CERUS CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21937

CERUS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 68-0262011
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2525 STANWELL DR., SUITE 300 94520
CONCORD, CALIFORNIA (Zip Code)
(Address of principal executive
offices)

(510) 603-9071
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)

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

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

The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq National Market on February 27, 1998, was
$84,215,505.

As of February 28, 1998, there were 9,228,497 shares of the registrant's
common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's definitive proxy statement, to be filed not
later than 120 days after December 31, 1997 in connection with the registrant's
1998 Annual Meeting of Stockholders, is incorporated by reference into Part III
of this Form 10-K.

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TABLE OF CONTENTS

PAGE

PART I

Item 1. Business....................................................................... 1

Item 2. Properties..................................................................... 20

Item 3. Legal Proceedings.............................................................. 20

Item 4. Submission of Matters to a Vote of Security Holders............................ 20

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...... 21

Item 6. Selected Financial Data........................................................ 22

Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 23

Item 8. Financial Statements and Supplemental Data..................................... 26

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................... 26

PART III

Item 10. Directors and Executive Officers of the Registrant............................. 27

Item 11. Executive Compensation......................................................... 27

Item 12. Security Ownership of Certain Beneficial Owners and Management................. 27

Item 13. Certain Relationships and Related Transactions................................. 27

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 27

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PART I

This report contains forward-looking statements within the meaning
Section 21E of the Securities Exchange Act of 1934 which are subject to the
"safe harbor" created by those sections. These forward-looking statements
include, but are not limited to, statements concerning the Company's plans to
continue development of its current product candidates; conduct clinical trials
with respect to its product candidates; seek regulatory approvals; address
certain markets; engage third-party manufacturers to supply its clinical trial
and commercial requirements; continue to rely on a third party for a marketing,
sales and distribution capability; and evaluate additional product candidates
for subsequent clinical and commercial development. These forward-looking
statements may be found under the captions "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements not specifically described above also may be found in
these and other sections of this report. Actual results could differ materially
from those discussed in the forward-looking statements as a result of certain
factors, including those discussed herein.

ITEM 1. BUSINESS

OVERVIEW

Cerus Corporation ("Cerus" or the "Company") is developing systems
designed to improve the safety of blood transfusions by inactivating infectious
pathogens in blood components (platelets, plasma and red blood cells) used for
transfusion and inhibiting the leukocyte activity that is responsible for
certain adverse immune and other transfusion-related reactions. Preclinical
studies conducted by the Company have indicated the ability of its systems to
inactivate a broad array of viral and bacterial pathogens that may be
transmitted in blood component transfusions and to inhibit leukocyte activity.
The Company believes that, as a result of the mechanism of action of its
proprietary technology, its systems also have the potential to inactivate many
new pathogens before they are identified and before tests have been developed to
detect their presence in the blood supply. Because the Company's systems are
being designed to inactivate rather than merely test for pathogens, these
systems also have the potential to reduce the risk of transmission of pathogens
that would remain undetected by testing.

The Company has completed four Phase 1 and Phase 2 clinical trials of
its platelet pathogen inactivation system in healthy subjects, and a Phase 2c
pilot patient study currently is underway. The Company has completed a Phase 1
clinical trial of its plasma pathogen inactivation system in healthy subjects,
with a Phase 2 study in healthy subjects currently underway. The Company's red
blood cell pathogen inactivation system is in preclinical development.

The Company's product development and commercialization programs are
being conducted pursuant to two agreements (the "Agreements") with Baxter
Healthcare Corporation ("Baxter") providing for development, manufacture and
marketing of pathogen inactivation systems for platelets, plasma and red blood
cells. The Agreements provide for Baxter and the Company to share development
expenses, for Baxter's exclusive right and responsibility to market the systems
worldwide and for the Company to receive a share of the gross profits from the
sale of the systems.

BACKGROUND

Blood transfusions are required to treat a variety of medical
conditions, including anemia, low blood volume, surgical bleeding, trauma,
acquired and congenital bleeding disorders and chemotherapy-induced blood
deficiencies. Worldwide, over 90 million whole blood donations occur each year.
Approximately 39 million of those donations occur in North America, Western
Europe and Japan, the major geographical markets for the Company's products. The
Company estimates the combined production in these regions of platelets, FFP and
red blood cells in 1995 to have been approximately 4 million, 9 million and 31
million, respectively.

Whole blood is composed of plasma, the liquid portion of blood
containing essential clotting proteins, and three cellular blood components:
platelets, red blood cells and white blood cells (leukocytes). Platelets are
essential to coagulation, while red blood cells carry oxygen to tissues and
carbon dioxide to the lungs. Leukocytes play a

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critical role in immune and other defense systems, but can cause harmful immune
transfusion-related reactions in, or transmit disease to, transfusion
recipients.

Patients requiring transfusions typically are treated with the specific
blood component required for their particular deficiency, except in cases of
rapid, massive blood loss, in which whole blood may be transfused. Platelets
often are used to treat cancer patients following chemotherapy or organ
transplantation. Red blood cells frequently are administered to patients with
trauma or surgical bleeding, acquired chronic anemia or genetic disorders, such
as sickle cell anemia. Plasma used for transfusions is stored in frozen form and
is referred to as fresh frozen plasma, or FFP. FFP generally is used to control
bleeding. Plasma also can be separated, or "fractionated," into different parts
that are used to expand blood volume, fight infections or treat diseases such as
hemophilia.

Despite recent improvements in donor screening and in the testing and
processing of blood, patients receiving transfusions of blood components face a
number of significant risks from blood contaminants, as well as adverse immune
and other transfusion-related reactions induced by leukocytes. Viruses such as
hepatitis B (HBV), hepatitis C (HCV), human immunodeficiency virus (HIV),
cytomegalovirus (CMV) and human T-cell lymphotropic virus (HTLV) can present
life-threatening risks. In addition, bacteria, the most common agents of
transfusion-transmitted disease, can cause complications such as sepsis, which
can result in serious illness or death. Although donor screening and diagnostic
testing of donated blood have been successful in reducing the incidence of
transmission of many pathogens, diagnostic testing has a number of limitations,
such as the inability of most tests to detect pathogens prior to the generation
of antibodies, ineffectiveness in detecting genetic variants of viruses, and the
risk of human error. In addition, emerging or unidentified pathogens for which
no tests exist represent a threat to the blood supply. Because of the continuing
risk of transmission of serious diseases through transfusion of contaminated
blood components from both known and unknown pathogens, together with the
limitations of current approaches to providing a safe blood supply, there
remains a need for an approach to blood-borne pathogen inactivation that is
safe, easy to implement and cost-effective.

TECHNOLOGY AND PRODUCTS

The Company is developing pathogen inactivation systems employing its
proprietary small molecule compounds, which act by preventing the replication of
nucleic acid (DNA or RNA). Platelets, FFP and red blood cells do not contain
nuclear DNA or RNA. When the inactivation compounds are introduced into the
blood components for treatment, they cross bacterial cell walls or viral
membranes, then move into the interior of the nucleic acid structure. When
subsequently activated by an energy source, such as light, the compounds bind to
the nucleic acid of the viral or bacterial pathogen, preventing replication of
the nucleic acid. A virus, bacteria or other pathogenic cell must replicate in
order to cause infection. The Cerus compounds react in a similar manner with the
nucleic acid in leukocytes. This interaction inhibits the leukocyte activity
that is responsible for certain adverse immune and other transfusion-related
reactions. These compounds are designed to react with nucleic acid only during
the pathogen inactivation process and not after the treated blood component is
transfused. The systems are also designed to reduce the amount of unbound, or
residual, inactivation compound and breakdown products of the inactivation
process prior to transfusion.

CLINICAL DEVELOPMENT

The Company believes that, in deciding whether a pathogen inactivation
system is safe and effective, the United States Food and Drug Administration
(the "FDA") and foreign regulatory authorities are likely to take into account
whether it adversely affects the therapeutic efficacy of blood components as
compared to the therapeutic efficacy of blood components not treated with the
system, and that the FDA will weigh the system's safety, including potential
toxicities of the inactivation compounds, and other risks against the benefits
of using the system in a blood supply that has become safer in recent years. No
assurance can be given that any of the Company's development programs will be
successfully completed, that any further investigational new drug application
("IND") or investigational device exemption application ("IDE") will become
effective or that additional clinical trials will be allowed by the FDA or other
regulatory authorities, that clinical trials will commence or be completed as
anticipated, that required United States or foreign regulatory approvals will be
obtained on a timely basis, if at all, or that any products for which approval
is obtained will be commercially successful.

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Based on discussions with the FDA, the Company believes that it will be
required to provide data from human clinical trials to demonstrate the safety of
treated blood components and their therapeutic comparability to untreated
components, but that only data from in vitro and animal studies, not data from
human clinical disease transmission studies, will be required to demonstrate the
system's efficacy in inactivating pathogens. In light of these criteria, the
Company's clinical trial programs are different from typical Phase 1, Phase 2
and Phase 3 clinical studies. There can be no assurance, however, that the
Company's program for demonstrating safety and efficacy will ultimately be
acceptable to the FDA or that the FDA will continue to believe that this
clinical plan is appropriate. See "Additional Business Risks - Uncertainty
Associated with Clinical and Preclinical Testing" and " -- Government
Regulation."

PRODUCTS IN DEVELOPMENT

The Company is developing treatment systems to inactivate infectious
pathogens in platelets, FFP and red blood cells and to inactivate leukocytes to
reduce the risk of certain adverse transfusion-related reactions. The following
table identifies the Company's product development programs:

THERAPEUTIC CERUS PRODUCT IN INACTIVATION DEVELOPMENT
PROGRAM INDICATION DEVELOPMENT COMPOUND STATUS
- -------------------- ------------------ -------------------- ---------------- ------------------

Platelets Surgery, cancer Platelet Pathogen S-59 Phases 1a, 1b,
chemotherapy, Inactivation System 2a and 2b
transplantation, Clinical Trials
bleeding completed
disorders
Phase 2c
Clinical Trial
commenced in
November 1997

Plasma (FFP) Surgery, FFP Pathogen S-59 Phase 1 Clinical
transplantation, Inactivation System Trial completed
bleeding
disorders Phase 2 Clinical
Trial commenced
in January 1998

Red Blood Cells Surgery, Red Blood Cell S-303 Preclinical
transplantation, Pathogen Development;
anemia, cancer Inactivation lead compound
chemotherapy, System selected
trauma

PLATELET PROGRAM

Platelets are cellular components of blood that are an essential part of
the clotting mechanism. Platelets facilitate blood clotting and wound healing by
adhering to damaged blood vessels and to other platelets. Platelet transfusions
are used to prevent or control bleeding in platelet-deficient (thrombocytopenic)
patients, such as those undergoing cancer chemotherapy or organ transplant.
Transfusion units of platelets are obtained either by combining the platelets
from four to six whole blood donations (pooled random donor platelets), or in an
automated procedure in which a therapeutic dose of platelets is obtained from a
single donor (apheresis or single donor platelets).

The Company's platelet pathogen inactivation system applies a technology
that combines light and the Company's proprietary inactivation compound, S-59,
which is a synthetic small molecule from a class of compounds known as
psoralens. S-59 was selected from over 100 psoralen derivatives synthesized by
the Company, following preclinical studies conducted by the Company to assess
safety and ability to inactivate pathogens and leukocytes while preserving
platelet function.

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When illuminated, S-59 undergoes a specific and irreversible chemical
reaction with nucleic acid. This chemical reaction renders the genetic material
of a broad array of pathogens and cells incapable of replication. A virus,
bacteria or other pathogenic cell must replicate in order to cause infection. A
similar reaction with leukocyte nucleic acid inhibits the leukocyte activity
that is responsible for certain adverse immune and other transfusion-related
reactions. Most of the S-59 is converted to breakdown products during and after
the inactivation reaction. Studies conducted by the Company with preclinical
models have indicated that, following transfusion, the unbound S-59 and its
unbound breakdown products are rapidly metabolized and excreted. As a further
safety measure, the system under development employs a removal process designed
to reduce the amount of residual S-59 and unbound breakdown products prior to
transfusion (the S-59 reduction device or "SRD").

The Company's platelet pathogen inactivation system, developed with
Baxter, has been designed for use in the blood center setting. The system
consists of a disposable processing set, containing the S-59 compound and the
SRD, and an illumination device to deliver light to initiate the inactivation
reaction. The Company believes that, in order to manufacture the SRD for its
platelet pathogen inactivation system on a commercial scale, it will need to
modify the SRD configuration and the related manufacturing process. The Company
currently is pursuing such modification. There can be no assurance that use of a
reconfigured SRD will not cause the Company to have to conduct additional
clinical studies or otherwise to experience delays in the approval process.

Human clinical trials of the platelet pathogen inactivation system are
currently being pursued by the Company. Baxter is the sponsor of such trials. To
date, the Company has completed studies in healthy subjects that have
demonstrated the safety and tolerability and the recovery and lifespan of
platelets treated with the platelet pathogen inactivation system.

Based on the results of its Phase 2a clinical trial, the Company
submitted a protocol to the FDA for a Phase 3 randomized clinical study of
treated apheresis platelets in approximately 100 patients requiring platelet
transfusion. The Company reviewed this protocol with the FDA and agreed to
perform a pilot study in 15 patients prior to initiating the larger Phase 3
trial. This Phase 2c trial, currently underway, is a double blind, controlled
cross-over study in which double dose platelet transfusions are given to
thrombocytopenic patients and bleeding time correction and post-transfusion
platelet count increment are measured. The results of this pilot Phase 2c
clinical trial, given its small size, cannot satisfactorily be evaluated
statistically. Thus, non-statistically significant variations in bleeding times,
or other measures of the trial, may result in the FDA requiring additional
patients to be enrolled in the Phase 2c trial. Due to the nature of the trial,
its implementation and its assessment of bleeding times, enrollment of a
significant number of additional patients would be impracticable to accomplish
on a timely basis and could significantly delay completion of this trial and, as
a result, commencement of a Phase 3 clinical trial in the United States. This
Phase 2c trial currently is not expected to be completed until at least the
third quarter of 1998. In addition, there can be no assurance that, upon
completion of the pilot study, the FDA will permit initiation of a Phase 3 trial
in the United States. The Company has submitted a protocol to the ethical
committees in five European countries for a Phase 3 clinical trial of treated
apheresis and pooled random donor platelets in approximately 120 patients
requiring platelet transfusion. Approval to proceed has been obtained for four
of the five study sites, but patient enrollment has not yet commenced. The
primary endpoint in these Phase 3 studies will be the increase in
post-transfusion platelet count adjusted for platelet dose and patient size (the
"corrected count increment"). The Phase 3 European clinical trial is a
randomized study designed to assess the therapeutic efficacy of platelets
treated with the pathogen inactivation system for apheresis platelets and pooled
random donor platelets. The Phase 3 United States clinical trial is being
designed to assess the therapeutic efficacy of platelets treated with the
pathogen inactivation system for apheresis platelets, not pooled random donor
platelets. If the Company decides to seek FDA approval of the platelet pathogen
inactivation system for use in treating pooled random donor platelets, the
Company may be required by the FDA to conduct additional clinical studies.

FFP PROGRAM

Plasma is a noncellular component of blood that contains coagulation
factors and is essential for maintenance of intravascular volume. Plasma is
either separated from collected units of whole blood or collected directly by
apheresis. The collected plasma is then packaged and frozen to preserve the
coagulation factors. Some of the frozen plasma is made available for
fractionation, while some is designated for use as FFP. FFP is a source of all
blood clotting factors except platelets and is used to control bleeding in
patients who require clotting factors, such as

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patients undergoing transplants or other extensive surgical procedures, patients
with chronic liver disease or certain genetic clotting factor deficiencies.

The Company's pathogen inactivation system for FFP will use the same
S-59 psoralen compound and an SRD and illumination device similar to those being
used by the Company in its clinical trials for its platelet pathogen
inactivation system. The FFP pathogen inactivation system under development has
been designed for use in the blood center setting and is compatible with plasma
collected either manually or by apheresis.

