a potential recipient is likely to experience hyperacute
rejection of the organ. The cross-match is designed to determine whether the
patient has circulating antibodies to the foreign tissue of the potential donor,
or related antigens developed in response to transfusion, pregnancy or prior
transplantation which may react with the donor cells and thus the donor organ.
The search for a reasonable tissue match based on histocompatibility antigens
can prolong the time spent on the organ transplant waiting list for a donor
organ. In the event that an organ is found with characteristics that suggest the
likelihood of a good outcome, the organ transplant is performed.

     Neither tissue typing nor cross-match technology result in a perfectly
matched organ. Therefore, foreign antigens will always be found on a donor
organ, except in the case of transplants from an identical twin. The differences
in donor and recipient antigens will cause the recipient's immune system to
maintain a continuous response


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against the donor organ until rejection occurs, unless the immune response is
suppressed. Following the transplantation procedure, the challenge in patient
management is to prevent acute rejection of the organ by inhibiting T cell
activation. The success of the transplant is dependent on the immunosuppressive
regimen which is initiated on the day of surgery and is continued daily for the
rest of the patient's life. Lifelong immunosuppressive therapy usually consists
of the administration of a combination of immunosuppressants such as
Sandimmune(R) or Neoral(R) (also known as cyclosporin A), prednisone (a
steroid), and Imuran(R), (an anti-metabolite, also known as azathioprine).
Chronic immunosuppressant medications have a narrow therapeutic window; that is,
the administration of dosages which are too low results in organ rejection,
while the administration of dosages which are too high can result in
unacceptable toxicity, risk of cancer and infection. Because these medications
also block the patient's T cells from recognizing foreign antigens, they render
the patient susceptible to infections and tumors. In addition, patient
noncompliance with the prescribed immunosuppressive therapy is a significant
clinical problem due to the fact that if these drugs are stopped, rejection,
sometimes irreversible, will occur.

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

     Approximately 30-50% of transplant patients will experience an acute
rejection episode in the first year after transplantation. Additional
intermittent episodes of acute rejection also occur, often requiring
rehospitalization for a course of more intensive immunosuppression and may
result in graft loss. Acute rejection episodes are treated with a short course
of high dose steroids, anti-thymocyte globulin (such as ATGAM), or OKT3. In many
cases these treatments are successful in reversing the acute rejection response.
If these treatments are successful in reversing the acute rejection response,
the recipient resumes chronic immunosuppressive drug maintenance therapy.
However, the treatment of these rejection episodes is associated with increased
complications due to the additional immunosuppression. Patients treated with
antibody-based therapies (ATGAM or OKT3) respond by producing antibodies
specific to the therapeutic antibody. This response can limit the ability of the
physician to use these agents more than once in a given patient. All of the
immunosuppressive drugs used to suppress the rejection response are toxic to the
recipient and carry a variety of potentially serious side effects, including
complications such as fever, shortness of breath, headaches, diarrhea, seizures
or life-threatening cardiac reactions as well as increased infection and a
higher incidence of cancer. Long-term use can cause liver and kidney damage and
bone marrow depletion.


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

PRODUCTS UNDER DEVELOPMENT

     In order to address the problems of organ transplantation described above,
BioTransplant is developing a portfolio of proprietary anti-rejection
pharmaceuticals and organ transplant systems with the goal of inducing long-term
specific transplantation tolerance in humans. The Company is developing methods
of selectively inhibiting T cells responsible for organ rejection and modifying
a patient's immune system to accept foreign organs as if they were self by
creating mixed bone marrow chimerism.

BTI-322

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

     BTI-322 is a monoclonal antibody that binds to CD2, an important
therapeutic target on the surface of T cells. The Company believes that BTI-322
interferes with signaling through CD2, thereby preventing T cell activation.
Other therapies used for the treatment of acute rejection only inhibit T cell
activation around the time of the treatment period. However, based on in vitro
experiments, the Company expects that BTI-322 will have a lasting effect even
after administration and will continue to selectively suppress T cell
responsiveness to the donor antigens. If the mechanism of action is
substantiated by further data, the Company believes that BTI-322 may be
effective against T cell mediated diseases (such as psoriasis, inflammatory
bowel disease, Crohn's disease and rheumatoid arthritis). BTI-322 (then known as
LO-CD2a) was discovered in the Experimental Immunology Unit of the Catholic
University of Louvain, Belgium, by Drs. Herve Bazin and Dominique Latinne. The
Company obtained exclusive rights to develop and commercialize this antibody in
early 1993.

     Clinical Development. Early clinical results and research data suggest that
BTI-322 has the potential to be a safe and effective agent for the prevention
and treatment of


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allograft (intra-species transplants) and xenograft (inter-species transplants)
rejection and GvHD. Prior to the grant of an exclusive license to BTI-322 to the
Company in 1993, four patients had been treated for either acute kidney
rejection or GvHD under a compassionate use protocol approved by the Catholic
University of Louvain hospital ethical committee.

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

     The Company is supporting a physician-sponsored Phase I/II clinical trial
at the Catholic University of Louvain, for the use of BTI-322 as a component of
induction therapy in renal allograft transplantation. Induction therapy is a
clinical protocol used at the time of transplantation to reduce the probability
of subsequent organ rejection by the recipient. Forty patients were randomized
equally, to receive either placebo or BTI-322. The last patient was enrolled in
February 1996. The rate of acute rejection after the administration of induction
therapy with BTI-322 is lower than that of a concurrent randomized control group
of twenty patients that were not given BTI-322 for their induction therapy. A
physician-sponsored Phase I/II clinical trial of BTI-322 for induction therapy
for liver allograft transplantation has been approved by the Catholic University
of Louvain hospital ethical committee and was open for enrollment in late 1996.

