NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  OPERATIONS AND BASIS OF PRESENTATION

             BioTransplant Incorporated (the “Company”) was incorporated on March 20, 1990. The Company is developing pharmaceutical products and systems to enable the body’s immune system to better tolerate the transplantation of foreign cells, tissues and organs.  Based on BioTransplant’s proprietary technology, both alone and in collaboration with others, BioTransplant is seeking to develop a portfolio of products designed to improve therapies associated with organ and bone marrow transplantation as well as to improve the treatment of cancer, autoimmune diseases and blood disorders.

             The Company is in the development stage and is devoting substantially all of its efforts toward product research and development and raising capital. The Company is subject to a number of risks similar to those of other development stage companies, including risks related to: its dependence on key individuals and collaborative research partners, competition from substitute products and larger companies, its ability to develop and market commercially usable products and obtain regulatory approval for its products under development, and its ability to obtain the substantial additional financing necessary to adequately fund the development of its products.

             The interim financial statements herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and include, in the opinion of management, all adjustments, consisting of normal, recurring adjustments, necessary for a fair representation of interim period results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The results for the interim periods presented are not necessarily indicative of results to be expected for the fiscal year or any future period. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on  Form 10-K for the year ended December 31, 2000, as filed with the SEC.

2.  CASH EQUIVALENTS AND INVESTMENTS

Cash equivalents include short-term, highly liquid investments with original maturities of less than ninety days from the date of purchase. Short-term investments consist primarily of corporate notes and securities issued by the United States Treasury or other United States government agencies with original maturities of greater than three months and remaining maturities of less than one year.  In accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company's investments are classified as held-to-maturity and are stated at amortized cost, which approximates market value.

The Company held the following investments at December 31, 2000 and  June 30, 2001:

             In order to provide its consent to the Eligix acquisition (see Note 9), a bank has required the Company to secure the outstanding balance on a term note (see Note 6) with cash funds until the earlier of the date the loan is paid off or the company raises additional funds.  The Company transferred $540,000 into a restricted cash account during April 2001 in order to meet this requirement.  As of June 30, 2001, this amount is still restricted.  The Company expects that the restricted cash will be released from the restricted account as a result of the financing completed in June 2001 (see Note 11).

3.  NET LOSS PER COMMON SHARE

Net loss per common share is based on the weighted average number of common shares outstanding during the periods presented, in accordance with Financial Accounting Standards Board Statement No. 128, "Earnings Per Share". Diluted net loss per common share is the same as basic net loss per common share as the inclusion of common stock issuable pursuant to options and warrants would be antidilutive. Antidilutive securities not included consist of 428,783 shares issuable pursuant to common stock options and 212,496 shares issuable pursuant to common stock warrants.

4.   IMMERGE BIOTHERAPEUTICS, INC.

             In September 2000, the Company and Novartis entered into an agreement to combine their respective expertise in the field of xenotransplantation into a newly-formed, independently-run company named Immerge BioTherapeutics AG ("Immerge"). Immerge began operations in January 2001. In return for contributing its technology and an aggregate of $30 million in funding over three years beginning January 1, 2001, Novartis obtained a 67% ownership share of Immerge and the exclusive worldwide, royalty-bearing rights to the development and commercialization of any xenotransplantation products resulting from Immerge's research. In return for contributing its technology, BioTransplant obtained a 33% share of Immerge and will receive royalty payments from Novartis sales of xenotransplantation products, if any.

             In December 2000, Immerge formed a wholly-owned Delaware operating subsidiary, Immerge BioTherapeutics, Inc. Effective January 1, 2001, BioTransplant entered into a contract research agreement with the Delaware subsidiary, under which BioTransplant has committed approximately 20 full-time employees to perform specified research activities exclusively for Immerge and has agreed to provide administrative services and support at agreed upon rates.  Amounts due BioTransplant under this agreement are being recorded as offsets to the relevant BioTransplant expenses incurred.  For the six months ended June 30, 2001, BioTransplant has recorded offsets to its expenses of approximately $3.0 million for research and development services and approximately $488,000 for general and administrative services and support provided under the agreement.  Of this amount, approximately $1.9 million is included as accounts receivable from Immerge at June 30, 2001.

5.  REVENUE RECOGNITION

             Substantially all of the Company's license and research and development revenues were derived from three collaborative research arrangements. Annual research and development payments were recognized on a straight-line basis over the period of the contract, which approximates when work is performed and costs are incurred. License fee revenue represents technology transfer fees received for rights to certain technology of the Company. Prior to the adoption of SEC Staff Accounting Bulletin No. 101 “Revenue Recognition” (“SAB 101”)  during 2000, the Company recorded license fees as revenue when all obligations as defined in the individual arrangements are fulfilled by the Company and there is no risk of refund.  Research and development expenses in the accompanying consolidated statements of operations include funded and unfunded expenses.