In vitro studies conducted by the Company to date have indicated the
efficacy of the FFP pathogen inactivation system for the inactivation in FFP of
a broad array of viral pathogens. Because of the mechanism of action of its FFP
pathogen inactivation system, the Company believes that its system may also
inactivate protozoans and inhibit leukocyte activity. Although bacterial
contamination in FFP is typically not as significant a problem as in platelets,
the Company believes that the FFP pathogen inactivation system will inactivate
bacteria at the levels typically found in FFP. To date, the Company has
conducted no studies on protozoans or to detect inhibition of leukocyte activity
in FFP and only limited studies on bacteria in FFP, and there can be no
assurance that the Company's FFP pathogen inactivation system would effectively
inactivate protozoans, leukocytes or bacteria. The Company has assessed the
impact of S-59 photochemical treatment on the function of plasma proteins.
Plasma derived from whole blood or apheresis must be frozen within six to eight
hours of collection to meet the standard as "fresh frozen plasma." After
freezing, plasma may be stored for up to one year, thawed once, and must be
transfused within four hours of thawing. The Company has measured the in vitro
coagulation function activity of various clotting factors in FFP after
photochemical treatment, SRD treatment, freezing and thawing. These in vitro
results are not necessarily indicative of coagulation function that may be
obtained in vivo, and there can be no assurance that the FDA or foreign
regulatory authorities would view such levels of coagulation function as
adequate.

The Company has completed a clinical study in healthy subjects that has
demonstrated the safety and tolerability of FFP treated with the pathogen
inactivation system as well as the comparability of post-transfusion coagulation
factors between subjects transfused with treated and untreated FFP. A Phase 2
clinical trial commenced in January 1998 and is presently underway at three
trial sites. In this study, 30 healthy subjects will donate plasma, with
one-half being prepared and frozen as standard FFP and one-half being treated
with the Company's pathogen inactivation system and frozen as S-59 FFP. After
plasma collection, subjects will be treated with an oral anticoagulant to reduce
the levels of clotting factors II, VII, IX, and X. Following anticoagulant
therapy, subjects will be transfused with a therapeutic dose of either standard
FFP or S-59 FFP in random order. Following transfusion, the levels of clotting
factors II, VII, IX, and X will be measured and compared between S-59 and
standard FFP transfusions. The Phase 2 trial is designed to serve as a
transitional therapeutic efficacy study into a Phase 3 trial to evaluate the
therapeutic efficacy of S-59 FFP for several major therapeutic indications,
including chronic liver disease with minor surgery, liver transplant surgery,
and thrombotic thrombocytopenic purpura with multiple whole blood volume plasma
exchange. While the Company has presented this clinical trial plan to the FDA,
there can be no assurance that the FDA will concur with this trial plan.

RED BLOOD CELL PROGRAM

Red blood cells are essential components of blood that carry oxygen to
tissues and carbon dioxide to the lungs. Red blood cells may be transfused as a
single treatment in surgical and trauma patients with active bleeding or on a
repeated basis in patients with acquired anemia or genetic disorders, such as
sickle cell anemia, or in connection with chemotherapy.

The Company has developed a system for pathogen inactivation in red
blood cells using a compound that binds to nucleic acid in a manner similar to
that of S-59-based systems, but does not require light. The Company's method for
inactivating pathogens in red blood cells is based on a proprietary ALE
compound, S-303, a small molecule synthesized by the Company. The selection of
S-303 was based on preclinical studies of over 100 ALE compounds synthesized by
the Company to assess safety, stability and ability to inactivate pathogens,
while preserving red blood cell survival and function.

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In vitro studies by the Company have indicated the efficacy of the ALE
process for the inactivation of a broad array of viral and bacterial pathogens
with preservation of red blood cell function. Because of the mechanism of action
of its red blood cell ALE treatment system, the Company believes that its system
may also inactivate protozoans and inhibit leukocyte function. However, the
Company has conducted no studies on protozoans or to detect inhibition of
leukocyte activity in red blood cells, and there can be no assurance that the
Company's red blood cell system would be effective to inactivate protozoans or
leukocytes. The Company is currently conducting good laboratory practice (GLP)
toxicology and pathogen inactivation validation studies on its red blood cell
pathogen inactivation system.

The Company has not filed to commence a Phase 1 clinical trial in red
blood cells. There can be no assurance as to whether Phase 1 trials, if
commenced, will be successful or as to the timing of these studies or the
acceptance of the design of these or any later studies by the FDA.

FUTURE PRODUCT DEVELOPMENT

The Company believes that the technology it has developed for treatment
of platelets, FFP and red blood cells may have application in treating other
blood products, including plasma fractions, such as Factor VIII and Factor IX
clotting factors, and recombinant equivalents of plasma derivatives. The Company
also believes that the compounds and processes it has developed for inactivation
of pathogens and leukocytes may have other medical applications in which
reactions with nucleic acid may serve to prevent or control the activities of
cells or microorganisms.

ALLIANCE WITH BAXTER

The Agreements with Baxter provide for the development, manufacture and
marketing of pathogen inactivation systems for platelets, FFP and red blood
cells. The Agreements generally provide for Baxter and the Company to share
development expenses equally, subject to mutually agreed budgets established
from time to time, and for Baxter's exclusive right and responsibility to market
the systems worldwide. Under the Agreements, the Company is to receive between
26.8% and 30.7% of revenues from sales of inactivation system disposables for
platelets after deducting from such revenues the amount by which Baxter's and
the Company's cost of goods for the inactivation system disposables exceeds
certain dollar amounts specified in the agreement (the "Premium"). The
percentage of Premium to be received by the Company will be determined on the
basis of the market price of the disposables; in no event, however, will the
amount to be received per inactivation system disposable be less than $8.50,
plus 2.2% of the Premium, nor more than $20.00, plus 2.2% of the Premium. For
red blood cells and FFP, the Company and Baxter are to share equally in gross
profits from sales of inactivation system disposables, after deducting from such
gross profits a specified percentage allocation to be retained by the marketing
party for marketing and administrative expenses. However, the revenue sharing
under this agreement is subject to adjustment upon the occurrence of certain
events, including any adjustments in the relative sharing by the parties of
development expenses. For red blood cells and FFP, the Company and Baxter are
also to receive their respective costs of goods for compounds and components
supplied for inactivation system disposables and the depreciation of certain
instruments used in the systems. For platelets, red blood cells and FFP, Baxter
will retain revenues from the sales of any related instruments, such as the
illumination devices used to activate S-59. The Company is obligated to supply
the inactivation compound for the systems, with Baxter supplying the remaining
components. Through December 31, 1997, Baxter paid the Company up-front license
fees and milestone and development payments totaling $14.8 million and invested
$17.5 million in the capital stock of the Company. Baxter currently owns
1,457,830 shares of the Company's common stock, or approximately 15.9% of the
Company's common stock currently outstanding. Baxter is obligated to make
additional equity investments, at 120% of the market price at the time of each
investment, subject to the achievement of certain milestones as follows: (i)
either $5 million, upon the achievement of both (a) the mutual determination by
the Company and Baxter that there is sufficient data to conclude that Phase 3
platelet trials are likely to satisfy specified criteria (the "Interim Platelet
Determination") and (b) the filing of a regulatory application with the FDA to
begin a Phase 1 study under the red blood cell program or comparable filing in
Europe under such program, or separate equity investments of $2 million upon the
Interim Platelet Determination, and $3 million upon the approval of a regulatory
application by the FDA under the red blood cell program or comparable approval
in Europe under such program; and (ii) $5 million, upon the achievement of both
(a) the approval by the FDA to commence a Phase 3 study in the United States or
comparable approval in

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Europe under the red blood cell program and (b) the approval by the FDA of an
application to market products developed under the platelet program or
comparable approval in Europe under such program.

Baxter has agreed that it will not at any time, nor will it permit any
of its affiliates to, own capital stock of the Company having 20.1% or more of
the outstanding voting power of the Company. Such restrictions on stock
purchases will not apply in the event a third party makes a tender offer for a
majority of the outstanding voting securities of the Company or if the Board of
Directors of the Company determines to liquidate or sell to a third party
substantially all of the assets or a majority of the voting securities of the
Company or to approve a merger or consolidation in which the Company's
stockholders will not own a majority of the voting securities of the surviving
entity.

In March 1998, the Company and Baxter entered into an amendment to one
of the Agreements providing that, to the extent the approved spending for 1998
for the red blood cell project exceeds $7.3 million, Cerus will fund all
expenses for the red blood cell project in 1998 in excess of such amount, up to
the amount of the approved budget. To compensate Cerus for such excess
expenditures, Baxter will fully fund the first expenditures under the approved
budget for the red blood cell project for 1999 in an amount equal to such excess
expenditures, after which the parties shall equally share the expenses of the
red blood cell project. If there is for any reason not an approved budget for
the red blood cell project for 1999, Baxter will fully fund the first
expenditures for 1999 under the approved budget for such other Cerus-Baxter
program or programs as Cerus shall designate in an amount equal to the Cerus
1998 excess expenditures. If by July 1, 1999, however, there is not an approved
budget for such other Cerus-Baxter program or programs that is at least equal to
such excess expenditures, Baxter will promptly pay to Cerus one-half of the
amount by which the excess expenditures exceed the amount of expenditures to be
funded by Baxter. Cerus anticipates that the expenditures for 1998 for the FFP
program will exceed the previously approved budget. Cerus and Baxter are
discussing each company's level of funding in 1998 for the FFP program. There
can be no assurance that the parties will agree on a budget that would permit
the FFP program to proceed in accordance with the Company's plans.

Baxter has certain discretion in decisions concerning the development
and marketing of pathogen inactivation systems. There can be no assurance that
Baxter will not elect to pursue alternative technologies or product strategies
or that its corporate interests and plans will remain consistent with those of
the Company. The Company is aware that Baxter is developing an alternative
pathogen inactivation system for FFP, based on a compound known as methylene
blue.

The Agreements contain restrictions on the Company's ability to develop
and market pathogen inactivation systems for blood components outside the
Agreements. The Company is entitled, however, to enter into development and
licensing agreements with third parties for pathogen inactivation technology for
plasma derivatives and recombinant equivalents of plasma derivatives. Such
development and licensing agreements are free of any rights of Baxter, except
that the Company must offer Baxter the right to license such technology on terms
no less favorable than the terms offered to other plasma derivative
manufacturers.

The development programs under the Agreements may be terminated by
Baxter or the Company on 90 days' notice. If either party so terminates as to a
program, the other party will gain exclusive development and marketing rights to
the program, and the terminating party's sharing in program revenues will be
reduced significantly. See "Additional Business Risks - Reliance on Baxter."

MANUFACTURING AND SUPPLY

The Company has in the past utilized, and intends to continue to
utilize, third parties to manufacture and supply the psoralen and ALE
inactivation compounds for its systems and to rely on Baxter to supply system
components for use in clinical trials and for the potential commercialization of
its products in development. The Company has no experience in manufacturing
products for commercial purposes and does not have any manufacturing facilities.
Consequently, the Company is dependent on contract manufacturers for the
production of compounds and on Baxter for other system components for
development and commercial purposes.

Under the Agreements, the Company is responsible for developing and
delivering its proprietary compounds for effecting pathogen inactivation to
Baxter for incorporation into the final system configuration. Baxter is
responsible for manufacturing or supplying the disposable units, such as blood
storage containers and

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related tubing, as well as any device associated with the inactivation process.
This arrangement applies both to the current supply for clinical trials and, if
applicable regulatory approvals are obtained, the future commercial supply. In
order to provide the inactivation compounds for its platelet and FFP pathogen
inactivation systems, the Company has contracted with two manufacturing
facilities for large-scale synthesis of S-59, although only one currently is
performing such synthesis and currently has a stock of compound sufficient to
support the anticipated remaining clinical trials planned for the platelet and
FFP pathogen inactivation systems. The Company has not contracted with a
manufacturer to produce large-scale quantities of S-303. There can be no
assurance that the Company will be able to contract for the manufacturing of
products and compounds for its pathogen inactivation systems in the future on
reasonable terms, if at all.

The Company purchases certain key components of its compounds from a
limited number of suppliers. While the Company believes that there are
alternative sources of supply for such components, establishing additional or
replacement suppliers for any of the components in the Company's compounds, if
required, may not be accomplished on a timely basis and could involve
significant additional costs. See "Additional Business Risks - Reliance on Third
Party Manufacturing; Dependence on Key Suppliers."

MARKETING, SALES AND DISTRIBUTION

If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of the Company's pathogen
inactivation systems for blood components worldwide. The Company does not
currently maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to rely on Baxter to market and sell its
pathogen inactivation systems. There can be no assurance that the Company will
be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to the Company. Revenues to be received by
the Company through any marketing and sales arrangement with Baxter will be
dependent on Baxter's efforts, and there can be no assurance that the Company
will benefit from Baxter's present or future market presence or that such
efforts will otherwise be successful. If the Agreements were terminated or if
Baxter's marketing efforts were unsuccessful, the Company's business, financial
condition and results of operations would be materially adversely affected.

COMPETITION

The Company expects to encounter competition in the sale of products it
may develop. If regulatory approvals are received, the Company's products may
compete with other approaches to blood safety currently in use, as well as with
future products developed by biotechnology and pharmaceutical companies,
hospital supply companies, national and regional blood centers, and certain
governmental organizations and agencies. Many companies and organizations that
may be competitors or potential competitors have substantially greater financial
and other resources than the Company and may have greater experience in
preclinical testing, human clinical trials and other regulatory approval
procedures. The Company's ability to compete successfully will depend, in part,
on its ability to develop proprietary products, develop and maintain products
that reach the market first, are technologically superior to and/or are of lower
cost than other products on the market, attract and retain scientific personnel,
obtain patent or other proprietary protection for its products and technologies,
obtain required regulatory approvals, and manufacture, market and sell any
product that it develops. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of the Company's products, or that might render the Company's
technology and products uncompetitive or obsolete. Furthermore, there can be no
assurance that the Company's competitors will not obtain patent protection or
other intellectual property rights that would limit the Company's ability to use
the Company's technology or commercialize products that may be developed.

Several companies are developing technologies which are, or in the
future may be, the basis for products that will directly compete with or reduce
the market for the Company's pathogen inactivation systems. A number of
companies are specifically focusing on alternative strategies for pathogen
inactivation or removal in various blood components. Although no commercial
processes are currently available to eliminate or inactivate pathogens in
platelets and red blood cells, a number of pathogen inactivation methods are
used commercially in Europe for FFP, including treatment with solvent-detergent
or methylene blue. Because the solvent-detergent process combines hundreds of
units of plasma into large pools, there is increased risk of transmission of
pathogens not inactivated by the process, such as parvovirus B19. In December
1996, the Blood Products Advisory Committee, an advisory panel

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to the FDA, unanimously recommended that solvent-detergent be approved for use
in treating FFP. Although recommendations of advisory committees are not
binding, unanimous recommendations generally are followed by the FDA. If
approved by the FDA, the treatment of FFP by solvent-detergent may become a
widespread practice prior to any commercialization of the Company's FFP pathogen
inactivation system, making such commercialization more difficult. Other groups
are developing synthetic blood product substitutes or products to stimulate the
growth of platelets. If any of these technologies is successfully developed, it
could have a material adverse effect on the Company's business, financial
condition and results of operations.

The Company believes that the primary competitive factors in the market
for pathogen inactivation systems will include the breadth and effectiveness of
pathogen inactivation processes, ease of use, the scope and enforceability of
patent or other proprietary rights, product price, product supply and marketing
and sales capability. In addition, the length of time required for products to
be developed and to receive regulatory and, in some cases, reimbursement
approval are important competitive factors. The Company believes it competes
favorably with respect to these factors, although there can be no assurance that
it will be able to continue to do so. The biopharmaceutical field is
characterized by rapid and significant technological changes. Accordingly, the
Company's success will depend in part on its ability to respond quickly to
medical and technological changes through the development and introduction of
new products. Product development involves a high degree of risk, and there can
be no assurance that the Company's product development efforts will result in
any commercially successful products.