     Under a compassionate use protocol, BTI-322 has also been used to treat
steroid-resistant GvHD. Six patients have been treated with BTI-322 and five
patients demonstrated reversal of certain of their symptoms during the course of
treatment with BTI-322. Two patients have shown no relapse of symptoms in the
absence of chronic steroid treatment for six and seven months, respectively,
after the antibody therapy. The other four patients suffered relapse of their
GvHD after completion of BTI-322 administration and subsequently died due to the
consequences of their disease. The


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Company believes that BTI-322 administered at the onset of GvHD symptoms has a
greater probability of long-term clinical success. A physician-sponsored Phase
I/II trial for the early treatment of steroid-resistant GvHD recently commenced
in Europe and MedImmune began a Phase I/II clinical trial in the United States
in late 1996.

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

     MEDI-500

     In October 1995, the Company and MedImmune formed a collaboration to
develop and commercialize products to treat and prevent organ transplant
rejection. The collaboration is based upon the development of products derived
from BTI-322 and MEDI-500. Under the terms of the collaboration agreement
between MedImmune and the Company, MedImmune is required to pay royalties to the
Company on sales of BTI-322 and MEDI-500. MEDI-500 is a murine monoclonal
antibody which has been in-licensed to MedImmune by the University of Kentucky.
MEDI-500 suppresses most T cells by binding to a protein (the alpha-beta
receptor) on the cell surface.

     Clinical Development. MEDI-500 has been evaluated in several
transplantation clinical trials involving approximately 400 individuals. A Phase
II clinical trial comparing MEDI-500 with OKT3, the only commercially available
monoclonal antibody for treatment of acute rejection suggested that MEDI-500 may
have a similar efficacy profile but with reduced side effects. MEDI-500 is
currently being evaluated for prevention of GvHD in a Phase III clinical trial
sponsored by the National Heart, Lung and Blood Institute (NHLBI).

The AlloMune System

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


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

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

     Preclinical Development. The Company is currently conducting preclinical
studies in which kidneys of intentionally fully mismatched donor monkeys are
being transplanted into recipient monkeys which have undergone the bone marrow
chimerism procedure. The first recipient has achieved mixed bone marrow
chimerism with normal kidney function for over 27 months, without chronic
systemic immunosuppressive therapy. In addition, the recipient has demonstrated
specific transplantation tolerance to a skin graft from the donor monkey, in the
absence of immunosuppressive drugs. However, the recipient monkey has rejected
skin grafts transplanted from another monkey (third party donor), indicating
that the monkey is specifically tolerant to the antigens of the donor and thus
has a normal ability to respond to foreign antigens. To date, the creation of
mixed bone marrow chimerism and normal kidney function has been replicated in
seven out of eight additional monkeys for periods from 6 to 37 months. The
Company has analyzed the ability of T cells from the chimeric monkeys to respond
to cells from the donor and other monkeys. The Company has demonstrated that the
T cells from the chimeric monkeys do not become activated by donor cells in
culture but will respond to cells from other monkeys (third party donors).

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


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     In order to demonstrate the feasibility of the induction of long-term
tolerance to allografts, the Company intends to optimize the AlloMune System
through additional preclinical trials in primates prior to filing an IND with
the FDA for clinical trials. The Company's academic collaborators have initiated
a physician sponsored IND under the approval of a hospital institutional review
board and have begun a pilot proof of principle evaluation of the prototype
AlloMune System in humans.

The XenoMune System

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

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

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

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


                                      -13-
<PAGE>   13
     Research and Preclinical Development. To avoid hyperacute rejection of
miniswine kidneys by baboons and cynomolgus monkeys the Company has used its
absorption technique. Up to 15 day survival of the miniswine kidneys has been
achieved without pathological signs of hyperacute rejection. Based on
preliminary data, the Company believes that this technique will also remove
natural antibodies from human blood.

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

     The Company's collaborators at the Massachusetts General Hospital have
published the first successful demonstration in a pig-to-mouse model of
tolerance to permanently re-educate the immune system to accept transplanted
tissue from a different species in the absence of immunosuppressive drugs.

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

COLLABORATIONS AND AGREEMENTS

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


                                      -14-
<PAGE>   14
     Dr. David H. Sachs/The Massachusetts General Hospital

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

     Novartis Pharma Inc. (formerly Sandoz)

     In April 1993, the Company entered into a five-year collaboration agreement
with Novartis Pharma Inc. ("Novartis," formerly Sandoz), the world's leading
supplier of transplantation therapeutics, which was amended and restated in
September 1995 (the "Novartis Agreement"), to develop and commercialize
xenotransplantation products utilizing gene transduction. Pursuant to the
Novartis Agreement, the Company will receive research funding of $20.0 million,
of which $14.0 million had been received as of December 31, 1996, and license
fees of $10.0 million, of which $7.0 million had been received as of December
31, 1996, in connection with the research by the Company of certain
xenotransplantation products. In addition, in 1992 Novartis purchased $5.0
million of the Company's Series B Convertible Preferred Stock ("Series B
Stock"), which converted into 532,125 shares of Common Stock upon consummation
of the Company's initial public offering. Pursuant to the terms of the Novartis
Agreement, Novartis is obliged to fund the development costs associated with
certain xenotransplantation products developed by the Company subject to
reimbursement of a portion thereof by the Company, if the Company elects to
co-promote such products. The Company has the right to co-promote such products
solely in North America and to receive an agreed upon share of profits, if any,
derived from North American sales. The Company is entitled to receive royalties
on the sale of such licensed products by Novartis outside of North America and,
to the extent that the Company elects not to co-promote in North America, on
sales in North America as well. Royalties and profits from any licensed products
developed will depend, in part, upon the efforts of Novartis to perform clinical
testing, obtain regulatory approvals and market and sell such products both
within and outside of the United States. The amount and timing of the resources
devoted to these activities by Novartis will be controlled by Novartis. Under
certain circumstances, Novartis may develop or market products competitive with
the Company's xenotransplantation products utilizing the gene transduction
approach. Pursuant to the Novartis Agreement, Novartis has an option under
certain circumstances to obtain an


