[HEMOSOL INC. LOGO]

HEMOSOL INC.

ANNUAL INFORMATION FORM

May 27, 2003

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ANNUAL INFORMATION FORM

MAY 27, 2003

TABLE OF CONTENTS

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ITEM 1 COVER PAGE ........................................................................ 1

ITEM 2 CORPORATE STRUCTURE ............................................................... 2

ITEM 3 GENERAL DEVELOPMENT OF THE BUSINESS ............................................... 2
Clinical Highlights ............................................................... 4
Recent Developments ............................................................... 7
Financing and Strategic Highlights ................................................ 8

ITEM 4 NARRATIVE DESCRIPTION OF THE BUSINESS ............................................. 8
Background ........................................................................ 9
The Hemosol Solution: HEMOLINK .................................................... 10
HEMOLINK Applications ............................................................. 11
Clinical Trials ................................................................... 12
Regulatory Matters ................................................................ 15
Market ............................................................................ 17
Competing Products ................................................................ 17
Raw Materials ..................................................................... 18
Intellectual Property ............................................................. 18
Other Products in Development ..................................................... 20
Human Resources ................................................................... 22
Sales and Marketing ............................................................... 23
Property, Plants and Equipment .................................................... 23
Environmental Matters ............................................................. 23
Credit Facility ................................................................... 24
Risks and Uncertainties ........................................................... 25

ITEM 5 SELECTED CONSOLIDATED FINANCIAL INFORMATION ....................................... 31
Last Three Financial Years ........................................................ 31
Last Eight Quarters ............................................................... 31
Dividend Policy ................................................................... 31

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................................... 31

ITEM 7 MARKET FOR SECURITIES ............................................................. 31

ITEM 8 DIRECTORS AND OFFICERS ............................................................ 32
Scientific Advisory Board ......................................................... 35

ITEM 9 ADDITIONAL INFORMATION ............................................................ 36

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ITEM 2 CORPORATE STRUCTURE

Hemosol Inc. ("HEMOSOL" or the "COMPANY") was incorporated
under the Business Corporations Act (Ontario) by articles of incorporation dated
July 11, 1985. The registered and principal office of the Company is located at
2585 Meadowpine Blvd. Mississauga, Ontario Canada, L5N 8H9.

The Company has no subsidiary whose total assets constituted
more than 10% of its consolidated assets at December 31, 2002 or subsidiaries
whose assets, in the aggregate, constituted more than 20% of its consolidated
assets at December 31, 2002.

ITEM 3 GENERAL DEVELOPMENT OF THE BUSINESS

Hemosol is an integrated biopharmaceutical company focused on
the development of a portfolio of products based on human hemoglobin. As a
near-term commercial stage company, Hemosol's immediate focus is the development
and successful commercialization of Hemolink(TM) (hemoglobin raffimer), a highly
purified, human-derived oxygen therapeutic product (historically termed a blood
substitute). HEMOLINK is designed to sustain life by delivering oxygen
immediately, effectively, and safely, resulting in improved patient outcomes and
to eliminate the need for donor red blood cell transfusions in patients
suffering from acute anemia. HEMOLINK is being evaluated for use in cardiac
surgery, high blood loss orthopedic surgery and life threatening acute anemia in
patients who cannot or will not accept red blood cell transfusions.

HEMOLINK is created through a series of purification processes
which separate the hemoglobin from red blood cells ("RBCs"), reducing the risk
of viral contamination compared to a unit of donor RBCs. The highly purified
hemoglobin is then chemically modified using a proprietary process called
"cross-linking". The o-raffinose cross-linker creates stable links within, and
between, the hemoglobin molecules. This carefully crafted configuration allows
for efficient oxygen delivery, prolonged circulation time and extended
shelf-life. The initial technology relating to cross-linking evolved from basic
scientific research at the Canadian Department of National Defence in the early
1980s. This technology has been exclusively licensed to Hemosol. The Company
believes it has achieved significant progress toward developing a commercially
viable oxygen-therapeutic product.