             SAB 101 requires companies to recognize certain upfront non-refundable fees and milestone payments over the life of the related alliance when such fees are received in conjunction with alliances which have multiple elements. The Company adopted this new accounting principle through a cumulative charge to the statement of operations, in accordance with Accounting Principles Board Opinion (APB) No. 20, "Accounting Changes", no later than the fourth quarter of 2000, effective January 1, 2000.   The adoption of this statement, consisting of the cumulative effect of the accounting change and the current year effect, did not have a material impact on the Company’s financial statements for the year ended December 31, 2000 or the quarter ended June 30, 2001.

6.  DEBT

             In September 1997, the Company entered into a term note with a bank, whereby the Company could borrow up to $500,000 for certain equipment and fixtures during a specified drawdown period, after which time the outstanding balance will become payable in 36 equal monthly principal installments plus interest. During 1999, the Company amended the term note to extend the drawdown period and increase its availability to $1.0 million under the same conditions of the original term note. Borrowings under the term note bear annual floating interest at the bank's Prime Rate (6.75% at June 30, 2001) during the drawdown period with an option to convert during the repayment period to an annual fixed rate at the three-month London Interbank Offered Rate ("LIBOR") (5.06% at June 30, 2001) plus 2.25%. Borrowings under the term note are secured by equipment and fixtures purchased using the proceeds of the note. There were $369,000 in borrowings outstanding under this term note at June 30, 2001.  The Company is required to maintain certain financial covenants under the agreement.  As of June 30, 2001, the Company is in compliance with these covenants.  In order to provide its consent to the acquisition of Eligix, Inc. (see Note 9), the bank required the Company to secure the outstanding balance on the note as well as an amount equal to the total credit available to the Company through corporate credit cards, with cash funds until the loan is paid off.  The Company transferred $540,000 into a restricted cash account during April 2001 in order to meet this requirement.  The Company has classified this restricted cash as short-term investments at June 30, 2001.

             In connection with the acquistion of Eligix (see Note 9), the Company has become a co-borrower on two loan and security agreements.  The first was entered into in September 1997 and allows the Company to borrow up to $750,000.  The minimum funding amount is $100,000 with a maximum of five loans.  Loans under the agreement bear interest at a fixed rate equal to the yield to maturity for the U.S. Treasury note having a term equivalent with the loan’s term on the date of funding plus 300 basis points.  The loans are collateralized by certain equipment.  There were $332,000 in borrowings outstanding under this term note at June 30, 2001.

             The second loan and security agreement was entered into in June 1999 and allows the Company to borrow up to $2,700,000.  The minimum funding amount is $35,000.  Each note will have a fixed term of 42 months.  Loans under the agreement bear interest at a fixed rate equal to the prime rate on the date of commencement plus the average interest rate of a similar term U.S Treasury note for the week preceding the date of commencement.  The loans are collateralized by certain equipment.  There were $1.4 million in borrowings outstanding under this term note at June 30, 2001.

             The weighted average interest rate on these Eligix loan and security agreements outstanding was 11.8% at December 31, 2000

7.  SEGMENT REPORTING

             The Company has adopted Statement of Financial Accounting Standards Board (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") which establishes standards for reporting information about operating segments. In accordance with SFAS 131, the Company believes that it operates in one operating segment.

8. COMPREHENSIVE INCOME

             SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements.  There are no material differences between the Company's reported income and comprehensive income for all periods presented.

9. ELIGIX ACQUISITION

             On May 15, 2001, the Company completed its acquisition of Eligix.  Under the terms of the merger agreement, a wholly-owned subsidiary of BioTransplant, BT/EL Acquisition Co., merged with and into Eligix and the security holders of Eligix will be entitled to receive up to an aggregate of 5,610,000 shares of BioTransplant common stock, either in the merger or upon exercise or conversion of Eligix options and warrants assumed by BioTransplant in the merger.  561,000 shares were deposited in an escrow account that may be used to compensate BioTransplant if BioTransplant is entitled to indemnification under the merger agreement. Any indemnification escrow shares that, 15 months following the completion of the merger, have not been used to indemnify BioTransplant and that are not subject to any unresolved claims for indemnification by BioTransplant, will be distributed to the Eligix stockholders. In addition, all Eligix stockholders had an additional 561,000 of their BioTransplant stock deposited in an escrow account to secure achievement by Eligix of CE mark approval by the European Union of Eligix' TCell-HDM product by December 31, 2001. If the European Union does not allow Eligix to affix the CE mark, which denotes conformity to European standards for safety, to its TCell-HDM product by December 31, 2001, the Eligix stockholders will not receive any of the shares allocated to secure achievement of the milestone.