                                      -15-
<PAGE>   15
exclusive license to inventions developed in the course of BioTransplant
research funded by Novartis for use outside the field of xenotransplantation.

     MedImmune

     In October 1995, the Company and MedImmune formed a collaborative agreement
for the development and commercialization of products to treat and prevent organ
transplant rejection. The collaboration is based upon the development of
products derived from BTI-322, MEDI-500 and future generations of products
derived from these two molecules. Pursuant to the collaboration, the Company
granted MedImmune an exclusive worldwide license to develop and commercialize
BTI-322 and any products based on BTI-322, other than the use of BTI-322 in kits
or systems for xenotransplantation or allotransplantation. MedImmune paid
BioTransplant a $2.0 million license fee at the time of formation of the
collaboration, and agreed to fund and assume responsibility for clinical testing
and commercialization of any resulting products. MedImmune has agreed to provide
research support and make milestone payments which could total up to an
additional $14.0 million, up to $12.0 million of which is repayable from
royalties on BTI-322 or MEDI-500, as well as to pay royalties on any sales of
BTI-322, MEDI-500 and future generations of products, if any. Royalties will
depend, in part, upon the efforts of MedImmune to perform clinical testing,
obtain regulatory approvals and market and sell BTI-322 and MEDI-500. The amount
and timing of the resources devoted to these activities by MedImmune will be
controlled by MedImmune.

     Charles River Laboratories

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


                                      -16-
<PAGE>   16
     Stem Cell Sciences

     The Company has entered into a strategic alliance with Stem Cell Sciences
Pty Ltd. ("Stem Cell Sciences") for the purpose of genetically engineering
miniswine. BioTransplant has been granted worldwide, exclusive rights, subject
to the payment of a royalty, to technology, products and processes for the
derivation and manipulation of porcine embryonic stem cells developed during the
research term and useful in xenotransplantation in humans. In addition, Stem
Cell Sciences will be creating relevant transgenic miniswine for the Company.
BioTransplant has made equity investments in Stem Cell Sciences, which represent
30% of the outstanding shares of that company. At least half of the
consideration received by Stem Cell Sciences from the Company's equity
investment will be used to fund research in the development of germ line
competent porcine embryonic stem cells and, in particular, the development of
technology, products and processes useful for xenotransplantation in humans.
BioTransplant made an additional investment in Stem Cell Sciences in 1996 to
maintain its 30% ownership position and support additional research. The Company
has the option to make a further equity investment in 1997 to maintain its
ownership percentage. If the Company does not make such further investment then
its rights become nonexclusive.

     Other Arrangements

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

     Alberta Research Council (Canada). BioTransplant has entered into a
worldwide license (subject to a royalty) with the Alberta Research Council for
specified patents and patent applications covering technology potentially useful
for removal of natural antibodies against xenografts. The license is exclusive,
except for one patent application directed to the removal of natural antibodies
against xenografts which is co-owned by one of the inventors and was assigned to
a competitor. The Alberta Research Council has also granted to BioTransplant a
non-exclusive, worldwide license to use any of its information, data, formulas
or processing information which pertain to the manufacture, development or use
of any products resulting from the licensed patents in the field of
xenotransplantation.

MANUFACTURING AND SUPPLY

     The Company currently has no manufacturing facilities or staff for clinical
or commercial production of any compounds or systems under consideration as
product candidates. The Company plans to rely on third parties initially to
manufacture certain


                                      -17-
<PAGE>   17
of its product candidates for research, preclinical testing, clinical trials and
commercialization, if any, with a long-term objective to develop internal
manufacturing capability where appropriate. There is no assurance that the
Company will be able to develop or contract for manufacturing capabilities of
any of its products or systems on acceptable terms.

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

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

MARKETING

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

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


                                      -18-
<PAGE>   18
     Pursuant to the collaboration agreement between BioTransplant and Novartis,
Novartis has been granted exclusive worldwide rights to market
xenotransplantation products based on gene transduction, subject to the
Company's right to co-promote in North America. The Company currently intends to
exercise this co-promotion right at such time as Novartis has submitted an
application for regulatory approval of the XenoMune System to the FDA. To the
extent the Company develops a xenotransplantation product that does not utilize
gene transduction, the Company may seek to collaborate with a third party or may
seek to market such product on its own.

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

RESEARCH AND DEVELOPMENT

     The Company's total research and development expenses were $11.8 million,
$9.5 million and $12.3 million for 1994, 1995 and 1996, respectively.
Collaborative research and development revenues totalled $3.0 million, $9.9
million and $7.8 million in 1994, 1995 and 1996, respectively.