Under the Agreements, Baxter has reserved the right to market competing
products not within the field of psoralen or ALE inactivation. Baxter is
conducting several independent product development efforts in blood collection
and processing that may improve blood component quality and safety. The Company
is aware that Baxter is developing an alternative pathogen inactivation system
for FFP, based on methylene blue. The development and commercialization of the
Company's pathogen inactivation systems could be materially adversely affected
by competition with Baxter or by Baxter's election to pursue alternative
strategies or technologies in lieu of those of the Company. See "Additional
Business Risks -- Rapid Technological Change; Significant Competition."

PATENTS, LICENSES AND PROPRIETARY RIGHTS

The Company's success depends in part on its ability to obtain patents,
to protect trade secrets, to operate without infringing upon the proprietary
rights of others and to prevent others from infringing on the proprietary rights
of the Company. The Company's policy is to seek to protect its proprietary
position by, among other methods, filing United States and foreign patent
applications related to its proprietary technology, inventions and improvements
that are important to the development of its business. As of December 31, 1997,
the Company owned 33 issued or allowed United States patents and 14 issued or
allowed foreign patents. The Company's patents expire at various dates between
2003 and 2015. In addition, the Company has 29 pending United States patent
applications and has filed 26 corresponding patent applications under the Patent
Cooperation Treaty, three of which are currently pending in Europe, Japan,
Australia and Canada. Proprietary rights relating to the Company's planned and
potential products will be protected from unauthorized use by third parties only
to the extent that they are covered by valid and enforceable patents or are
effectively maintained as trade secrets. There can be no assurance that any
patents owned by, or licensed to, the Company will afford protection against
competitors or that any pending patent applications now or hereafter filed by,
or licensed, to the Company will result in patents being issued. In addition,
the laws of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.

The patent positions of biopharmaceutical companies involve complex
legal and factual questions and, therefore, their enforceability cannot be
predicted with certainty. There can be no assurance that any of the Company's
patents or patent applications, if issued, will not be challenged, invalidated
or circumvented, or that the rights granted thereunder will provide proprietary
protection or competitive advantages to the Company against competitors with
similar technology. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company. Because of the extensive time required for development, testing
and regulatory review of a potential product, it is possible that, before any of
the Company's products can be commercialized, any related patent may expire or
remain in existence for only a short period following commercialization, thus
reducing any advantage of the patent, which could adversely affect the

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Company's ability to protect future product development and, consequently, its
operating results and financial position.

Because patent applications in the United States are maintained in
secrecy until patents issue and since publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, the Company
cannot be certain that it was the first to make the inventions covered by each
of its issued or pending patent applications or that it was the first to file
for protection of inventions set forth in such patent applications. There can be
no assurance that the Company's planned or potential products will not be
covered by third-party patents or other intellectual property rights, in which
case continued development and marketing of such products would require a
license under such patents or other intellectual property rights. There can be
no assurance that such required licenses will be available to the Company on
acceptable terms, if at all. If the Company does not obtain such licenses, it
could encounter delays in product introductions while it attempts to design
around such patents, or could find that the development, manufacture or sale of
products requiring such licenses is foreclosed. Litigation may be necessary to
defend against or assert such claims of infringement, to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company or to
determine the scope and validity of the proprietary rights of others. In
addition, interference proceedings declared by the United States Patent and
Trademark Office may be necessary to determine the priority of inventions with
respect to patent applications of the Company. Litigation or interference
proceedings could result in substantial costs to and diversion of effort by the
Company, and could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
these efforts by the Company would be successful.

The Company is a licensee under a worldwide exclusive license agreement
with Miles, Inc. and Diamond Scientific Corporation with respect to two United
States patents covering inventions pertaining to psoralen-based photochemical
decontamination treatment of whole blood or blood components and four United
States patents relating to vaccines, as well as related foreign patents. Whether
the Company's psoralen-based pathogen inactivation systems practice either of
the photochemical decontamination patents depends on an interpretation of the
scope of the patent claims. If such systems practice such patents, the license
provides for Cerus to make milestone payments and pay royalties on revenues
Cerus receives from sales of such systems. The license also calls for minimum
annual royalty payments in order to maintain certain exclusive rights. The
manner in which any such milestone payments and royalties would be shared by
Baxter, if at all, has not been determined.

The Company may rely, in certain circumstances, on trade secrets to
protect its technology. However, trade secrets are difficult to protect. The
Company seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.
To the extent that the Company's employees or its consultants or contractors use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.

In August 1996, the Company received correspondence from Circadian
Technologies, Inc., an Australian entity, alleging that unspecified trade
secrets and know-how jointly owned by Circadian and the Auckland Division Cancer
Society of New Zealand were, without the consent of Circadian, used in the
development by the Cancer Society and the Company of unspecified compounds for
the Company's red blood cell program. Such claims do not relate to the Company's
platelet or FFP programs. In subsequent correspondence, Circadian has indicated
that it is seeking compensation in the form of royalties or a lump sum payment.
Based on its investigation of the matter to date, the Company does not believe
that the claims are meritorious. Any future litigation involving these
allegations, however, would be subject to inherent uncertainties, especially in
cases where complex technical issues are decided by a lay jury. There can be no
assurance that, if a lawsuit were commenced, it would not be decided against the
Company, which could have a material adverse effect upon the Company's business,
financial condition and results of operations.

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GOVERNMENT REGULATION

The Company and its products are comprehensively regulated in the United
States by the FDA and, in some instances, by state and local governments, and by
comparable governmental authorities in other countries. The FDA regulates drugs,
medical devices, and biologics under the Federal Food, Drug and Cosmetic Act and
other laws, including, in the case of biologics, the Public Health Service Act.
These laws and implementing regulations govern, among other things, the
development, testing, manufacturing, record keeping, storage, labeling
advertising, promotion and premarket clearance or approval of products subject
to regulation.

The Company believes its pathogen inactivation systems will be regulated
by the FDA as devices. It is also possible, however, that the FDA will decide to
regulate the pathogen inactivation systems as biologics, as drugs, as
combination products including drugs or biologics and one or more medical
devices, or as drugs or biologics with one or more medical devices (i.e., the
blood bags and light source) requiring separate approval or clearance. Whether
the FDA regulates the pathogen inactivation systems as devices or as one or more
of the other alternatives, it is likely that the FDA's Center for Biologics
Evaluation and Research will be principally responsible for regulating the
pathogen inactivation systems.

Before a medical device may be marketed in the United States, the FDA
must clear a pre-market notification (a "510(k)") or approve a pre-market
approval application ("PMA") for the product. Before a new drug may be marketed
in the United States, the FDA must approve an NDA for the product. Before a
biologic may be marketed in the United States, the FDA must approve a Biologic
License Application ("BLA"). Before a combination product can be marketed in the
United States, it must have an approved NDA, BLA or PMA, depending on which
statutory authority the FDA elects to use.

Despite the multiplicity of statutory and regulatory possibilities, the
steps required before approval are essentially the same whether the product is
ultimately regulated as a medical device, biologic, drug, a combination product,
or a combination thereof. The steps required before a medical device, drug or
biologic may be approved for marketing in the United States pursuant to a PMA,
BLA or NDA, respectively, generally include (i) preclinical laboratory and
animal tests, (ii) submission to the FDA of an investigational device exemption
("IDE") (for medical devices) or an IND (for drugs or biologics) for human
clinical testing, which must become effective before human clinical trials may
begin (iii) appropriate tests to show the product's safety, (iv) adequate and
well-controlled human clinical trials to establish the product's efficacy for
its intended indications, (v) submission to the FDA of a PMA, BLA or NDA, as
appropriate and (vi) FDA review of the PMA, BLA or NDA in order to determine,
among other things, whether the product is safe and effective for its intended
uses. In addition, the FDA inspects the facilities at which the product is
manufactured and will not approve the product unless compliance with current
Good Manufacturing Practices ("cGMP") requirements is satisfactory. The steps
required before a medical device may be cleared for marketing in the United
States pursuant to a 510(k) are generally the same, except that instead of
conducting tests to demonstrate safety and efficacy, data, including clinical
data if necessary, must be obtained to show that the product is substantially
equivalent to a legally marketed device, and the FDA must make a determination
of substantial equivalence rather than a determination that the product is safe
and effective.

The Company believes that, in deciding whether a pathogen inactivation
system is safe and effective, the FDA is likely to take into account whether it
adversely affects the therapeutic efficacy of blood components as compared to
the therapeutic efficacy of blood components not treated with the system, and
that the FDA will weigh the system's safety, including potential toxicities of
the inactivation compounds, and other risks against the benefits of using the
system in a blood supply that has become safer in recent years. There can be no
assurance that the FDA will not require further toxicology studies of the
Company's products.

Based on discussions with the FDA, the Company believes that it will be
required to provide data from human clinical studies to demonstrate the safety
of treated platelets and their therapeutic comparability to untreated platelets,
but that only data from in vitro and animal studies, not data from human
clinical studies, will be required to demonstrate the system's efficacy in
inactivating pathogens. In light of these criteria, the Company's clinical trial
programs for platelets and FFP will consist of studies that differ from the
usual Phase 1, Phase 2 and Phase 3 clinical studies.

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There can be no assurance, however, that these means of demonstrating
safety and efficacy will ultimately be acceptable to the FDA or that the FDA
will continue to believe that this clinical plan is appropriate. Moreover, even
if the FDA considers these means of demonstrating safety and efficacy to be
acceptable in principle, there can be no assurance that the FDA will find the
data submitted sufficient to demonstrate safety and efficacy. In particular,
although the Company anticipates that the FDA will consider in vitro and animal
data an appropriate means of demonstrating efficacy in pathogen inactivation,
there can be no assurance that the FDA will so conclude, and any requirement to
provide other than in vitro and animal data would adversely affect the timing
and could affect the success of the Company's efforts to obtain regulatory
approval.

Even if regulatory approval or clearance is granted, it could include
significant limitations on the indicated uses for which a product could be
marketed. For example, the Company does not believe that it will be able to make
any labeling claims that the Company's pathogen inactivation systems may
inactivate any pathogens for which it does not have in vitro, and in certain
cases animal, data supporting such claims. The testing and approval/clearance
process requires substantial time, effort and financial resources, and is
generally lengthy, expensive and uncertain. The approval process is affected by
a number of factors, including the availability of alternative treatments and
the risks and benefits demonstrated in clinical trials. Additional animal
studies or clinical trials may be requested during the FDA review period and may
delay marketing approval. After FDA approval for the initial indications,
further clinical trials may be necessary to gain approval for the use of the
product for additional indications. The FDA may also require post-marketing
testing to monitor for adverse effects, which can involve significant expense.
Later discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. In addition, the policies of the FDA may change, and additional
regulations may be promulgated which could prevent or delay regulatory approval
of the Company's planned products. There can be no assurance that any approval
or clearance will be granted on a timely basis, if at all. Any failure to obtain
or delay in obtaining such approvals or clearances, and any significant
limitation on their indicated uses, could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

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The Phase 3 European clinical trial is being designed to assess the
therapeutic efficacy of the platelet pathogen inactivation system for use in
treating apheresis platelets and pooled random donor platelets. The Phase 3
United States clinical trial is being designed to assess the therapeutic
efficacy of the platelet pathogen inactivation system for use in treating
apheresis platelets, not pooled random donor platelets, which represent 55% and
45% of the market, respectively. If the Company decides to seek FDA approval of
the platelet pathogen inactivation system for use in treating pooled random
donor platelets, the Company may be required by the FDA to conduct additional
clinical studies. In addition, there currently are three principal manufacturers
of automated apheresis collection equipment used in the United States, including
Baxter. The equipment of each manufacturer collect platelets into plastic
disposables designed for that equipment; thus, a pathogen inactivation system
designed for disposables used by one manufacturer will not necessarily be
compatible with other manufacturers' collection equipment. The Company intends
initially to seek FDA approval of a platelet pathogen inactivation system
configured for Baxter's aphersis collection equipment. If the Company determines
that compatibility with other equipment is desirable, it will need to develop
additional processing procedures. Although the Company believes that the FDA
would accept the clinical data from the original system for platelets collected
using other equipment and procedures and would require only limited additional
studies to show comparability, there can be no assurance that it would do so.

Because of the risk of bacterial growth, current FDA rules require that
platelets may not be stored for more than five days after collection from the
donor. The rules also require that pooled platelets be transfused within four
hours of pooling and, as a result, most pooling occurs at hospitals. However,
the Company's platelet pathogen inactivation system is being designed to be used
at blood centers, not at hospitals, and requires a processing time of
approximately eight hours. Therefore, in order for the Company's platelet
pathogen inactivation system to be effectively implemented and accepted at blood
centers as planned, the FDA-imposed limit on the time between pooling and
transfusion would need to be lengthened or eliminated for blood products treated
with the Company's systems, which are being designed to inactivate bacteria that
would otherwise contaminate pooled platelets. If the Company were to pursue the
pooled random donor platelet market, it would need to work with the FDA during
the approval/clearance process to obtain the necessary changes in these
limitations. There can be no assurance, however, that the FDA would change this
requirement and, if such a change were not made, the Company's business,
financial condition and results of operations would be materially adversely
affected.

The Company is developing a European investigational plan based on the
platelet and FFP treatment systems using S-59 being categorized as Class III
devices under European Union regulatory authorities. However, there can be no
assurance that this approach will be accepted by European authorities. The
European Union has promulgated rules that require that medical devices receive
by mid-1998 the right to affix the CE Mark, an international symbol of adherence
to quality assurance standards and compliance with applicable European medical
device directives. Failure to receive CE Mark certification will prohibit the
Company from selling its products in the European Union.

The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials,
biological specimens and wastes. There can be no assurance that the Company will
not be required to incur significant costs to comply with environmental and
health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, including
certain hazardous chemicals and radioactive materials. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.

EMPLOYEES

As of February 28, 1998, the Company had 76 employees, 59 of whom were
engaged in research and development and 17 in finance and other administration.
The Company also had consulting arrangements with nine individuals. No employee
of the Company is covered by collective bargaining agreements, and the Company
believes that its relationship with its employees is good.

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ADDITIONAL BUSINESS RISKS

The Company's business is subject to the following risks in addition to
those discussed above and elsewhere in this report.

Early Stage of Product Development. The Company's pathogen inactivation
systems for blood transfusion components are in the research and development
stage and will require additional preclinical and clinical testing prior to
submission of any regulatory application for commercial use. The Company has not
commenced the large-scale clinical trials that would, if successful, lead to
filing product approval applications with the FDA. The Company's products are
subject to the risks of failure inherent in the development of medical device,
pharmaceutical and biological products and products based on new technologies.
These risks include the possibility that the Company's approach to pathogen
inactivation will not be safe or effective, that the Company's products will not
be easy to use or cost-effective, that third parties will develop and market
superior or equivalent products, that any or all of the Company's products will
fail to receive any necessary regulatory approvals, that such products will be
difficult or uneconomical to manufacture on a commercial scale, that proprietary
rights of third parties will preclude the Company from marketing such products
and that the Company's products will not achieve market acceptance. As a result
of these risks, there can be no assurance that the Company's research and
development activities will result in any commercially viable products.