             In accordance with APB No. 16, Business Combinations, the purchase price for Eligix has been allocated to the assets and liabilities of Eligix based upon their respective fair values.  The aggregate purchase price based upon the fair market value of BioTransplant common stock was $45.5 million, including the value of the outstanding options and warrants to purchase the Company’s common stock and the transaction costs related to the merger.

             The purchase price was allocated to the assets acquired based upon independent appraisal which used proven valuation tools and techniques.  Significant portions of the purchase price were identified as intangible assets which included in-process research and development (IPR&D) of $20.0 million and acquired technology of $25.0 million.  The excess of the purchase price over the fair value of identified intangible and tangible net assets of $3.2 million has been allocated to goodwill.  Intangible assets are being amortized over their estimated useful life of seven years.  The fair value of the IPR&D relating to current in-process research and development projects was recorded as an expense as of the merger date.

             The aggregate purchase price of $45.5 million, including acquistion costs, was allocated as follows:

              As of June 30, 2000, intangible assets, net relates entirely to the Eligix merger and consists of the following:

             For the three and six months ended June 30, 2001, the Company recorded $503,000 in amortization expense related to the acquired technology and goodwill.  Additionally, the Company recorded $32,000  in stock based compensation related to the vesting of stock options held by employees and consultants of Eligix.  The Company also reversed deferred compensation of $5,000 related to options forfeited by terminated employees.

             In connection with the merger, certain employees of Eligix received an aggregate of 990,000 shares of BioTransplant common stock under the Eligix management equity incentive plan. These shares vest over a 365-day period following the closing of the merger, with 33 1/3% of the shares vesting 90 days after closing of the merger, an additional 33 1/3% of the shares vesting 180 days after the closing of the merger, an additional 23 1/3% of the shares vesting 270 days after the closing of the merger and the remaining 10% of the shares vesting 365 days after the closing of the merger. If, within 365 days after the closing of the merger, BioTransplant terminates a former Eligix management member other than for cause, or a management member terminates his or her employment for good reason, that management member's shares will vest immediately in full upon termination. Otherwise, BioTransplant will have the right to repurchase a terminated management member's unvested shares for $.01per share. Of these shares, 99,000 are being held in escrow for 15 months following the completion of the merger to compensate BioTransplant if it is entitled to indemnification under the merger agreement and 99,000 shares are being held in escrow to secure achievement by Eligix of CE mark approval by the European Union of its TCell-HDM product by December 31, 2001. The value of the 990,000 shares less 99,000 shares held in escrow to secure achievement of that CE Mark Approval by the European Union of its Tcell-HDM product are being treated as deferred compensation and are being expensed over the 365-day vesting period. The per share price used to determine the value of these shares was $6.84, the fair market value of BioTransplant common stock on the closing date of the merger. Accordingly, at the merger date, $6,094,000 was recorded as deferred compensation and will be recorded as stock-based compensation over the 365-day vesting period of the shares.  Additionally, shares held in escrow to secure the achievement of CE mark approval will be valued using the fair market value of BioTransplant common stock on the date these shares are released from escrow.

             During the three months ended June 30, 2001, the Company amortized $1,350,000 of deferred compensation including approximately $638,000 related to the termination of an Eligix employee as the vesting of these shares were accelerated in full.  This entire amount is included as stock based compensation expense in the accompanying statement of operations for the three and six months ended June 30, 2001.  Additionally, the Company reversed deferred compensation of $13,000 related to the shares forfeited by terminated employees.

             Unaudited pro forma operating results for the Company, assuming the merger occurred at the beginning of the periods presented are as follows:

             For purposes of these pro forma operating results, the IPR&D was assumed to have been written off prior to the pro forma periods, so that operating results presented only include recurring costs.

10. PRIVATE PLACEMENT

             On June 8, 2001, the Company completed a private placement of its common stock for net proceeds of approximately $17.9 million.  Investors purchased 3,022,457 shares of common stock at a purchase price of $6.30 per share.  All proceeds from this private placement will be used for general corporate purposes

11. RECENT ACCOUNTING PRONOUNCEMENTS

             In July 2001, the FASB issue SFAS No. 141, “Business Combinations”.  SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations are accounted for under a single method, the purchase method.  This statement is effective for all business combinations initiated after June 30, 2001.

             In July 2001, the FASB issued SFAS No. 142,” Goodwill and Other Intangible Assets”.  This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired.  Under this statement goodwill as well as other intangibles determined to have an infinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis.  This statement is effective for the Company for its first quarter of 2002.  Management is currently evaluating the impact that this statement will have on the Company’s financial statements.  Management does not believe the adoption of this statement will have a material impact on the Company's financial statements.

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