PATENTS AND PROPRIETARY RIGHTS

     As of March 17, 1997, there were five patents issued and 34 patent
applications pending in the United States Patent and Trademark Office owned by
or licensed to BioTransplant, including 17 patent applications licensed
exclusively to the Company by MGH. The Company has also filed corresponding
patent applications in selected foreign countries for certain of these U.S.
patent applications. BioTransplant believes that its proprietary rights in its
technology are important to its ability to develop and commercialize products
and to profit from its research.

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


                                      -19-
<PAGE>   19
     The Company is aware of granted patents which claim monoclonal antibodies
which bind to T cells and the therapeutic use thereof. These patents are owned
by Johnson & Johnson, which manufactures and sells OKT3, a T cell binding
monoclonal antibody with which the Company expects BTI-322 to compete. Although
BTI-322 is also a monoclonal antibody which binds to T cells, the Company
believes that BTI-322 is distinguishable from the monoclonal antibodies claimed
in such patents, and does not infringe such patents either literally or under
the doctrine of equivalents. Notwithstanding such belief, there is a risk that
the patent owner could initiate patent infringement litigation to prevent the
manufacture, sale and use of BTI-322. If the patentee should prevail in such
litigation, the Company could be required to pay damages and reimburse the
patentee for the cost of such litigation. In addition, if the patentee was not
prepared to grant a license to the Company, an injunction could issue which
would prevent the manufacture, sale and use of BTI-322. In addition, MEDI-500 is
a monoclonal antibody which binds to T cells, and may be subject to similar
risks as BTI-322. If the manufacture, sale or use of MEDI-500 infringes these
patents, the royalties, if any, relating to MEDI-500 may be reduced or
eliminated.

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

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

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


                                      -20-
<PAGE>   20
     Some of the Company's know-how and technology is not patentable. To protect
its rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements with BioTransplant. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.

COMPETITION

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

     In particular, there are several commercially available anti-rejection
drugs that will compete with BTI-322 and MEDI-500 products, including OKT3 and
ATGAM. To the extent that these therapeutics address the problems associated
with transplantation on which the Company has focused, they may represent
significant competition. In addition, Roche (Protein Design Laboratories, Inc.)
and Novartis have conducted clinical trials with potentially competitive
compounds.

     In addition, the Company is aware of other biotechnology companies
attempting xenotransplants, including Imutran Ltd., a wholly-owned subsidiary of
Novartis, Nextran Inc., a wholly owned subsidiary of Baxter HealthCare, Alexion
Pharmaceuticals, Inc. and SangStat. Some of the Company's competitors are using
organs derived from genetically


                                      -21-
<PAGE>   21
modified transgenic donors which are designed to eliminate hyperacute rejection
in humans. Despite the Company's progress in creating specific immune tolerance
for transplantation, there can be no assurance that others will not be
successful in inducing specific immune tolerance. In addition, the development
of superior immunosuppressant therapeutics, mechanical organ systems and other
improvements in therapies for end stage organ disease could adversely affect the
size of the Company's available markets.

GOVERNMENT REGULATION

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

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

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

     Following completion of these clinical investigations, the preclinical and
clinical evidence that has been accumulated, together with manufacturing data,
is submitted to


                                      -22-
<PAGE>   22
the FDA as part of a product license application ("PLA") for a biologic or as
part of a new drug application ("NDA") for a non-biologic drug in the United
States. Approval of the PLA or NDA is necessary before a company may market the
product. The approval process can be very lengthy and depends upon the time it
takes to review the submitted data, the FDA's comments on the application and
the time required for the Company to provide satisfactory answers or additional
clinical data when requested. The FDA has ongoing adverse experience reporting
requirements once the PLA is approved.

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

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

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


                                      -23-
<PAGE>   23
     A product that receives orphan drug designation by the FDA and is the first
product to receive FDA marketing approval for its indication is entitled to a
seven-year exclusive marketing period in the United States for that indication.
A product that is considered by the FDA to be different from a particular orphan
drug or is approved for different indications is not barred from sale in the
United States during the seven-year exclusive marketing period. In the European
Union, although there are some minor orphan drug provisions in some countries,
there is, as yet, no equivalent overall process to that followed in the United
States.

REIMBURSEMENT

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

FACTORS THAT MAY AFFECT RESULTS

     This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth below and elsewhere in this Annual Report on Form 10-K.

     Lack of Commercial Products; No Assurance of Successful Product
Development. The Company is in the early development stage and has been engaged,
to date, primarily in organizational and research and development activities.
The Company has not yet completed the development of, or conducted significant
human testing with respect to, any product. The Company has no products
available for sale and does not expect to have any of its potential products
available for at least the next several years, if at all. The Company's
potential products will require significant additional development,


                                      -24-
<PAGE>   24
preclinical and clinical testing, regulatory approval and additional investment
prior to commercialization. The Company's potential products are subject to the
risks of failure inherent in the development of products based on new
technologies. There can be no assurance that any of the Company's products will
be successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, obtain required regulatory approvals, be
capable of being produced in commercial quantities at reasonable costs or be
successfully marketed.

     History of Losses and Accumulated Deficit; No Assurance of Revenue or
Operating Profit. The Company has generated no revenues from product sales and
has experienced significant operating losses since inception. As of December 31,
1996, the Company's accumulated deficit was approximately $36.1 million. The
Company expects to incur substantial additional costs, resulting in significant
and increasing losses for at least the next several years. Revenues, if any,
that the Company may receive in the next few years will be limited to payments
under the Company's agreements with Sandoz and MedImmune, and any other research
or product development relationships that the Company may hereafter establish,
and interest income. The Company's ability to achieve significant revenue or
profitability is dependent on successfully completing the development of its
products, obtaining required technology licenses and regulatory approvals, and
manufacturing and marketing its products. There can be no assurance, however,
that the Company will successfully develop, commercialize, manufacture or market
any of its potential products, obtain regulatory approvals, patents or
third-party licenses to technology or ever achieve profitability.