Uncertainty Associated with Preclinical and Clinical Testing. The
regulatory process includes preclinical and clinical testing of each product to
establish its safety and efficacy, and may include post-marketing studies
requiring expenditure of substantial resources. The results from preclinical
studies and early clinical trials conducted by the Company may not be predictive
of results obtained in later clinical trials, and there can be no assurance that
clinical trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain the requisite approvals or that marketable products will
result. For example, at the request of the FDA, the Company designed and
commenced a pilot Phase 2c clinical trial in 15 thrombocytopenic patients to
assess the effect of treated platelets on post-transfusion bleeding time
correction and platelet count increment. The results of this pilot Phase 2c
clinical trial, given its small size, cannot satisfactorily be evaluated
statistically. Thus, non-statistically significant variations in bleeding times,
or other measures of the trial, may result in the FDA requiring additional
patients to be enrolled in the Phase 2c trial. Due to the nature of the trial,
its implementation and its assessment of bleeding times, enrollment of a
significant number of additional patients could be impracticable to accomplish
on a timely basis and could significantly delay completion of this trial and, as
a result, commencement of the proposed Phase 3 clinical trial. This Phase 2c
trial currently is not expected to be completed until at least the third quarter
of 1998. The rate of completion of the Company's clinical trials may be delayed
by many other factors, including slower than anticipated patient enrollment or
any other adverse event occurring during the clinical trials. Completion of
testing, studies and trials may take several years, and the length of time
generally varies substantially with the type, complexity, novelty and intended
use of the product. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, delays or rejections may be encountered based
upon many factors, including changes in regulatory policy during the period of
product development. The Company's products under development require
significant additional research and development efforts. No assurance can be
given that any of the Company's development programs will be successfully
completed, that any further INDs or IDEs will become effective or that
additional clinical trials will be allowed by the FDA or other regulatory
authorities, that clinical trials will commence as planned, that required United
States or foreign regulatory approvals will be obtained on a timely basis, if at
all, or that any products for which approval is obtained will be commercially
successful. Due to the uncertain nature of clinical trial programs, there can be
no assurance that the proposed schedules for IND or IDE and clinical protocol
submissions to the FDA, initiations of studies and completions of clinical
trials can be maintained. Any delays in the Company's clinical trials or
failures to obtain required regulatory approvals would have a material adverse
effect on the Company's business, financial condition and results of operations.

Reliance on Baxter. Under the terms of the Agreements, the Company
relies on Baxter for significant funding, product development support, the
manufacture and supply of certain system components and the marketing of its
planned products. The Company anticipates that, prior to commencement of product
sales, if any, the Company's principal source of revenue will continue to be
payments under the Agreements.

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The development programs under the Agreements may be terminated by
Baxter on 90 days' notice. If the Agreements were terminated, if Baxter failed
to provide the committed funding or if Baxter's product development efforts were
unsuccessful, the Company may need to obtain additional funding from other
sources and would be required to devote additional resources to the development
of its products, delaying the development of its products. Any such delay would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that disputes will not
arise in the future with respect to the Agreements. Possible disagreements
between Baxter and the Company could lead to delays in the research, development
or commercialization of certain planned products or could require or result in
time-consuming and expensive litigation or arbitration and would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Under the terms of the Agreements, Baxter is responsible for
manufacturing the disposable units, such as blood storage containers and related
tubing, as well as any devices associated with the inactivation processes. If
the Agreements were terminated or if Baxter otherwise failed to deliver an
adequate supply of components, the Company would be required to identify other
third-party component manufacturers. There can be no assurance that the Company
would be able to identify such manufacturers on a timely basis or enter into
contracts with such manufacturers on reasonable terms, if at all. Any delay or
change in the availability of devices or disposables from Baxter or its
suppliers could adversely affect the timely submission of products for
regulatory approval or the market introduction and subsequent sales of such
products and would have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, the inclusion of
components manufactured by others could require the Company to seek new
approvals from government regulatory authorities, which could result in delays
in product delivery. There can be no assurance that the Company would receive
any such required regulatory approvals. Any such delay would have a material
adverse effect on the Company's business, financial condition and results of
operations.

If appropriate regulatory approvals are received, Baxter will be
responsible for the marketing, sales and distribution of the Company's pathogen
inactivation systems for blood components worldwide. The Company does not
currently maintain, nor does it intend to develop, its own marketing and sales
organization but instead expects to rely on Baxter to market and sell its
pathogen inactivation systems. There can be no assurance that the Company will
be able to maintain its relationship with Baxter or that such marketing
arrangements will result in payments to the Company. Revenues to be received by
the Company through any marketing and sales arrangement with Baxter will be
dependent on Baxter's efforts, and there can be no assurance that the Company
will benefit from Baxter's present or future market presence or that such
efforts will otherwise be successful. If the Agreements were terminated or if
Baxter's marketing efforts were unsuccessful, the Company's business, financial
condition and results of operations would be materially adversely affected.

The Agreements provide for key decision-making regarding development and
commercialization by a management board comprised of equal representation from
Baxter and the Company and, in the case of FFP and red blood cells, one
independent member. There can be no assurance that such board's decisions will
be consistent with the Company's interests, that Baxter will not elect to pursue
alternative technologies or product strategies or that its corporate interests
and plans will remain consistent with those of the Company. In the Agreements,
Baxter agreed to certain limited restrictions on its ability to independently
develop and market products that compete with the products under the Agreements.
There can be no assurance that these provisions will prevent Baxter from
developing or marketing competing products. The Company is aware that Baxter is
developing an alternative pathogen inactivation system for FFP based on
methylene blue. The development and commercialization of the Company's pathogen
inactivation systems could be materially adversely affected by competition with
Baxter or by Baxter's election to pursue alternative strategies or technologies
in lieu of those of the Company.

Government Regulation. All of the Company's products under development
and anticipated future products are or will be subject to extensive and rigorous
regulation by the federal government (principally the FDA) and state, local, and
foreign governments. Such regulations govern, among other things, the
development, testing, manufacturing, labeling, storage, pre-market clearance or
approval, advertising, promotion, sale and distribution of such products. The
process of obtaining regulatory approvals or clearances is generally lengthy,
expensive and uncertain. To date, none of the Company's products under
development has been approved for sale in the United States or any foreign
market. Satisfaction of pre-market approval or clearance or other regulatory
requirements of the FDA, or similar requirements of foreign regulatory agencies,
typically takes several years, and may take longer,

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18

depending upon the type, complexity, novelty and intended use of the product.
There can be no assurance that the FDA or any other regulatory agency will grant
approval or clearance for any product being developed by the Company on a timely
basis, if at all. If regulatory approval of a product is granted, such approval
may impose limitations on the indicated uses for which a product may be
marketed. Further, even if regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product, including withdrawal of the product from the market. The policies of
the FDA and foreign regulatory bodies may change, and additional regulations may
be promulgated, which could prevent or delay regulatory approval of the
Company's planned products. Delay in obtaining or failure to obtain regulatory
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. Among the conditions for FDA
approval of a pharmaceutical, biologic or device is the requirement that the
manufacturer's quality control and manufacturing procedures conform to cGMP
requirements, which must be followed at all times. The FDA enforces cGMP
requirements through periodic inspections. There can be no assurance that the
FDA will determine that the facilities and manufacturing procedures of Baxter or
any other third-party manufacturer of the Company's planned products will
conform to cGMP requirements.

Blood centers and others that ship blood and blood products interstate
will likely be required to obtain approved license supplements from the FDA
before shipping products processed with the Company's pathogen inactivation
systems. This requirement and/or FDA delays in approving such supplements may
deter some blood centers from using the Company's products, and blood centers
that do submit supplements may face disapproval or delays in approval that could
provide further disincentives to use the systems. The regulatory impact on
potential customers could have a material adverse effect on the Company's
business, financial condition and results of operations.

No Assurance of Market Acceptance; Concentrated Market. The Company
believes that market acceptance of the Company's pathogen inactivation systems
will depend, in part, on the Company's ability to provide acceptable evidence of
the safety, efficacy and cost-effectiveness of its products, as well as the
ability of blood centers to obtain FDA approval and adequate reimbursement for
such products. The Company believes that market acceptance of its pathogen
inactivation systems also will depend upon the extent to which physicians,
patients and health care payors perceive that the benefits of using blood
components treated with the Company's systems justify the systems' additional
costs and processing requirements in a blood supply that has become safer in
recent years. While the Company believes that its pathogen inactivation systems
are able to inactivate pathogens in excess of concentrations that the Company
believes typically are present in contaminated blood components when the blood
is donated, there can be no assurance that contamination levels will never
exceed the capacity of the Company's pathogen inactivation systems. The Company
does not expect that its planned products will be able to inactivate all known
and unknown infectious pathogens, and there can be no assurance that the
inability to inactivate certain pathogens will not affect the market acceptance
of its products. There can be no assurance that the Company's pathogen
inactivation systems will gain any significant degree of market acceptance among
blood centers, physicians, patients and health care payors, even if clinical
trials demonstrate safety and efficacy and necessary regulatory approvals and
health care reimbursement approvals are obtained.

In the United States, approximately 55% of platelets are collected by
apheresis. The Company's Phase 3 United States clinical trial protocol for its
platelet pathogen inactivation system has been designed to assess the
therapeutic efficacy of such system in treating apheresis platelets only. There
can be no assurance that the market share for apheresis platelets will increase.
If such market share does not increase, the Company may decide to conduct
additional clinical studies in order to obtain FDA approval of the system for
use in treating random donor platelets. In addition, there currently are three
principal manufacturers of automated apheresis collection equipment used in the
United States, including Baxter. The equipment of each manufacturer collect
platelets into plastic disposables designed for that equipment; thus, a pathogen
inactivation system designed for disposables used by one manufacturer will not
necessarily be compatible with the other manufacturers' collection equipment.
The Company intends initially to seek FDA approval of a platelet pathogen
inactivation system configured for Baxter's apheresis collection equipment. If
the Company determines that compatibility with other equipment is desirable, it
will need to develop additional processing procedures. Although the Company
believes that the FDA would accept the clinical data from the original system
for platelets collected using other equipment and procedures and would require
only limited additional studies to show comparability, there can be no assurance
that it would do so.

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19

The Company's target customers are the limited number of national and
regional blood centers, which collect, store and distribute blood and blood
components. The failure to penetrate even a small number of these customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Rapid Technological Change; Significant Competition. The
biopharmaceutical field is characterized by rapid and significant technological
change. Accordingly, the Company's success will depend in part on its ability to
respond quickly to medical and technological changes through the development and
introduction of new products. Product development involves a high degree of
risk, and there can be no assurance that the Company's product development
efforts will result in any commercially successful products. Technological
developments may result in the Company's products becoming obsolete or
non-competitive before the Company is able to generate any significant revenue.
Any such occurrence would have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company expects to encounter competition in the sale of products it
may develop, and its success will be dependent upon its ability to compete. Many
companies and organizations that may be competitors or potential competitors
have substantially greater financial and other resources than the Company and
may have greater experience in preclinical testing, human clinical trials and
other regulatory approval procedures. The Company's ability to compete
successfully will depend, in part, on its ability to develop proprietary
products, develop and maintain products that reach the market first, are
technologically superior to and/or are of lower cost than other products on the
market, attract and retain scientific personnel, obtain patent or other
proprietary protection for its products and technologies, obtain required
regulatory approvals, and manufacture, market and sell any product that it
develops. In addition, other technologies or products may be developed that have
an entirely different approach or means of accomplishing the intended purposes
of the Company's products, or that might render the Company's technology and
products uncompetitive or obsolete. Furthermore, there can be no assurance that
the Company's competitors will not obtain patent protection or other
intellectual property rights that would limit the Company's ability to use the
Company's technology or commercialize products that may be developed.

Dependence on Key Employees. The Company is highly dependent on the
principal members of its management and scientific staff. The loss of the
services of one or more of these employees could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled scientific and managerial
personnel. Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting and retaining such personnel
and the failure to do so could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of the stock options currently held by many of the Company's
key employees are vested and may be fully vested over the next several years
before the Company achieves significant revenues or profitability. The Company
intends to grant additional options and provide other forms of incentive
compensation to attract and retain such key personnel, although there can be no
assurance such objective will be achieved.

Patent and License Uncertainties. The Company's success depends in part
on its ability to obtain patents, to protect trade secrets, to operate without
infringing upon the proprietary rights of others and to prevent others from
infringing on the proprietary rights of the Company. There can be no assurance
that any patents owned by, or licensed to, the Company will afford protection
against competitors or that any pending patent applications now or hereafter
filed by, or licensed to, the Company will result in patents being issued. In
addition, the laws of certain foreign countries do not protect the Company's
intellectual property rights to the same extent as do the laws of the United
States. There can be no assurance that the Company's planned or potential
products will not be covered by third-party patents or other intellectual
property rights, in which case continued development and marketing of such
products would require a license under such patents or other intellectual
property rights. There can be no assurance that such required licenses will be
available to the Company on acceptable terms, if at all. If the Company does not
obtain such licenses, it could encounter delays in product introductions while
it attempts to design around such patents, or could find that the development,
manufacture or sale of products requiring such licenses is foreclosed.
Litigation may be necessary to defend against or assert claims of infringement,
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the scope and validity of the proprietary
rights of others. In addition, interference proceedings declared by the United
States Patent and Trademark Office may be necessary to determine the priority of
inventions with respect to patent applications of the

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20

Company. Litigation or interference proceedings could result in substantial
costs to and diversion of effort by the Company, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company may rely, in certain circumstances, on trade secrets to
protect its technology. However, trade secrets are difficult to protect. The
Company seeks to protect its proprietary technology and processes, in part, by
confidentiality agreements with its employees and certain contractors. There can
be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently discovered by competitors.

Limited Operating History; History of Losses and Expectation of Future
Losses. The Company's net losses in fiscal years 1997, 1996 and 1995 were
$14.7 million, $10.2 million and $2.4 million, respectively. As of December 31,
1997, the Company had an accumulated deficit of approximately $34.9 million. The
Company has not received any revenues from product sales, and all revenues
recognized by the Company to date have resulted from the Agreements and federal
research grants. All of the Company's planned pathogen inactivation systems are
in the research and development stage. The Company will be required to conduct
significant research, development, testing and regulatory compliance activities
on these products that, together with anticipated general and administrative
expenses, are expected to result in substantial losses in future periods. The
Company expects that the amount of such losses will fluctuate from quarter to
quarter as a result of differences in the timing of expenses incurred and
potential revenues from Baxter under the Agreements, and such fluctuations may
be significant. The Company's ability to achieve a profitable level of
operations will depend on successfully completing development, obtaining
regulatory approvals and achieving market acceptance of its pathogen
inactivation systems. There can be no assurance that the Company will ever
achieve a profitable level of operations.

Reliance on Third-Party Manufacturing; Dependence on Key Suppliers. The
Company has no experience in manufacturing products for commercial purposes and
does not have any manufacturing facilities. Consequently, the Company is
dependent on contract manufacturers for the production of compounds and on
Baxter for other system components for development and commercial purposes.
There can be no assurance that existing manufacturers or any new manufacturer
will be able to provide sufficient quantities of the compounds needed for the
Company's pathogen inactivation systems in the future or that the Company will
be able to enter into arrangements for the commercial-scale manufacture of such
compounds on reasonable terms, if at all.

In the event that the Company is unable to obtain or retain third-party
manufacturing, it will not be able to commercialize its products as planned.
Failure of any third-party manufacturer to deliver the required quantities of
products on a timely basis and at commercially reasonable prices would
materially adversely affect the Company's business, financial condition and
results of operations. In addition, inclusion of components manufactured by
other third parties could require the Company to seek new approvals from
government regulatory authorities, which could result in delays in product
delivery. There can be no assurance that such approval would be obtained. In the
event the Company undertakes to establish its own commercial manufacturing
capabilities, it will require substantial additional funds, manufacturing
facilities, equipment and personnel.

The Company purchases certain key components of its compounds from a
limited number of suppliers. While the Company believes that there are
alternative sources of supply for these components, establishing additional or
replacement suppliers for any of the components in the Company's compounds, if
required, may not be accomplished on a timely basis and could involve
significant additional costs. Any failure by the Company to obtain any of the
components used to manufacture the Company's compounds from alternative
suppliers, if required, could limit the Company's ability to manufacture its
compounds and would have a material adverse effect on the Company's business,
financial condition and results of operations.

Risk of Product Liability. The testing, marketing and sale of the
Company's products will entail an inherent risk of product liability, and there
can be no assurance that product liability claims will not be asserted against
the Company. The Company intends to secure limited product liability insurance
coverage prior to the commercial introduction of any product, but there can be
no assurance that the Company will be able to obtain product liability insurance
on acceptable terms or that insurance subsequently obtained will provide
adequate coverage against any or all potential claims. Any product liability
claim against the Company, regardless of its merit or eventual outcome, could
have a material adverse effect upon the Company's business, financial condition
and results of operations.

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21

Environmental Regulation; Use of Hazardous Substances. The Company is
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens and
wastes. There can be no assurance that the Company will not be required to incur
significant costs to comply with additional environmental and health and safety
regulations in the future. The Company's research and development involves the
controlled use of hazardous materials, including certain hazardous chemicals and
radioactive materials and pathogens. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In the event
of such an accident, the Company could be held liable for any damages that
result and any such liability could exceed the resources of the Company.

Uncertainty Regarding Health Care Reimbursement and Reform. The future
revenues and profitability of biopharmaceutical and related companies as well as
the availability of capital to such companies may be affected by the continuing
efforts of the United States and foreign governments and third-party payors to
contain or reduce costs of health care through various means. In the United
States, given recent federal and state government initiatives directed at
lowering the total cost of health care, it is likely that the Congress and state
legislatures will continue to focus on health care reform and the cost of
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While
the Company cannot predict whether any such legislative or regulatory proposals
will be adopted, the announcement or adoption of such proposals could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for the
cost of the products and related treatment of blood components are obtained from
governmental authorities, private health insurers and other organizations, such
as health maintenance organizations ("HMOs"). Third-party payors are
increasingly challenging the prices charged for medical products and services.
The trend toward managed health care in the United States and other countries
and the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices for the Company's products.
The cost containment measures that health care payors and providers are
instituting and the effect of any health care reform could materially adversely
affect the Company's ability to operate profitably.

Volatility of Stock Price. The trading price of the Company's Common
Stock is subject to significant fluctuations. Factors such as the announcements
of scientific achievements or new products by the Company or its competitors;
governmental regulation; health care legislation; developments in patent or
other proprietary rights of the Company or its competitors, including
litigation; fluctuations in the Company's operating results; comments made by
analysts, including changes in analysts' estimates of the Company's financial
performance; and market conditions for health care stocks in general could have
significant impact on the future price of the Common Stock. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations, which may be unrelated to the operating performance of particular
companies. In the past, securities class action litigation has often been
instituted following periods of volatility in the market price for a company's
securities. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages as of February 27,
1998 are as follows:

NAME AGE POSITION
---- --- --------

Stephen T. Isaacs ............... 49 President, Chief Executive Officer and Director
David S. Clayton ................ 54 Vice President, Finance and Chief Financial Officer
Laurence M. Corash .............. 53 Vice President, Medical Affairs
John E. Hearst .................. 62 Vice President, New Science Opportunities

STEPHEN T. ISAACS founded the Company in September 1991 and has served
as President, Chief Executive Officer and a member of the Board of Directors
since that time. Mr. Isaacs was previously President and Chief Executive Officer
of HRI, a research and development company, from September 1984 to December
1996. From 1975 to 1986, Mr. Isaacs held a faculty research position at the
University of California at Berkeley.

DAVID S. CLAYTON has been Chief Financial Officer of the Company since
May 1996 and Vice President, Finance of the Company since July 1996. From 1992
to May 1996, Mr. Clayton was a financial consultant to various companies,
including the Company. From 1989 through May 1992, Mr. Clayton was the Executive
Vice President of Trans Ocean Ltd., a company engaged in leasing of
international maritime shipping containers.

LAURENCE M. CORASH, M.D., a co-founder of the Company, has been Vice
President, Medical Affairs of the Company since July 1996. From July 1994 until
he assumed his current position, Dr. Corash was Director of Medical Affairs. Dr.
Corash was a consultant to the Company from 1991 to July 1994. Dr. Corash has
been a Professor of Laboratory Medicine at the University of California, San
Francisco since July 1985 and Chief of the Hematology Laboratory for the Medical
Center at the University of California, San Francisco since January 1982. Dr.
Corash has served as a consultant to the FDA Advisory Panel for Hematology
Devices since 1990.

JOHN E. HEARST, PH.D., D.SC., a co-founder of the Company, was elected
Vice President, New Science Opportunities in July 1996. From January 1996 until
July 1996, Dr. Hearst served as Director, New Science Opportunities. He has
served as a member of the Board of Directors of the Company since January 1992.
Dr. Hearst has been a Professor of Chemistry at the University of California at
Berkeley since 1972. In 1984, Dr. Hearst co-founded HRI.

ITEM 2. PROPERTIES

The Company leases approximately 17,400 square feet for its main
facility and approximately 9,900 square feet for an additional facility, both of
which contain laboratory and office space, in Concord, California. The lease of
the main facility extends through June 1999 with two five-year renewal options.
The lease of the additional facility extends through January 1999, with renewal
options for up to six years. The Company also has a short-term lease for
approximately 4,500 square feet at a facility located near its main facility in
Concord. The Company believes that its facilities will be adequate to meet its
needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

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PART II

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

(a) The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "CERS." The Company completed the initial public offering of
its Common Stock on January 30, 1997. The following table sets forth, for the
periods indicated, the high and low sales prices for the Common Stock as
reported by the Nasdaq National Market:

HIGH LOW
---- ---

Fiscal 1997:
First Quarter (from January 30) . $ 12 3/8 $ 7 3/4
Second Quarter .................. 12 3/4 8 1/2
Third Quarter ................... 18 8
Fourth Quarter .................. 25 1/2 16 7/8

On February 27, 1998, the last reported sale price of the Company's
Common Stock on the Nasdaq National Market was $16 1/8 per share. At February
27, 1998, the Company had approximately 282 holders of record of its Common
Stock.

(b) On January 30, 1997, the Company sold 2,000,000 shares of Common
Stock in an initial public offering for which the Company received net proceeds
of $21,070,000. Of such proceeds, the Company has applied $10,650,000 to
contracts and consultants, $5,450,000 to employee salaries and related expenses,
$1,440,000 to supplies and office expenses, $1,390,000 to professional fees,
$1,360,000 to facilities and the purchase and installation of equipment,
$460,000 to travel and entertainment, $250,000 to insurance, $70,000 to
repayment of indebtedness.

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ITEM 6. SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data for the
fiscal year ended December 31, 1997. The information presented should be read in
conjunction with the financial statements and notes included elsewhere herein.
The selected financial data for the periods prior to the financial statements
included herein are derived from audited financial statements.

YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue ......................... $ 6,851 $ 3,609 $ 6,799 $ 4,796 $ 230
Operating expenses:
Research and development ...... 19,569 12,080 8,125 5,680 2,485
General and administrative .... 3,163 2,200 1,517 1,194 1,210
----------- ----------- ----------- ----------- -----------
Total operating expenses .. 22,732 14,280 9,642 6,874 3,695
----------- ----------- ----------- ----------- -----------
Loss from operations ............ (15,881) (10,671) (2,843) (2,078) (3,465)
Other income (expense), net ..... 1,217 464 483 278 (50)
----------- ----------- ----------- ----------- -----------
Net loss ........................ $ (14,664) $ (10,207) $ (2,360) $ (1,800) $ (3,515)
=========== =========== =========== =========== ===========
Net loss per share-basic and
diluted(1) .................... $ (1.76) $ (5.98) $ (1.67) $ (1.24) $ (2.35)
Shares used in computing net loss
per share-basic and diluted(1) 8,351,872 1,705,821 1,413,969 1,456,336 1,492,785

DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
(IN THOUSANDS)

BALANCE SHEET DATA:
Cash and cash equivalents . $ 11,604 $ 6,002 $ 9,659 $ 7,802 $ 6,076
Working capital ........... 21,374 2,653 7,263 5,865 3,884
Total assets .............. 27,315 8,812 11,349 9,684 6,807
Capital lease obligations,
less current portion .... 43 92 32 94 --
Accumulated deficit ....... (34,870) (20,206) (9,999) (7,639) (5,838)
Total stockholders' equity
(deficit) ............... 22,475 4,839 8,663 5,439 (516)

(1) See Note 1 of Notes to Financial Statements for a description of the
method used in computing the net loss per share. The net loss per share
amounts prior to 1997 have been restated as required to comply with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(Statement No. 128) and the Securities and Exchange Commission's Staff
Accounting Bulletin No. 98, (SAB 98). For further discussion of net loss
per share and the impact of Statement No. 128 and SAB 98, see the notes
to the consolidated financial statements.

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

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the Notes thereto included elsewhere in this report. This report
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ significantly from those discussed in
these forward-looking statements as a result of certain factors, including those
set forth under "Business" and elsewhere herein.

OVERVIEW

Cerus is developing systems designed to improve the safety of blood
transfusions by inactivating infectious pathogens in blood components used for
transfusion (platelets, plasma and red blood cells) and inhibiting the leukocyte
(white blood cell) activity that is responsible for certain adverse immune and
other transfusion-related reactions. The Company's platelet and plasma pathogen
inactivation systems are in Phase 2 clinical trials in the United States, and
its red blood cell pathogen inactivation system is in preclinical development.

Since its inception in 1991, Cerus has devoted substantially all of its
efforts and resources to the research, development and clinical testing of
techniques and systems for inactivating pathogens in blood transfusion
components. The Company has been unprofitable since inception and, as of
December 31, 1997, had an accumulated deficit of approximately $34.9 million.
All of the Company's pathogen inactivation systems are in the research and
development stage. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on these products
that, together with anticipated general and administrative expenses, are
expected to result in substantial losses at least until commercialization of its
products under development. The Company's ability to achieve a profitable level
of operations in the future will depend on its ability to successfully complete
development, obtain regulatory approvals and achieve market acceptance of its
pathogen inactivation systems. As a result, there can be no assurance that the
Company will ever achieve a profitable level of operations. Further, a
significant portion of the Company's development funding is provided by Baxter
Healthcare Corporation ("Baxter") under the agreements described below. There
can be no assurance that such agreements will not be modified or terminated as
provided therein.

In December 1993, Cerus entered into a development and commercialization
agreement with Baxter to develop a system for inactivation of pathogens in
platelets. The agreement provides for Baxter to make an equity investment and
certain up-front license and milestone payments. The agreement further provides
for Baxter and the Company to generally share system development costs equally,
subject to mutually agreed budgets established from time to time. The agreement
also provides for a sharing of revenue from sales of inactivation system
disposables, after each party is reimbursed for its cost of goods above a
specified level. In January 1997, the Company and Baxter amended the agreement
to provide that the Company would receive an additional 2.2% of the adjusted
product revenue from the sale of the platelet pathogen inactivation system
disposables in return for payment by the Company to Baxter of $5.5 million in
1997 in four equal quarterly installments for development costs.

In January and July 1995, Cerus received approximately $2.6 million from
Baxter in connection with interim funding agreements related to the development
of pathogen inactivation systems for plasma for transfusions (fresh frozen
plasma or "FFP") and red blood cells. In April 1996, Cerus entered into a second
development and commercialization agreement with Baxter, principally focused on
the FFP and red blood cell pathogen inactivation systems. The agreement provides
for Baxter to make certain equity investments, including two future
milestone-based investments of $5 million each at 120% of the market price at
the time of the investment. The agreement also provides for Baxter and the
Company to generally share development costs of the systems equally, subject to
mutually agreed budgets established from time to time. The agreement further
provides for the Company and Baxter to share gross profits from the sale of
inactivation system disposables, after deducting from such gross profits a
specified percentage allocation to be retained by the marketing party for
marketing and administration expenses.

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26

Through December 31, 1997, Baxter has paid the Company up-front license fees
and milestone and development payments totaling $14.8 million and has invested
$17.5 million in the capital stock of the Company under the agreements described
above.

In March 1998, the Company and Baxter entered into an amendment to the April
1996 agreement providing that, to the extent the approved spending for 1998 for
the red blood cell project exceeds $7.3 million, Cerus will fund all expenses
for the red blood cell project in 1998 in excess of such amount, up to the
amount of the approved budget. To compensate Cerus for such excess expenditures,
Baxter will fully fund the first expenditures under the approved budget for the
red cell project for 1999 in an amount equal to such excess expenditures, after
which the parties shall equally share the expenses of the red cell project. If
for any reason there is not an approved budget for the red cell project for
1999, Baxter will fully fund the first expenditures for 1999 under the approved
budget for such other Cerus-Baxter program or programs as Cerus shall designate
in an amount equal to the Cerus 1998 excess expenditures. If by July 1, 1999,
however, there is not an approved budget for such other Cerus-Baxter program or
programs that is at least equal to such excess expenditures, Baxter will
promptly pay to Cerus one-half of the amount by which the excess expenditures
exceed the amount of expenditures to be funded by Baxter. Cerus anticipates that
the expenditures for 1998 for the FFP program will exceed the previously
approved budget. Cerus and Baxter are discussing the level of funding each
company will support in 1998 for the FFP program. There can be no assurance that
the parties will agree on a budget that would permit the FFP program to proceed
in accordance with the Company's Plans.

To date, the Company has not received any revenue from product sales and it
will not derive revenue from product sales unless and until one or more planned
products receives regulatory approval and achieves market acceptance. The
Company anticipates that its sources of revenue until product sales occur will
be limited to payments under development and commercialization agreements with
Baxter in the area of blood component pathogen inactivation, payments from the
United States government under research grant programs, payments from future
collaboration agreements, if any, and interest income. Under the agreements, all
research, development, preclinical and clinical costs of the pathogen
inactivation projects are shared by Cerus and Baxter. Because more of such
research and development is typically performed internally at Cerus than at
Baxter and because Cerus is generally responsible for engaging third parties to
perform certain aspects of these projects, the Company's research and
development expenses have exceeded its share of expenses. As a result, the
Company has recognized revenue from Baxter, giving rise to a receivable due from
Baxter and corresponding periodic balancing payments to the Company. At December
31, 1997, the amount of the Baxter receivable was approximately $4.4 million. On
February 13, 1998, Baxter paid Cerus approximately $4.5 million in satisfaction
of such receivable and anticipated adjustments. Through December 31, 1997, the
Company had recognized approximately $19.2 million in revenue under its
agreements with Baxter, including the license fee and milestone amounts
described above, and approximately $3.1 million under United States government
grants.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

Revenue. Revenue earned under the Agreements for the years ending
December 31, 1997, 1996 and 1995 was $6.2 million, $2.9 million and $6.0 million
and accounted for 90%, 79% and 89% of the Company's total revenue, respectively.
Revenue from Baxter increased in 1997 from 1996, as the Company recognized
milestone and license fee revenue related to the platelet program of
approximately $1.7 million and recognized increased development revenue
primarily relating to its FFP and red blood cell programs. Revenue from Baxter
decreased to approximately $2.9 million in 1996 from 1995, as no milestone or
license fee revenue relating to the platelet program was recognized, as compared
with approximately $1.7 million in milestone and related license fee revenue
recognized during 1995. In addition, FFP and red blood cell development revenue
decreased in 1996 by approximately $1.2 million, principally reflecting lower
revenue during 1996 under the interim funding agreements. Government grant
revenue, generally unchanged among the periods, was approximately $660,000,
$758,000 and $751,000 for the years 1997, 1996 and 1995, respectively.

Research and Development Expenses. Research and development expenses for
the years ending December 31, 1997, 1996 and 1995 were $19.6 million, $12.1
million and $8.1 million, respectively. The increases in 1997 and 1996 were due
principally to third party costs, particularly toxicology studies, compound
manufacturing development and initiation of clinical trials relating to the
platelet and plasma programs, as well as to increased

24
27

activity at the Company in the FFP and red blood cell programs. A significant
portion of the increase was the result of increased payroll and other personnel
expenses, related laboratory supplies, equipment and facilities expansion. In
addition, as described above, under an amendment to the 1993 platelet agreement,
Cerus made payments to Baxter in 1997 of $5.5 million for development costs in
return for an additional 2.2% share of platelet pathogen inactivation system
adjusted product revenue.