     Need for Substantial Additional Funds. The Company will need substantial
additional funds before it can expect to realize significant product revenue.
The Company's working capital needs and additional funding requirements will
depend upon numerous factors, including the progress of the Company's research
and development programs and the external research and development programs
being supported by the Company, the timing and results of preclinical and
clinical testing, the timing and costs of obtaining regulatory approvals, the
level of resources that the Company commits to the development of manufacturing,
marketing and sales capabilities, the ability of the Company to maintain
existing and establish new collaborative arrangements with other companies to
provide funding to the Company, the technological advances and activities of
competitors, and other factors. The Company believes that it has sufficient
funds to fund its operating expenses and capital requirements as currently
planned through the end of 1998. Substantial additional funds will be required
to support the Company's operations. The Company anticipates that these funds
will be obtained from external sources and intends to seek additional equity,
debt or lease financing to fund future operations. The Company also expects to
seek additional collaborative arrangements with corporate partners in order to
fund its research and development programs. There can be no assurance, however,
that the Company will be able to negotiate such arrangements or obtain the
additional funding that it will require on acceptable terms, if at all.


                                      -25-
<PAGE>   25
     Reliance upon Third Parties. The Company's strategy for development and
commercialization of its products entails entering into arrangements with
corporate, government and academic collaborators, third party manufacturers,
licensors, licensees and others. There can be no assurance that the Company will
be able to maintain its existing arrangements or establish additional
collaborative arrangements or license agreements that the Company deems
necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful or that current or potential collaborators will
not seek alternative means of developing the products. Both of the Company's
corporate collaborators are independently developing products that may be
competitive with products they are developing in collaboration with
BioTransplant. In addition, the Company is entitled to receive royalties on
MEDI-500, a product proprietary to MedImmune, and any such royalties are wholly
dependent on the efforts of MedImmune to develop and market such product.

     Novel Therapeutic Approach; Technological Uncertainties. While the
Company's BTI-322 antibody has the ability to induce antigen specific
hyporesponsiveness in vitro, the Company has not proven that this activity can
be induced clinically. BTI-322 has been tested in relatively few patients. There
can be no assurance that the clinical activity already seen will continue to be
encouraging. Furthermore, the Company's AlloMune and XenoMune Systems are based
on creating long-term specific transplantation tolerance by introducing mixed
bone marrow chimerism or gene transduction. These approaches are novel and, to
the Company's knowledge, have never been achieved in humans, including by the
Company. There can be no assurance that the Company will be successful in
achieving long-term specific transplantation tolerance, that the AlloMune and
XenoMune Systems will be useful clinically or that physicians will adopt such
novel therapeutic approaches.

     Uncertainties Associated with Preclinical and Clinical Testing. Before
obtaining regulatory approvals for the commercial sale of any of the Company's
potential products, the products will be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy in humans. The failure
to adequately demonstrate the safety and efficacy of a therapeutic product under
development could delay or prevent regulatory approval of the product and would
have a material adverse effect on the Company. Furthermore, the Company has
limited experience in conducting clinical trials. The Company is dependent on
MedImmune to conduct clinical trials for BTI-322, Novartis to conduct clinical
trials for the development of xenotransplantation products utilizing gene
transduction and may become dependent on other third parties to conduct future
clinical trials of its AlloMune System and any other products.

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


                                      -26-
<PAGE>   26
There can be no assurance that patent applications relating to the Company's
products or technology will result in patents being issued or that, if issued,
the patents will not be challenged, invalidated or circumvented, or that the
rights granted thereunder will provide competitive advantages to the Company. In
addition, patents may have been granted, or may be granted, covering products or
processes that are necessary for or useful to the development of the Company's
products. Holders of these patents could prevent the Company from
commercializing its products or require the Company to obtain licenses to
develop, manufacture or market its products. There can be no assurance that the
Company will be able to obtain such licenses on commercially reasonable terms,
if at all, or that the patents underlying the licenses will be valid and
enforceable. There has been significant litigation in the industry regarding
patents and other proprietary rights. If the Company became involved in
litigation regarding its intellectual property rights, the cost of such
litigation could be substantial.

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

     No Assurance of FDA Approval; Comprehensive and Evolving Government
Regulation; Limited Regulatory Precedent. The Company's research, development
and clinical programs, as well as its manufacturing operations, are subject to
extensive regulation by numerous government authorities in the United States and
other countries. All of the Company's products require governmental approvals
for commercialization, none of which have yet been obtained. Preclinical and
clinical trials and manufacturing of many of the Company's products will be
subject to the rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities. There is presently limited
regulatory precedent for approval of products based on monoclonal antibodies,
and no such products have been approved by the FDA for use in induction therapy.
The FDA has not yet established definitive regulatory guidelines for
xenotransplantation and for assessing the risks of animal pathogens, but has
drafted guidelines in an attempt to reduce the risk of contamination of
transplanted organs with infectious agents. There can be no assurance that such
guidelines will be issued, or that the Company will be able to comply with any
guidelines that may be issued. The regulatory process, which includes
preclinical, clinical and post-clinical testing of the Company's products to
establish their safety and efficacy, requires many years to complete and the
expenditure of substantial resources. Delays in obtaining approvals could
adversely affect the marketing of products under development by the Company and
the Company's ability


                                      -27-
<PAGE>   27
to generate commercial product revenues. There can be no assurance that
requisite regulatory approvals will be obtained within a reasonable period of
time, if at all. Moreover, if regulatory approval of a product is granted, such
approval may impose limitations on the indicated uses for which such product may
be marketed. Further, even if such regulatory approval is obtained, a marketed
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections, and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.