General and Administrative Expenses. General and administrative expenses
were approximately $3.2 million in 1997, $2.2 million in 1996 and $1.5 million
in 1995. The increases were primarily attributable to increased personnel levels
associated with the expansion of the Company's operations.

Other Income (Expense). Interest income was approximately $1.2 million
in 1997, $482,000 in 1996 and approximately $500,000 in 1995. The increase from
1996 to 1997 was attributable primarily to increased average cash balances
related to proceeds from the Company's initial public offering and private
placement to Baxter (see Liquidity and Capital Resources below). The increase
from 1995 to 1996 was attributable primarily to increased average cash balances
related to financings and funding under the Baxter platelet agreement. Interest
expense was relatively unchanged and was approximately $15,000, $18,000 and
$17,000 for the years 1997, 1996 and 1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

From inception to December 31, 1997, Cerus has financed its operations
primarily through private placements of preferred and common equity securities,
an initial public offering of common stock totaling approximately $60.1 million
and project funding provided by Baxter totaling $19.2 million. During that
period, the Company received approximately $3.1 million under United States
government grants and approximately $2.6 million in interest income. At December
31, 1997, the Company had cash and cash equivalents of approximately $11.6
million and short-term investments of approximately $10.0 million.

Net cash used in operating activities for 1997, 1996, and 1995 was
approximately $16.6 million, $8.9 million and $3.4 million, respectively,
resulting primarily from net losses. From inception through December 31, 1997,
net cash used in investing activities of approximately $12.3 million resulted
from short-term cash investments, purchases of furniture and equipment, and
leasehold improvements.

At December 31, 1997, the Company's net operating loss carryforwards
were approximately $27.8 million and $14.1 million for federal and state income
tax purposes, respectively. The Company's federal research and development tax
credit carryforwards were approximately $1.2 million and $400,000 for federal
and state income tax purposes, respectively, at December 31, 1997. The federal
net operating loss and tax credit carryforwards expire at various dates from
2007 to 2012. The California state net operating loss expires in 2001 and 2002.
The Tax Reform Act of 1986 and state tax statutes contain provisions relating to
changes in ownership that may limit the utilization in any given year of
available net operating loss carryforwards and research and development credits.
See Note 6 of Notes to Financial Statements.

The Company's future capital requirements and the adequacy of its
available funds will depend on many factors, including progress of the platelet
and FFP programs and the related clinical trials, progress of the red blood cell
program, achievement of milestones leading to equity investments, regulatory
approval and successful commercialization of the Company's pathogen inactivation
systems, costs related to creating, maintaining and defending the Company's
intellectual property position, and competitive developments. The Company
believes that its available cash balances, together with anticipated cash flows
from existing Baxter and grant arrangements, will be sufficient to meet its
capital requirements for at least the next 12 months. In the event that
additional capital is required, the Company may seek to raise that capital
through public or private equity or debt financings or through additional
collaborative arrangements or government grants. Future capital funding
transactions may result in dilution to stockholders. There can be no assurance
that such capital will be available on favorable terms, if at all.

25
28

IMPACT OF THE YEAR 2000

Computer programs using two rather than four digits to identify the year
in a date field may cause computer systems to malfunction in the year 2000. Any
computer programs that have time-related software may determine a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to engage in specific business activities.

Based on a recent assessment, the Company has determined that it will be
required to upgrade or replace a portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company believes that, with upgrades of existing software and/or
conversions to new software, the year 2000 issue will not pose significant
operational problems for its business activities.

The Company has initiated communications with its significant suppliers
to determine the extent to which the Company's operations are vulnerable to
those third parties' failure to solve their own year 2000 issues. The Company
anticipates that its costs associated with the upgrade and/or conversion of
existing computer software relating to the year 2000 issue is less than
$100,000. There can be no assurance that the systems of other companies on which
the Company relies will be converted on a timely basis and will not have an
adverse effect on the Company's operations. Estimated costs were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
assurance that these estimates will be achieved, and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The Company's financial statements, together with related notes and
report of Ernst & Young, LLP, independent auditors, are listed in Item 14(a).

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

Not applicable.

26
29

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item, insofar as it relates to directors,
will be contained under the captions "Election of Directors" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" in the Company's
definitive proxy statement with respect to the Company's 1998 Annual Meeting of
Stockholders (the "Proxy Statement"), and is hereby incorporated by reference
thereto. The information relating to executive officers of the Company is
contained in Part I of this report.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation," and is hereby incorporated
by reference thereto.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
Management," and is hereby incorporated by reference thereto.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be contained in the Proxy
Statement under the caption "Certain Relationships and Related Transactions,"
and is hereby incorporated by reference thereto.

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

The following documents are being filed as part of this report on Form
10-K:

(a) Financial Statements.

Report of Independent Auditors .........................................29

Balance Sheets as of December 31, 1997 and 1996.........................30

Statements of Operations for the three
years ended December 31, 1997...........................................31

Statements of Stockholders' Equity for
the three ended December 31, 1997.......................................32

Statements of Cash Flows for the three years
ended December 31, 1997.................................................33

Notes to Financial Statements...........................................34

Other information is omitted because it is either presented elsewhere,
is inapplicable or is immaterial as defined in the instructions.

(b) No reports on Form 8-K were filed during the quarter ended December 31,
1997

27
30

(c) Exhibits

EXHIBIT
NUMBER. DESCRIPTION OF EXHIBIT
------- ----------------------

3.1(1) Registrant's Amended and Restated Certificate of Incorporation.
3.2(1) Registrant's Bylaws.
10.1(1) Form of Indemnity Agreement entered into between the
Registrant and each of its directors and executive
officers.
10.2(1) 1996 Equity Incentive Plan.
10.3(1) Form of Incentive Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.4(1) Form of Nonstatutory Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.5(1) 1996 Employee Stock Purchase Plan Offering.
10.7(1) Warrant Agreement, dated May 11, 1992, between the
Registrant and Comdisco, Inc. to purchase Series A
Preferred Stock.
10.8(1) Warrant Agreement, dated July 12, 1993, between the
Registrant and Comdisco, Inc. to purchase Series B
Preferred Stock.
10.9(1) Warrant Agreement, dated May 25, 1994, between the
Registrant and Comdisco, Inc. to purchase Series C
Preferred Stock.
10.10(1) Warrant Agreement, dated April 25, 1995, between the
Registrant and Comdisco, Inc. to purchase Series D
Preferred Stock.
10.11(1) Form of Warrant to purchase shares of Series B Preferred
Stock of the Registrant.
10.12(1) Form of Warrant to purchase shares of Series C Preferred
Stock of the Registrant.
10.13(1) Series D Preferred Stock Purchase Agreement, dated March
1, 1995, between the Registrant and certain investors.
10.14(1) Series E Preferred Stock Purchase Agreement, dated April
1, 1996, between the Registrant and Baxter Healthcare
Corporation.
10.15(1) Common Stock Purchase Agreement, dated September 3, 1996 between the
Registrant and Baxter Healthcare Corporation.
10.16(1) Amended and Restated Investors' Rights Agreement, dated
April 1, 1996, among the Registrant and certain investors.
10.17+(1) Development, Manufacturing and Marketing Agreement, dated December 10,
1993 between the Registrant and Baxter Healthcare Corporation.
10.18+(1) Development, Manufacturing and Marketing Agreement, dated April 1,
1996, between the Registrant and Baxter Healthcare Corporation.
10.21(1) Industrial Real Estate Lease, dated October 1, 1992,
between the Registrant and Shamrock Development Company,
as amended on May 16, 1994 and December 21, 1995.
10.22(1) Real Property Lease, dated August 8, 1996, between the Registrant and
S.P. Cuff.
10.23(1) Lease, dated February 1, 1996, between the Registrant and
Holmgren Partners.
10.24(1) First Amendment to Common Stock Purchase Agreement, dated
December 9, 1996, between the Registrant and Baxter
Healthcare Corporation.
10.25+(1) Amendment, dated as of January 3, 1997, to the Agreement
filed as Exhibit 10.17.
10.26(1) Memorandum of Agreement, dated as of January 3, 1997,
between the Registrant and Baxter Healthcare Corporation.
10.27* License Agreement, dated as of November 30, 1992, by and among the
Company, Miles Inc. and Diamond Scientific Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.

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

+ Certain portions of this exhibit are subject to a confidential treatment
order.

(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-11341) and amendments thereto.

* Confidential treatment has been requested for certain portions of this
exhibit.

28
31
Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
Cerus Corporation

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

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

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

Ernst & Young LLP

Walnut Creek, California
January 27, 1998, except for
Note 2 as to which the date is March 6, 1998

29

32

CERUS CORPORATION

BALANCE SHEETS

DECEMBER 31,
1997 1996
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 11,603,596 $ 6,002,050
Short-term investments ................................................. 9,977,178 --
Accounts receivable from a related party ............................... 4,376,141 325,515
Other current assets ................................................... 214,687 206,015
--------------------------------
Total current assets ..................................................... 26,171,602 6,533,580
Furniture and equipment at cost:
Laboratory and office equipment ........................................ 1,309,950 900,280
Leasehold improvements ................................................. 1,440,863 1,440,863
--------------------------------
2,750,813 2,341,143
Less accumulated depreciation and amortization ......................... 1,718,984 1,156,918
--------------------------------
Net furniture and equipment .............................................. 1,031,829 1,184,225
Deferred financing costs ................................................. -- 969,142
Other assets ............................................................. 111,725 124,663
--------------------------------
Total assets ............................................................. $ 27,315,156 $ 8,811,610
================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 1,298,868 $ 391,267
Accrued compensation and related expenses .............................. 931,991 631,380
Accrued third-party toxicology and development expenses ................ 896,000 854,300
Accrued financing costs ................................................ -- 413,000
Other accrued expenses ................................................. 1,600,502 514,848
Deferred revenue ....................................................... -- 981,523
Current portion of capital lease obligations ........................... 69,816 94,130
--------------------------------
Total current liabilities ................................................ 4,797,177 3,880,448

Capital lease obligations, less current portion .......................... 43,002 92,127

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.001 par value;
5,000,000 shares authorized: issuable in series; none issued and
outstanding at December 31, 1997, 3,001,630 at December 31, 1996;
aggregate liquidation preference of $24,485,277 at December 31, 1996 .. -- 3,002
Common stock, $.001 par value;
50,000,000 shares authorized: 9,183,629 and 1,928,807 shares issued and
outstanding at December 31, 1997 and 1996, respectively ............... 9,184 1,929
Additional paid-in capital ............................................. 57,476,775 25,425,529
Deferred compensation .................................................. (140,937) (310,387)
Notes receivable from stockholders ..................................... -- (75,206)
Accumulated deficit .................................................... (34,870,045) (20,205,832)
--------------------------------
Total stockholders' equity ............................................... 22,474,977 4,839,035
--------------------------------
Total liabilities and stockholders' equity ............................... $ 27,315,156 $ 8,811,610
================================

See accompanying notes.

30

33

CERUS CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------

Revenue:
Licenses, milestones and development funding from a
related party ............................................ $ 6,190,781 $ 2,851,236 $ 6,047,579
Government grants ........................................... 660,066 758,305 751,356
------------------------------------------
Total revenue ................................................. 6,850,847 3,609,541 6,798,935
Operating expenses:
Research and development .................................... 19,569,469 12,080,445 8,125,311
General and administrative .................................. 3,163,012 2,200,018 1,517,152
------------------------------------------
Total operating expenses ...................................... 22,732,481 14,280,463 9,642,463
------------------------------------------
Loss from operations .......................................... (15,881,634) (10,670,922) (2,843,528)
Other income (expense):
Interest income ............................................. 1,232,322 482,384 500,028
Interest expense ............................................ (14,901) (18,347) (16,821)
------------------------------------------
Total other income (expense) .................................. 1,217,421 464,037 483,207
------------------------------------------
Net loss ...................................................... $(14,664,213) $(10,206,885) $ (2,360,321)
==========================================
Net loss per share - basic and diluted ........................ $ (1.76) $ (5.98) $ (1.67)
==========================================
Shares used in computing net loss per share - basic and diluted 8,351,872 1,705,821 1,415,969
==========================================

See accompanying notes.

31

34
CERUS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY

PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------------------------------------------------------------------

Balances at December 31, 1994 ....... 2,091,593 $ 2,092 1,413,272 $ 1,413 $ 13,154,907
Exercise of stock options ......... -- -- 4,623 5 1,681
Issuance of Series D convertible
preferred stock, net of
issuance costs of $60,806 ..... 529,084 529 -- -- 5,494,047
Issuance of warrants to purchase
Series D preferred stock ...... -- -- -- -- 87,500
Net loss .......................... -- -- -- -- --
---------------------------------------------------------------------
Balances at December 31, 1995 ....... 2,620,677 2,621 1,417,895 1,418 18,738,135
Exercise of stock options ......... -- -- 510,912 511 258,411
Issuance of Series E convertible
preferred stock, net of issuance
costs of $100,777 .............. 380,953 381 -- -- 5,898,768

Payment on notes receivable ....... -- -- -- -- --

Deferred compensation ............. -- -- -- -- 530,215
Amortization of deferred
compensation ................... -- -- -- -- --
Net loss .......................... -- -- -- -- --
---------------------------------------------------------------------
Balances at December 31, 1996 ....... 3,001,630 3,002 1,928,807 1,929 25,425,529
Public offering of common stock, net
of expenses of $2,945,259 ......... -- -- 2,000,000 2,000 21,052,741
Issuance of common stock ............ -- -- 714,080 714 10,542,502
Conversion of preferred stock ....... (3,001,630) (3,002) 4,412,243 4,412 (3,118)
Issuance of common stock under stock
option and employee stock purchase
plans and warrant exercises........ -- -- 129,664 130 459,754
Common shares reacquired ............ -- -- (1,165) (1) (633)
Payment on notes receivable ......... -- -- -- -- --
Amortization of deferred
compensation ................... -- -- -- -- --
Net loss ............................ -- -- -- -- --
---------------------------------------------------------------------
Balances at December 31, 1997 ....... -- $ -- 9,183,629 $ 9,184 $ 57,476,775
=====================================================================

NOTES
RECEIVABLE TOTAL
DEFERRED FROM ACCUMULATED STOCKHOLDERS'
COMPENSATION STOCKHOLDERS DEFICIT EQUITY
----------------------------------------------------------

Balances at December 31, 1994 ....... $ -- $ (80,588) $ (7,638,626) $ 5,439,198
Exercise of stock options ......... -- -- -- 1,686
Issuance of Series D convertible
preferred stock, net of
issuance costs of $60,806 ..... -- -- -- 5,494,576
Issuance of warrants to purchase
Series D preferred stock ...... -- -- -- 87,500
Net loss .......................... -- -- (2,360,321) (2,360,321)
----------------------------------------------------------
Balances at December 31, 1995 ....... -- (80,588) (9,998,947) 8,662,639
Exercise of stock options ......... -- -- -- 258,922
Issuance of Series E convertible
preferred stock, net of issuance
costs of $100,777 .............. -- -- -- 5,899,149

Payment on notes receivable ....... -- 5,382 -- 5,382

Deferred compensation ............. (530,215) -- -- --
Amortization of deferred
compensation ................... 219,828 -- -- 219,828
Net loss .......................... -- -- (10,206,885) (10,206,885)
----------------------------------------------------------
Balances at December 31, 1996 ....... (310,387) (75,206) (20,205,832) 4,839,035
Public offering of common stock, net
of expenses of $2,945,259 ......... -- -- -- 21,054,741
Issuance of common stock ............ -- -- -- 10,543,216
Conversion of preferred stock ....... -- -- -- (1,708)
Issuance of common stock under stock
option and employee stock purchase
plans and warrant exercises -- -- -- 459,884
Common shares reacquired ............ -- -- -- (634)
Payment on notes receivable ......... -- 75,206 -- 75,206
Amortization of deferred
compensation ................... 169,450 -- -- 169,450
Net loss ............................ -- -- (14,664,213) (14,664,213)
----------------------------------------------------------
Balances at December 31, 1997 ....... $ (140,937) $ -- $(34,870,045) $ 22,474,977
==========================================================

See accompanying notes.