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

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

     Limited Manufacturing and Marketing Capabilities. Because of the relatively
early stage of the Company's research and development programs, the Company has
not yet


                                      -28-
<PAGE>   28
invested significantly in manufacturing, marketing, distribution or product
sales resources. The Company currently does not have the capacity to manufacture
its potential products, and is dependent on contract manufacturers or
collaborative partners for the production of its potential products for
preclinical research and clinical trial purposes and may be dependent on such
manufacturers or collaborative partners for commercial production. There can be
no assurance that the Company will be able to enter into arrangements with third
parties for such purposes. In the event that the Company is unable to establish
its own manufacturing facilities or obtain contract manufacturing on
commercially acceptable terms, it may not be able to commercialize its products
as planned. The Company has no experience in manufacturing pharmaceutical or
other products or in conducting manufacturing testing programs or in the
clinical evaluations required to obtain FDA and other regulatory approvals.

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

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

EMPLOYEES

     As of March 17, 1997, the Company had 57 full time employees.


                                      -29-
<PAGE>   29
ITEM 2 . PROPERTIES

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


ITEM 3 . LEGAL PROCEEDINGS

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

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, 1996.


EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
Name                              Age             Position
----                              ---             --------
<S>                               <C>             <C>
Elliot Lebowitz, Ph.D.             55             President and Chief Executive
                                                  Officer, Director

James Hope, Ph.D.                  45             Senior Vice President of
                                                  Development

Julia L. Greenstein, Ph.D.         40             Senior Vice President of Research
                                                  and Chief Scientific Officer

Mary White-Scharf, Ph.D.           46             Vice President of Research
</TABLE>


                                      -30-
<PAGE>   30
<TABLE>
<S>                                <C>            <C>
Robert S. Kauffman, M.D., Ph.D     48             Vice President of Clinical Affairs

Richard V. Capasso, C.P.A.         35             Director of Finance
</TABLE>

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

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

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


                                      -31-
<PAGE>   31
     Dr. White-Scharf has served as Vice President of Research of the Company
since December 1995. From September 1991 until December 1995 she served as
Director of Monoclonal Antibody Development of the Company where she directed
the BTI-322 program and the Company's hybridoma discovery, scale-up, antibody
purification and antibody engineering. From 1989 to 1991, she served as a
Research Scientist at Repligen Corporation, a biotechnology company, where she
directed its efforts to generate a broadly neutralizing monoclonal antibody to
HIV-1. Dr. White-Scharf received her B.S. in biology from Southern Methodist
University, her M.A. in physiology from the University of Texas Medical Branch
and her Ph.D. in medical microbiology from Stanford University School of
Medicine.

     Dr. Kauffman has served as Vice President of Clinical Affairs of the
Company since June 1996. From April 1995 until June 1996, he served as Medical
Director of Serono Laboratories, a biotechnology company where he participated
in the development program for recombinant human growth hormone for treatment of
AIDS-associated wasting. From 1993 to 1995, he served as Executive Director,
Medical Research at Syntex Research, a biotechnology company, where he was
leader of the clinical development team that implemented the three Phase III
studies leading to U.S., European and Canadian marketing approval of CellCept
(mycophenolate mofetil) for prevention of renal allograft rejection. From 1989
to 1993 he served as Associate Medical Director at Syntex Research. Dr. Kauffman
received his B.A. in biology from Temple University, and his M.D. and Ph.D. in
microbiology from the University of Pennsylvania School of Medicine.

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

                                    PART II


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

The Common Stock of BioTransplant Incorporated has been traded on the Nasdaq
National Market under the symbol BTRN since May 8, 1996. Prior to May 8, 1996,
the Company's Common Stock was not publicly traded. The following table sets
forth for the periods indicated the high and low sales prices per share of the
Common Stock as reported by the Nasdaq National Market.


                                      -32-
<PAGE>   32
<TABLE>
<CAPTION>
                                                                1996
                                                                ----

                                                         High          Low
                                                         ----          ---
<S>                                                  <C>            <C>
Second Quarter
  (May 8 through June 30, 1996)                      $   11.00      $   8.13

Third Quarter
  (July 1, 1996 through September 30, 1996)          $    8.50      $   5.63

Fourth Quarter
  (October 1, 1996 through December 31, 1996)        $    7.00      $   5.00
</TABLE>

     On March 17, 1997, the Company had approximately 460 stockholders of
record. On March 17, 1997, the closing price of the Company's Common Stock on
the Nasdaq National Market was $6.00. The Company has never declared or paid any
dividends on its Common Stock. The Company does not expect to pay cash dividends
in the foreseeable future.

     In January 1996 and February 1996, the Company sold an aggregate of
3,495,409 shares of Series D Convertible Preferred Stock (which converted into
873,850 shares of Common Stock), to a group of investors for an aggregate
purchase price of $6,990,818, of which $6,606,073 was paid in cash and $384,745
was paid via the cancellation and conversion of promissory notes (plus accrued
interest) previously issued by the Company to certain of such investors. In
February 1996, the Company sold 309,792 shares of Series D Convertible Preferred
Stock (which converted into 77,448 shares of Common Stock upon the Company's
initial public offering) to BioLease Inc. ("BioLease") for an aggregate purchase
price of $619,584. The purchase price was paid by the cancellation and
settlement in full of an outstanding debt of $619,584 owed by the Company to
BioLease. The securities issued in these transactions were issued in reliance
upon the exemptions from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended and Regulation D promulgated thereunder.


ITEM 6 .  SELECTED CONSOLIDATED FINANCIAL DATA

     Incorporated by reference from the Company's 1996 Annual Report to
Stockholders under the heading "Selected Consolidated Financial Data."


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

     Incorporated by reference from the Company's 1996 Annual Report to


                                      -33-
<PAGE>   33
Stockholders under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations."


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements and supplementary data of the Company
required by this item are listed under Item 14 below and are incorporated by
reference from the Company's 1996 Annual Report to Stockholders.


                                      -34-
<PAGE>   34
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

     There have been no disagreements with the Company's independent accountants
on accounting and financial matters.


                                    PART III

ITEMS 10-13.

     The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 1997 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management", "Election of Directors", "Board and
Committee Meetings", "Compensation for Directors", "Compensation of Executive
Officers", 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) The following documents are included as part of this Annual Report
on Form 10-K or are incorporated by reference from the Company's 1996 Annual
Report to Stockholders.

                                                                           Page

1.   The following financial statements (and related notes) of the
     Company are incorporated by reference from the Company's 1996
     Annual Report to Stockholders

     Report of Independent Public Accountants                              F-8*

     Consolidated Balance Sheets as of December 31, 1995 and 1996          F-9*


                                      -35-
<PAGE>   35
     Consolidated Statements of Operations for the years ended
          December 31, 1994, 1995 and 1996 and for the period
          from inception (March 20, 1990) to December 31, 1996             F-10*

     Consolidated Statements of Stockholders' Equity (Deficit) for
          the period from inception (March 20, 1990) to
          December 31, 1996                                                F-11*

     Consolidated Statements of Cash Flows for the years ended
          December 31, 1994, 1995 and 1996 and for the period
          from inception (March 20, 1990) to December 31, 1996             F-12*

     Notes to Consolidated Financial Statements                            F-13*

     *Refers to page number of 1996 Annual Report

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

3.   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:

                                 BioTransplant(TM)
                                   AlloMune(TM)
                                    BTI-322(TM)
                                   XenoMune(TM)


                                      -36-
<PAGE>   36
                                   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 26th day of
March, 1997.


                                        BIOTRANSPLANT INCORPORATED


                                        By: /s/ Elliot Lebowitz
                                           ____________________________________
                                                Elliot Lebowitz, Ph.D.


     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>
                                   President, Chief Executive              March 26, 1997
/s/ Elliot Lebowitz                Officer and Director (Principal
-------------------------          Executive Officer)
Elliot Lebowitz


/s/ Richard V. Capasso             Director of Finance (Principal          March 26, 1997
-------------------------          Financial and Accounting
Richard V. Capasso                 Officer)



/s/ William W. Crouse              Director                                March 26, 1997
-------------------------
William W. Crouse

/s/ James C. Foster                Director                                March 26, 1997
-------------------------
James C. Foster

/s/ Daniel O. Hauser               Director                                March 26, 1997
-------------------------
Daniel O. Hauser

/s/ Robert A. Vukovich             Director                                March 26, 1997
-------------------------
Robert A. Vukovich
</TABLE>


                                      -37-
<PAGE>   37
<TABLE>
<S>                                <C>                                     <C>
/s/ Daniel P. Kearney              Director                                March 26, 1997
-------------------------
Daniel P. Kearney

/s/ Donald R. Conklin              Director                                March 26, 1997
-------------------------
Donald R. Conklin
</TABLE>






                                      -38-
<PAGE>   38
                                 Exhibit Index

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

<TABLE>
<CAPTION>
  Exhibit No.                             Description
  -----------                             -----------
<S>                      <C>
    **3.1                Restated Certificate of Incorporation.

    **3.2                By-laws, as amended to date.

     *4.1                Specimen certificate for shares of Common Stock.

   *+10.1                Research and License Agreement between the Company and
                         The General Hospital Corporation, dated January 1, 1991
                         as amended by Agreements dated November 10, 1993, June
                         28, 1995, November 1, 1995, December 19, 1995, December
                         22, 1995 and January 31, 1996 (the "1991 MGH
                         Agreement").

   *+10.2                Research and License Agreement between the Company and
                         The General Hospital Corporation dated December 8,
                         1992.

   *+10.3                Research and License Agreement between the Company and
                         The General Hospital Corporation dated August 1, 1994.

   *+10.4                Alliance Agreement between the Company and MedImmune,
                         Inc., dated October 2, 1995.

   *+10.5                Agreement between the Company and Catholic University
                         of Louvain Experimental Immunology Unit dated January
                         1, 1993.

   *+10.6                Agreement between the Company and Alberta Research
                         Council, dated December 23, 1992.

   *+10.7                Supply Agreement between the Company and Alberta
                         Research Council dated December 24, 1992.

   *+10.8                Research and Supply Agreement between the Company and
                         Charles River Laboratories, Inc. dated March 1, 1991,
                         as supplemented by letter dated April 10, 1992.