32
35

CERUS CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------

OPERATING ACTIVITIES
Net loss ........................................................... $(14,664,213) $(10,206,885) $ (2,360,321)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 562,066 477,551 369,267
Amortization of deferred compensation ............................ 169,450 219,828 --
Changes in operating assets and liabilities:
Accounts receivable from a related party ....................... (4,050,626) (325,515) --
Other current assets .......................................... (8,672) 52,568 72,220
Other assets .................................................. 12,938 36,706 42,184
Accounts payable .............................................. 907,601 133,657 (246,115)
Accrued compensation and related expenses ..................... 300,611 275,869 191,911
Accrued third-party toxicology and development expenses ....... 41,700 854,300 (586,383)
Other accrued expenses ........................................ 1,085,654 472,500 31,582
Deferred revenue .............................................. (981,523) (918,981) (933,241)
------------------------------------------
Net cash used in operating activities .............................. (16,625,014) (8,928,402) (3,418,896)

INVESTING ACTIVITIES
Purchases of furniture and equipment ............................... (378,645) (164,960) (124,359)
Purchases of short-term investments ................................ (31,977,178) -- --
Sale of short-term investments ..................................... 1,000,000 -- --
Maturities of short-term investments ............................... 21,000,000 -- --
------------------------------------------
Net cash used in investing activities .............................. (10,355,823) (164,960) (124,359)

FINANCING ACTIVITIES
Net proceeds from sale of preferred stock .......................... -- 5,899,149 5,494,576
Proceeds from issuance of common stock ............................. 32,613,983 258,922 1,686
Payment of fractional shares on preferred stock conversion ......... (1,708) -- --
Repurchase of common stock ......................................... (634) -- --
Deferred financing costs ........................................... -- (556,142) --
Payments on notes receivable from shareholders ..................... 75,206 5,382 --
Payments on capital lease obligations .............................. (104,464) (170,916) (96,265)
------------------------------------------
Net cash provided by financing activities .......................... 32,582,383 5,436,395 5,399,997
------------------------------------------
Net increase (decrease) in cash and cash equivalents ............... 5,601,546 (3,656,967) 1,856,742
Cash and cash equivalents, beginning of period ..................... 6,002,050 9,659,017 7,802,275
------------------------------------------
Cash and cash equivalents, end of period ........................... $ 11,603,596 $ 6,002,050 $ 9,659,017
==========================================
Supplemental disclosures:
Interest paid .................................................... $ 14,901 $ 18,347 $ 16,821
==========================================
Supplemental schedule of noncash investing and financing activities:
Issuance of preferred stock warrants in connection with an
operating lease line ........................................... $ -- $ -- $ 87,500
==========================================
Capital lease obligations incurred ............................... $ 31,025 $ 226,936 $ 79,624
==========================================
Deferred compensation related to stock option grants ............. $ -- $ 530,215 $ --
==========================================
Conversion of preferred stock to common stock .................... $ 24,534,998 $ -- $ --
==========================================

See accompanying notes.

33

36
CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1997

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Cerus Corporation (the "Company") (formerly Steritech, Inc.), incorporated
in California on September 19, 1991, is developing systems designed to improve
the safety of blood transfusions by inactivating infectious pathogens in blood
components used for transfusion (platelets, fresh frozen plasma ("FFP") and red
blood cells) and inhibiting the leukocyte (white blood cell) activity that is
responsible for certain adverse immune and other transfusion-related reactions.
The Company has entered into two development and commercialization agreements
with Baxter Healthcare Corporation ("Baxter") to develop, manufacture and market
these pathogen inactivation systems (see Note 2). The Company has not received
any revenues from product sales, and all revenues recognized by the Company to
date have resulted from the Company's agreements with Baxter and federal
research grants. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities on its pathogen
inactivation systems that, together with anticipated general and administrative
expenses, are expected to result in substantial additional losses in future
periods. The Company's ability to achieve a profitable level of operations will
depend on successfully completing development, obtaining regulatory approvals
and achieving market acceptance of its pathogen inactivation systems. There can
be no assurance that the Company will ever achieve a profitable level of
operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

REVENUES AND RESEARCH AND DEVELOPMENT EXPENSES

Revenues related to the cost reimbursement provisions under development
contracts are recognized as the costs on the project are incurred. Revenues
related to milestones specified under development contracts are recognized as
the milestones are achieved. Prepaid license fees, included in deferred revenue,
are recognized as revenues upon achievement of milestones. Research and
development costs are expensed as incurred.

The Company receives certain United States government grants which support
the Company's research effort in defined research projects. These grants
generally provide for reimbursement of approved costs incurred as defined in the
various grants. Revenues associated with these grants are recognized as costs
under each grant are incurred.

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

The Company considers all highly liquid investments with original
maturities less than three months to be cash and cash equivalents. Cash
equivalents consist principally of short-term money market instruments and
commercial paper.

34
37

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS (CONTINUED)

In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the Company
has classified all debt securities as available-for-sale at the time of purchase
and re-evaluates such designation as of each balance sheet date. The
available-for-sale securities recorded at December 31, 1997 totaled $21,580,375.

Unrealized gains and losses at December 31, 1997 and 1996 and realized
gains and losses for the years then ended were not material. Accordingly, the
Company has not made a provision for such amounts in its balance sheets. The
cost of securities sold is based on the specific identification method.
Substantially, all of the Company's cash, cash equivalents, and short-term
investments are maintained by three major financial institutions.

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation on furniture and equipment is calculated on a
straight-line basis over the estimated useful lives of the assets (principally
five years for laboratory equipment and furniture and three years for office
equipment). Leasehold improvements are amortized on a straight-line basis over
the shorter of the lease term or the estimated useful lives of the improvements.

STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The Company adopted FAS 123 in 1996. The Company
accounts for employee stock options in accordance with Accounting Principles
Board Opinion No. 25 and has adopted the "disclosure only" alternative described
in FAS 123.

INCOME TAXES

The Company accounts for income taxes based upon Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

NET LOSS PER SHARE - BASIC AND DILUTED

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"), which is required to be adopted for
the period ended December 31, 1997. FAS 128 replaced the calculation of primary
and fully diluted net income (loss) per share with basic and diluted net income
(loss) per share. Unlike primary net income (loss) per share, basic net income
(loss) per share excludes any dilutive effects of options, warrants and
convertible securities.

35

38

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE - BASIC AND DILUTED (CONTINUED)

In February 1998, Staff Accounting Bulletin No. 98 ("SAB 98") was issued
and amends the existing Securities and Exchange Commission staff guidance
primarily to give effect to FAS 128. Topic 4.D of SAB 98 revises the
instructions regarding the dilutive effects of stock issued for consideration
below the initial public offering ("IPO") price or options and warrants to
purchase common stock with exercise prices below the IPO price, previously
referred to as cheap stock. The new guidance highlights the treatment that
should be given to the dilutive effect of common stock or options and warrants
to purchase common stock issued for nominal consideration.

All net loss per share amounts for all periods have been presented, and
where appropriate, restated to conform to the FAS 128 and SAB 98 requirements.
Common stock equivalent shares from convertible preferred stock and from stock
options and warrants are not included as the effect is anti-dilutive.

PRO FORMA NET LOSS PER SHARE

Pro forma net loss per share is computed as described above and also gives
effect, even if anti-dilutive, to common equivalent shares from convertible
preferred shares that automatically converted to common shares upon the closing
of the Company's initial public offering (using the as-if-converted method):

YEARS ENDED DECEMBER 31,
1997 1996 1995
------------------------------------------

Net loss ...................................................... $(14,664,213) $(10,206,885) $ (2,360,321)
==========================================

Weighted average common shares outstanding .................... 8,351,872 1,705,821 1,415,969
Adjustment to reflect the effect of the assumed conversion of
convertible preferred stock ................................ -- 4,202,396 3,722,770
------------------------------------------
Shares used in computing pro forma basic and diluted net loss
per share .................................................. 8,351,872 5,908,217 5,138,739
==========================================

Pro forma basic and diluted net loss per share ................ $ (1.76) $ (1.73) $ (0.46)
==========================================

Common stock equivalents are excluded from the diluted net loss per share
calculation, as the effect is anti-dilutive.

RECLASSIFICATION OF PRIOR YEAR BALANCES

Certain balances in the 1996 financial statements have been reclassified to
conform to the current year financial statement presentation.

36

39
CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal year 1999.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is not expected to
have a significant impact on the Company's consolidated financial position,
results of operations or cash flows.

2. LICENSING AGREEMENTS WITH BAXTER HEALTHCARE CORPORATION, A RELATED PARTY OF
THE COMPANY

In December 1993, Cerus entered into a development and commercialization
agreement with Baxter Healthcare Corporation ("Baxter") to develop a system for
inactivation of pathogens in platelets. The agreement provides for Baxter to
make an equity investment and certain up-front license and milestone payments.
The agreement further provides for Baxter and the Company to generally share
system development costs equally, subject to mutually agreed budgets established
from time to time. The agreement also provides for a sharing of revenue from
sales of inactivation system disposables, after each party is reimbursed for its
cost of goods above a specified level. In January 1997, the Company and Baxter
amended the agreement to provide that the Company would receive an additional
2.2% of the adjusted product revenue from the sale of the platelet pathogen
inactivation system disposables in return for payment by the Company to Baxter
of $5.5 million in 1997 in four equal quarterly installments for development
costs.

In January and July 1995, Cerus received approximately $2.6 million from
Baxter in connection with interim funding agreements related to the development
of pathogen inactivation systems for plasma for transfusions (fresh frozen
plasma or "FFP") and red blood cells. In April 1996, Cerus entered into a second
development and commercialization agreement with Baxter, principally focused on
the FFP and red blood cell pathogen inactivation systems. The agreement provides
for Baxter to make certain equity investments, including two future
milestone-based investments of $5 million each at 120% of the market price at
the time of the investment. The agreement further provides for Baxter and the
Company to generally share development costs of the systems equally, subject to
mutually agreed budgets established from time to time. The agreement also
provides for the Company and Baxter to share gross profits from the sale of
inactivation system disposables, after deducting from such gross profits a
specified percentage allocation to be retained by the marketing party for
marketing and administration expenses.

Through December 31, 1997, Baxter has paid the Company up-front license fees
and milestone and development payments totaling $14.8 million and has invested
$17.5 million in the capital stock of the Company under the agreements described
above.

37
40

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. LICENSING AGREEMENTS WITH BAXTER HEALTHCARE CORPORATION, A RELATED PARTY OF
THE COMPANY (CONTINUED)

Under the agreements, all research, development, preclinical and clinical
costs of the pathogen inactivation projects are shared by Cerus and Baxter.
Because more of such research and development is typically performed internally
at Cerus than at Baxter and because Cerus is generally responsible for engaging
third parties to perform certain aspects of these projects, the Company's
research and development expenses have exceeded its share of expenses. As a
result, the Company has recognized revenue from Baxter, giving rise to a
receivable due from Baxter and corresponding periodic balancing payments to the
Company. At December 31, 1997, the amount of the Baxter receivable was
approximately $4.4 million. On February 13, 1998, Baxter paid Cerus
approximately $4.5 million in satisfaction of such receivable and anticipated
adjustments. Through December 31, 1997, the Company had recognized approximately
$19.2 million in revenue under its agreements with Baxter, including the license
fee and milestone and development funding amounts described above.

In March 1998, the Company and Baxter entered into an amendment to the April
1996 agreement providing that, to the extent the approved spending for 1998 for
the red blood cell project exceeds $7.3 million, Cerus will fund all expenses
for the red blood cell project in 1998 in excess of such amount, up to the
amount of the approved budget. To compensate Cerus for such excess expenditures,
Baxter will fully fund the first expenditures under the approved budget for the
red blood cell project for 1999 in an amount equal to such excess expenditures,
after which the parties shall equally share the expenses of the red blood cell
project. If for any reason there is not an approved budget for the red blood
cell project for 1999, Baxter will fully fund the first expenditures for 1999
under the approved budget for such other Cerus-Baxter program or programs as
Cerus shall designate in an amount equal to the Cerus 1998 excess expenditures.
If by July 1, 1999, however, there is not an approved budget for such other
Cerus-Baxter program or programs that is at least equal to such excess
expenditures, Baxter will promptly pay to Cerus one-half of the amount by which
the excess expenditures exceed the amount of expenditures to be funded by
Baxter. Cerus anticipates that the expenditures for 1998 for the FFP program
will exceed the previously approved budget. Cerus and Baxter are in discussion
regarding the level of funding each company will support in 1998 for the FFP
program.

As of December 31, 1997, Baxter owned 1,457,830 shares of the common stock
of the Company, representing approximately 15.9% of the outstanding common stock
of the Company. Baxter has agreed that it will not at any time, nor will it
permit any of its affiliates, to own capital stock of the Company having 20.1%
or more of the outstanding voting power of the Company. Such restrictions on
stock purchases will not apply in the event a third party makes a tender offer
for a majority of the outstanding voting securities of the Company or if the
Board of Directors of the Company determines to liquidate or sell to a third
party substantially all of the assets or a majority of the voting securities of
the Company or to approve a merger or consolidation in which the Company's
stockholders will not own a majority of the voting securities of the surviving
entity.

Revenue relating to licenses, milestones and development funding for all
periods presented are as a result of agreements with Baxter.

38

41

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. INVESTMENTS

Investments classified as available-for-sale as of December 31, 1997, were
as follows:

Money market mutual funds ...................... $ 4,584,900
U.S. government obligations .................... 5,092,388
Commercial paper ............................... 11,903,086
------------
Total investments .............................. 21,580,374
Less: amounts classified as cash equivalents ... (11,603,196)
============
Short-term investments ......................... $ 9,977,178
============

4. COMMITMENTS AND CONTINGENCIES

The Company leases its office facilities and certain equipment under
non-cancelable operating leases with initial terms in excess of one year which
require the Company to pay operating costs, property taxes, insurance and
maintenance. These facility leases generally contain renewal options and
provisions adjusting the lease payments.

Capital lease obligations represent the present value of future rental
payments under capital lease agreements for laboratory and office equipment. The
original cost and accumulated amortization on the equipment under capital leases
is $444,994 and $269,941, respectively, at December 31, 1997 and $413,969 and
$161,472, respectively, at December 31, 1996.

Future minimum payments under capital and operating leases are as follows:

CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------

1998 ...................................... $ 78,648 $529,009
1999 ...................................... 32,541 172,205
2000 ...................................... 8,389 --
2001 ...................................... 4,893 --
------------------
Total minimum lease payments .............. 124,471 $701,214
========
Amount representing interest ............... 11,653
--------
Present value of net minimum lease payments 112,818
Current portion ............................ 69,816
--------
Long-term portion .......................... $ 43,002
========

Rent expense for office facilities and certain equipment was $677,501,
$732,302 and $801,632 for the years ended December 31, 1997, 1996 and 1995,
respectively.

39
42

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. COMMITMENTS AND CONTINGENCIES (CONTINUED)

TRADE SECRET MATTER

In August 1996, an Australian entity, alleged that its unspecified trade
secrets and know-how were used in the development by the Company of unspecified
compounds for the Company's red blood cell program without its consent. This
entity has indicated that it is seeking compensation in the form of royalties or
a lump-sum payment. Based on its investigation of the matter to date, the
Company believes that the claims are without merit. However, any future
litigation involving these allegations would be subject to inherent
uncertainties, especially in cases where complex technical issues are decided by
a lay jury. There can be no assurance that, if a lawsuit were commenced, it
would not be decided against the Company, in which case, settlement of this
claim could have a material adverse effect upon the Company's business,
financial condition and results of operations.