   *+10.9                Amended and Restated Collaboration Agreement between
                         the Company and Novartis Pharma, Inc. dated September
                         7, 1995.
</TABLE>


                                      -39-
<PAGE>   39
<TABLE>
<CAPTION>
  Exhibit No.                             Description
  -----------                             -----------
<S>                      <C>
  *+10.10                Shareholders' Agreement by and among the Company,
                         Castella Research, Secure Sciences and Stem Cell
                         Sciences Pty Ltd. dated April 5, 1994 as amended.

  *+10.11                Research and License Agreement between the Company and
                         Stem Cell Sciences Pty Ltd. dated April 5, 1994 as
                         amended.

   *10.12                Series A Convertible Preferred Stock Purchase Agreement
                         by and among the Company and the parties listed on
                         Schedule I thereto dated October 8, 1991, as
                         supplemented by a Supplemental Agreement dated May 15,
                         1992.

   *10.13                Series B Convertible Preferred Stock Purchase Agreement
                         between the Company and Sandoz Pharma, Ltd. dated May
                         15, 1992.

   *10.14                Series D Convertible Preferred Stock Purchase Agreement
                         by and among the Company and the parties listed on
                         Schedule I thereto dated November 1, 1993.

   *10.15                Series D Convertible Preferred Stock Purchase Agreement
                         dated January 23, 1996 by and among the Company and the
                         parties listed on Schedule I thereto.

   *10.16                Stock Purchase and Registration Rights Agreement by and
                         between the Company and BioLease, Inc. dated February
                         2, 1996.

   *10.17                Series E Convertible Preferred Stock Purchase Agreement
                         between the Company and Cayman BioVentures Ltd.
                         effective January 15, 1994.

   *10.18                Form of Common Stock Warrant issued to certain
                         investors in 1993 and January 1994 and Schedule of
                         Warrantholders.

   *10.19                Form of Common Stock Warrant issued to affiliates of
                         BioLease, Inc. in June 1994 and Schedule of
                         Warrantholders.

   *10.20                Common Stock Warrant issued to Aberlyn Holding Company
                         dated June 16, 1993.

   *10.21                Common Stock Warrant issued to Aberlyn Capital
                         Management dated June 16, 1993.

   *10.22                Common Stock Warrant issued to Aberlyn Capital
                         Management Limited Partnership dated November 18, 1994.
</TABLE>


                                      -40-
<PAGE>   40
<TABLE>
<CAPTION>
  Exhibit No.                             Description
  -----------                             -----------
<S>                      <C>
   *10.23                Common Stock Warrant issued to Aberlyn Capital
                         Management Limited Partnership dated November 18, 1994.

   *10.24                Form of Common Stock Warrant issued to certain
                         investors in August 1994 and Schedule of
                         Warrantholders.

   *10.25                Form of Common Stock Warrant issued to certain
                         investors in October 1994 and Schedule of
                         Warrantholders.

   *10.26                Form of Common Stock Warrant issued to certain
                         investors in August 1995 and Schedule of
                         Warrantholders.

   *10.27                Convertible Promissory Note and Warrant Purchase
                         Agreement by and among the Company, HealthCare Ventures
                         II, L.P. and Everest Trust dated December 20, 1991.

   *10.28                Preferred Stock Warrant Agreement between the Company
                         and Comdisco, Inc., dated December 12, 1991, as
                         clarified by a Letter Agreement dated May 15, 1992.

   *10.29                Credit Agreement by and among the Company and the
                         parties signatory thereto dated August 18, 1995. 

   *10.30                Convertible Promissory Note and Warrant Purchase
                         Agreement by and among the Company and the parties
                         signatory thereto dated October 31, 1994. 

   *10.31                Third Amended and Restated Stockholders Agreement by
                         and among the Company and the parties signatory
                         thereto; as amended by a Consent, Waiver and Amendment
                         dated January 23, 1996. 

   *10.32                Form of Consent, Waiver and Amendment Agreement to
                         Third Amended and Restated Stockholders' Agreement by
                         and among the Company and the parties signatory
                         thereto.

(1)*10.33                Amended 1991 Stock Option Plan.

(1)*10.34                1994 Directors' Equity Plan.

   *10.35                Consulting Agreement between the Company and Dr. David
                         H. Sachs dated January 1, 1991 as amended by an
                         Agreement dated January 1, 1997.
</TABLE>


                                      -41-
<PAGE>   41
<TABLE>
<CAPTION>
  Exhibit No.                             Description
  -----------                             -----------
<S>                      <C>
   *10.36                Master Lease Agreement between the Company and Aberlyn
                         Capital Management Limited Partnership dated May 12,
                         1993.

   *10.37                Master Lease Agreement between the Company and
                         Comdisco, Inc., dated December 12, 1991.

   *10.38                Lease between the Company and BioLease, Inc. dated
                         March 17, 1994.

 **+10.39                Development and Supply Agreement between BioTransplant
                         Incorporated and Activated Cell Therapy, dated August
                         22, 1996.

 **+10.40                Supply Agreement between BioTransplant Incorporated and
                         Neose Technologies, Inc., dated September 20, 1996.

       11                Statement regarding computation of earnings per share.

       13                1996 Annual Report to Stockholders (which shall be
                         deemed filed only with respect to those portions
                         specifically incorporated by reference herein).

       23                Consent of Arthur Andersen LLP.

       27                Financial Data Schedule.
</TABLE>


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

(1)Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.

*    Incorporated herein by reference to the Company's Registration Statement on
     Form S-1, as amended (File No. 333-2144).

**   Incorporated herein by reference to the Company's 10-Q for the quarter
     ending September 30, 1996.

+    Confidential treatment requested as to certain portions.



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