5. STOCKHOLDERS' EQUITY

COMMON STOCK

On January 30, 1997, the Company completed an initial public offering of
2,000,000 shares of common stock at $12.00 per share. The Company received net
proceeds of $21.1 million. In conjunction with the initial public offering, the
Company sold an additional 496,878 shares of its common stock to Baxter for an
aggregate purchase price of approximately $5.5 million. Additionally, at the
time of the initial public offering, 33,315 warrants to purchase 47,605 shares
of common stock were exercised for an aggregate price paid to the Company of
$183,000 and Series A, B, C, D and E preferred stock converted into 4,412,243
shares of common stock.

1992 STOCK OPTION PLAN

In January 1992, the Company's Board of Directors approved the 1992 Stock
Option Plan (the "Plan"), which provides for the grant of stock options to
purchase up to 588,000 of the Company's common stock. On May 18, 1996, the
Company's Board of Directors approved an increase in the number of shares of
common stock reserved for issue under the Plan from 588,000 to 1,029,000. Under
the Plan, two types of options may be granted: Incentive Stock Options ("ISOs")
and Non-Qualified Stock Options ("NQSOs"). The ISOs may be granted at a price
per share not less than the fair market value at the date of grant. The NQSOs
may be granted at a price per share not less than 85% of the fair market value
at the date of grant. The option term is 10 years. Vesting, as determined by the
Board of Directors, generally occurs ratably over four years. In the event
option holders cease to be employed by the Company, except in the event of death
or disability or as otherwise provided in the option grant, all unvested options
are forfeited and all vested options must be exercised within a three-month
period, otherwise the options are forfeited. Options granted are immediately
exercisable and unvested (but issued) shares are subject to repurchase by the
Company if the holder is no longer employed by the Company. As of December 31,
1997, 84,173 shares were subject to this repurchase provision.

On July 24, 1996, the Company adopted the 1996 Equity Incentive plan (the
"Incentive Plan") (approved by the stockholders in January 1997) as an amendment
and restatement of the Company's 1992 Stock Option Plan, and reserved an
additional 441,000 shares of common stock for issuance thereunder. The Incentive
Plan provides for grants of incentive stock options to employees and non
statutory stock options, restricted stock purchase awards, stock appreciation
rights and stock bonuses to employees, directors and consultants of the Company.

40

43
CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

1992 STOCK OPTION PLAN (CONTINUED)

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FAS
123 requires the use of option valuation models that were not developed for use
in valuing employee stock options.

"As adjusted" information regarding net loss and net loss per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options and grants under its employee stock purchase plan
described below under the fair value method of that Statement. The fair value
for these options and shares was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:

YEARS ENDED DECEMBER 31,
1997 1996 1995
---------------------------------

Expected dividend yield .......... 0% 0% 0%
Expected volatility .............. .7424 .5925 .5925
Risk-free interest rate .......... 6.13% 5.09% 5.35%
Expected life of the option ...... 2.6 years 5 years 5 years

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

For purposes of "as adjusted" disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effects of
applying FAS 123 on "as adjusted" net loss are not likely to be representative
of the effects on reported net loss/income for future years. The Company's
reported and "as adjusted" information at December 31 follows:

1997 1996 1995
----------------------------------------------------

Net loss, as reported ............................... $(14,664,213) $(10,206,885) $(2,360,321)
Net loss, "as adjusted" ............................. (14,966,213) (10,509,885) (2,365,321)
Net loss per share - basic and diluted, as reported . (1.76) (5.98) (1.67)
Net loss per share - basic and diluted, "as adjusted" (1.79) (6.16) (1.67)

41

44

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

1992 STOCK OPTION PLAN (CONTINUED)

Activity under the Plan is set forth below:

OUTSTANDING OPTIONS
---------------------------------- WEIGHTED AVERAGE
NUMBER OF PRICE EXERCISE PRICE OF
SHARES PER SHARE SHARES UNDER PLAN
---------------------------------------------------------

Balances at December 31, 1994................................... 498,256 $ .262- .544
Granted....................................................... 75,705 .714 $ .714
Cancelled..................................................... (63,290) .262- .544 .376
Exercised..................................................... (4,623) .262- .544 .365
---------------------------------------------------------
Balances at December 31, 1995................................... 506,048 .262- .714 .670
Granted....................................................... 418,126 .714- 10.200 2.533
Cancelled..................................................... (5,879) .714 .714
Exercised..................................................... (510,912) .262- 2.721 .344
---------------------------------------------------------
Balances at December 31, 1996................................... 407,383 .262- 10.200 2.523
Granted....................................................... 51,300 10.625- 23.875 14.925
Cancelled..................................................... (10,184) .544- 4.082 3.240
Exercised..................................................... (61,229) .262- 2.721 1.045
---------------------------------------------------------
Balances at December 31, 1997................................... 387,270 $ .262- 23.875 $ 4.380
=========================================================

The weighted average fair value of options granted during 1997, 1996 and
1995 is $8.107, $6.005 and $1.024 per share, respectively. Options to purchase
507,116 shares of common stock were available for future grant.

The following table summarizes information concerning outstanding and
vested options as of December 31, 1997:

OPTIONS OUTSTANDING OPTIONS VESTED
---------------------------------------------------- ---------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER OF REMAINING WEIGHTED AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------ --------------- ----------------- ------------------ ---------------------------------------

$0.262-0.7143............. 47,033 6.82 $ 0.611 38,247 $ 0.598
$2.721-4.082.............. 274,605 8.38 $ 2.814 106,879 $ 2.801
$8.163-14.000............. 53,932 9.28 $ 11.952 9,962 $ 10.877
$19.000-23.875............ 11,700 9.87 $ 21.375 - -
=============== ================= ================== =======================================
387,270 8.36 $ 4.380 155,088 $ 2.776
=============== ================= ================== =======================================

42

45
CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

The Company recognized deferred compensation of $530,215 for the difference
between the exercise price and deemed fair value of certain stock options
granted during the year ended December 31, 1996. This amount is being amortized
by periodic charges to operations over the four year vesting periods of the
individual options. Amortization expense related to deferred compensation
totaled $169,450 and $219,828 for the years ended December 31, 1997 and 1996,
respectively.

EMPLOYEE STOCK PURCHASE PLAN

On July 24, 1996, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") (approved by the stockholders in
January 1997) covering an aggregate 220,500 shares of common stock. The Purchase
Plan is intended to qualify as an employee stock purchase plan within the
meaning of Section 423(b) of the Code. Under the Purchase Plan, the Board of
Directors may authorize participation by eligible employees, including officers,
in periodic offerings following the adoption of the Purchase Plan. The offering
period for any offering will be no more than 27 months. During 1997, employees
purchased 20,830 shares under the Purchase Plan. At December 31, 1997, 199,670
shares were available for issuance.

WARRANTS

The Company had the following warrants issued in connection with an
operating lease line, outstanding at December 31, 1997 to purchase shares of
common stock, all of which expire in February 2002:

NUMBER EXERCISE DATE
OF SHARES PRICE PER SHARE ISSUED
--------- --------------- ------

30,545 $2.62 May 1992

5,805 $3.45 July 1993

9,187 $5.44 May 1994

6,615 $7.14 April 1995
==============
52,152
==============

43
46
CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. STOCKHOLDERS' EQUITY (CONTINUED)

REINCORPORATION AND STOCK SPLIT

On January 14, 1997, the Company effected a stock split of all outstanding
shares of common stock such that each share of common stock will be split into
1.47 shares of common stock. All common shares in the accompanying financial
statements have been retroactively adjusted to reflect the stock split. In
connection with the stock split, the conversion and exercise provisions of the
outstanding shares of preferred stock, stock options and warrants have been
adjusted accordingly. At the same time, the Board authorized the Company to
proceed with the reincorporation of the Company into Delaware. Upon the
reincorporation, the authorized stock of the Company became 5,000,000 shares of
preferred stock, par value $.001 per share, and 50,000,000 shares of common
stock, par value $.001 per share. Also upon reincorporation, the Board of
Directors received the authority, without further action by the stockholders, to
issue up to 5,000,000 shares of preferred stock in one or more series and to fix
the designations, powers, preferences, privileges, and relative participating,
optional or special rights and the qualifications, limitations, or restrictions
thereof, including dividend rights, conversion rights, voting rights, and terms
of redemption and liquidation preferences, any or all of which may be greater
than the rights of the common stock.

6. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:

DECEMBER 31,
1997 1996
-----------------------------

Net operating loss carryforward .......................... $ 10,200,000 $ 6,400,000
Research and development credit carryforward ............. 1,600,000 800,000
Certain expenses not currently deductible for tax purposes 2,200,000 --
Deferred revenue ......................................... -- 400,000
Capitalized research and development ..................... 900,000 400,000
Other .................................................... 300,000 200,000
-----------------------------
Gross deferred tax assets ................................ 15,200,000 8,200,000
Valuation allowance ...................................... (15,200,000) (8,200,000)
-----------------------------
Net deferred tax assets .................................. $ -- $ --
=============================

44

47

CERUS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES (CONTINUED)

The valuation allowance increased by $7,000,000 and $4,000,000 for the
fiscal years ended in 1997 and 1996, respectively. The increase is primarily
attributable to the increase in the net operating loss and tax credit
carryforwards. The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realizability of the deferred tax assets such that a full valuation allowance
has been recorded. These factors include the Company's history of net losses
since its inception, the need for FDA approval of the Company's products prior
to commercialization, expected near-term future losses, the nature of the
Company's deferred tax assets, the lack of firm sales backlog, no significant
excess of appreciated asset value over the tax basis of the Company's net assets
and the absence of taxable income in prior carryback years. The valuation
allowance at December 31, 1997 includes $400,000 related to deferred tax assets
arising from tax benefits associated with stock option plans. This benefit, when
realized, will be recorded as an increase in stockholders' equity rather than as
a reduction in the income tax provision.

Although management's operating plans assume, beyond the near-term, taxable
and operating income in future periods, management's evaluation of all available
information in assessing the realizability of the deferred tax assets in
accordance with Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes," indicates that such plans are subject to
considerable uncertainty. Therefore, the valuation allowance has been increased
to fully reserve the Company's deferred tax assets. The Company will continue to
assess the realizability of the deferred tax assets based on actual and
forecasted operating results.

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $27,800,000 for federal and $14,100,000 for state income tax
purposes. The Company also had research and development tax credit carryforwards
of approximately $1,200,000 for federal income tax purposes and approximately
$400,000 for state income tax purposes at December 31, 1997. The federal net
operating loss and tax credit carryforwards expire between the years 2007 and
2012. The state net operating loss carryforward expires in 2001 and 2002.

Utilization of the Company's net operating losses and credits are subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code. The annual limitation may result in the
expiration of net operating losses and credits before utilization.

7. RETIREMENT PLAN

The Company maintains a defined contribution savings plan (the "401(k)
Plan") that qualifies under the provisions of Section 401(k) of the Internal
Revenue Code and covers all employees of the Company. Under the terms of the
401(k) Plan, employees may contribute varying amounts of their annual
compensation. The Company may contribute a discretionary percentage of qualified
individual employee's salaries, as defined, to the 401(k) Plan. Company
contributions of $3,500 and $2,700 were charged to operations in 1996 and 1995,
respectively, in order to cover certain costs of the 401(k) Plan. The Company
did not contribute to the 401(k) Plan in 1997.

45

48

SIGNATURES

Pursuant to the requirement 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, in the City of
Concord, State of California, on the 6th day of March, 1998.

CERUS CORPORATION

By: /s/ Stephen T. Isaacs
--------------------------------------
Stephen T. Isaacs
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this report
has been signed below by the following persons in the capacities and on the
dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Stephen T. Isaacs President, Chief Executive Officer and March 6, 1998
- ---------------------------------
Stephen T. Isaacs Director
(Principal Executive Officer) March 6, 1998

/s/ David S. Clayton Vice President, Finance and Chief Financial March 6, 1998
- ---------------------------------
David S. Clayton Officer
(Principal Financial and Accounting Officer) March 6, 1998

/s/ B. J. Cassin Chairman of the Board
- ---------------------------------
B. J. Cassin

/s/ John E. Hearst Director March 6, 1998
- ---------------------------------
John E. Hearst

/s/ Peter H. McNerney Director March 6, 1998
- ---------------------------------
Peter H. McNerney

/s/ Dale A. Smith Director March 6, 1998
- ---------------------------------
Dale A. Smith

/s/ Henry E. Stickney Director March 6, 1998
- ---------------------------------
Henry E. Stickney

49

EXHIBIT INDEX

EXHIBIT
NUMBER. DESCRIPTION OF EXHIBIT
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3.1(1) Registrant's Amended and Restated Certificate of Incorporation.
3.2(1) Registrant's Bylaws.
10.1(1) Form of Indemnity Agreement entered into between the
Registrant and each of its directors and executive
officers.
10.2(1) 1996 Equity Incentive Plan.
10.3(1) Form of Incentive Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.4(1) Form of Nonstatutory Stock Option Agreement under the 1996 Equity
Incentive Plan.
10.5(1) 1996 Employee Stock Purchase Plan Offering.
10.7(1) Warrant Agreement, dated May 11, 1992, between the
Registrant and Comdisco, Inc. to purchase Series A
Preferred Stock.
10.8(1) Warrant Agreement, dated July 12, 1993, between the
Registrant and Comdisco, Inc. to purchase Series B
Preferred Stock.
10.9(1) Warrant Agreement, dated May 25, 1994, between the
Registrant and Comdisco, Inc. to purchase Series C
Preferred Stock.
10.10(1) Warrant Agreement, dated April 25, 1995, between the
Registrant and Comdisco, Inc. to purchase Series D
Preferred Stock.
10.11(1) Form of Warrant to purchase shares of Series B Preferred
Stock of the Registrant.
10.12(1) Form of Warrant to purchase shares of Series C Preferred
Stock of the Registrant.
10.13(1) Series D Preferred Stock Purchase Agreement, dated March
1, 1995, between the Registrant and certain investors.
10.14(1) Series E Preferred Stock Purchase Agreement, dated April
1, 1996, between the Registrant and Baxter Healthcare
Corporation.
10.15(1) Common Stock Purchase Agreement, dated September 3, 1996 between the
Registrant and Baxter Healthcare Corporation.
10.16(1) Amended and Restated Investors' Rights Agreement, dated
April 1, 1996, among the Registrant and certain investors.
10.17+(1) Development, Manufacturing and Marketing Agreement, dated December 10,
1993 between the Registrant and Baxter Healthcare Corporation.
10.18+(1) Development, Manufacturing and Marketing Agreement, dated April 1,
1996, between the Registrant and Baxter Healthcare Corporation.
10.21(1) Industrial Real Estate Lease, dated October 1, 1992,
between the Registrant and Shamrock Development Company,
as amended on May 16, 1994 and December 21, 1995.
10.22(1) Real Property Lease, dated August 8, 1996, between the Registrant and
S.P. Cuff.
10.23(1) Lease, dated February 1, 1996, between the Registrant and
Holmgren Partners.
10.24(1) First Amendment to Common Stock Purchase Agreement, dated
December 9, 1996, between the Registrant and Baxter
Healthcare Corporation.
10.25+(1) Amendment, dated as of January 3, 1997, to the Agreement
filed as Exhibit 10.17.
10.26(1) Memorandum of Agreement, dated as of January 3, 1997,
between the Registrant and Baxter Healthcare Corporation.
10.27* License Agreement, dated as of November 30, 1992, by and among the
Company, Miles Inc. and Diamond Scientific Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.

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+ Certain portions of this exhibit are subject to a confidential treatment
order.

(1) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File No. 333-11341) and amendments thereto.

* Confidential treatment has been requested for certain portions of this
exhibit.