In general, the development of the Company's products
commences with discovery research followed by pre-clinical studies. Following
the generation of data in pre-clinical studies, applications are made to
regulatory authorities to conduct clinical trials. See "Narrative Description of
the Business - Clinical Trials". Clinical trials normally are conducted in three
sequential phases: Phase I clinical trials are initial studies in humans, using
small doses and a limited number of healthy volunteers, to assess the safety of
a product. Upon successful completion of Phase I clinical trials, Phase II
clinical trials are conducted in human patients to further assess the safety and
also the efficacy of a product. Upon successful completion of Phase II clinical
trials, Phase III clinical trials are conducted. Phase III clinical trials are
comprehensive studies in human patients to assess the safety, efficacy and drug
interactions of a product. In order to seek approval to market a product in the
U.S. and Canada, after the satisfactory completion of the clinical trial
process, a Biologics License Application will be submitted to the FDA's Centre
for Biologics Evaluation and Research and a New Drug Submission will be
submitted to Health Canada's Biologics and Genetic Therapies Directorate. See
"Narrative Description of the Business - Regulatory Matters". Following review
of the

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license applications, the manufacturing and testing facilities will undergo
on-site inspections and, if everything is deemed satisfactory, a marketing
license will be issued.

Hemosol has completed a pivotal Phase III clinical trial of
HEMOLINK in Canada and the U.K. Based on the results of this trial, Hemosol
sought regulatory approval to market HEMOLINK in Canada for use in scheduled
surgery, such as coronary artery bypass grafting ("CABG"), and was granted
priority review status. However, Hemosol was advised in March 2002 that there
was insufficient data to license HEMOLINK by Health Canada for marketing in
Canada. Hemosol is also seeking regulatory approval in the U.K. Provided such
approval is obtained, Hemosol intends to follow the Mutual Recognition Procedure
registration route for HEMOLINK in the rest of Europe. Hemosol is currently
conducting two Phase II clinical trials in the U.S. for use of HEMOLINK in
primary CABG surgery and high blood loss orthopedic surgery. Upon completion of
these two trials, Hemosol planned to review the data with the U.S. Food and Drug
Administration (the "FDA") and design a third trial that is expected to be
pivotal for U.S. registration.

In March 2003, following the receipt of information from the
Data & Safety Monitoring Board ("DSMB") for the Phase II clinical trial for the
use of HEMOLINK in primary CABG surgery, Hemosol elected to halt enrolment of
patients in the trial pending a review of safety data. The DSMB's comments were
based on an observation of an imbalance in the incidence of certain adverse
events between the HEMOLINK and control groups. As a precaution, the Company has
also voluntarily suspended enrolment in its Phase II clinical trial involving
the use of HEMOLINK in patients undergoing high blood loss orthopedic surgery.
Once Hemosol has completed a full review of the safety data from the Phase II
CABG study, further discussions with the relevant regulatory agencies will be
required prior to re-starting either of the Phase II trials for the use of
HEMOLINK in CABG or high blood loss orthopedic surgery.

Set out below is a chart summarizing the products currently
being developed by Hemosol.

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[CHART]

A pivotal Phase III trial in Canada and the U.K. was completed
for HEMOLINK in March 2000, and a regulatory submission for Canada was filed in
July 2000. A regulatory submission for the U.K. was filed in February 2001. To
support initial sales, the production capabilities of the Company's Skyway
manufacturing facility were scaled up to achieve an annual rate of 25,000 units
and commercial good manufacturing practice licensing, see "Narrative Description
of the Business - Property, Plants and Equipment". To support future expansion
and initial sales in the key U.S. market, Hemosol also completed a new
commercial manufacturing facility with an initial expected capacity of 300,000
units per year. Although the Company believes that it has achieved significant
progress toward developing HEMOLINK as a commercially viable oxygen therapeutic,
no assurance can be given that the remaining Phase III clinical trials for
HEMOLINK will be successfully completed, that the suspended Phase II clinical
trials for HEMOLINK will be re-started, that HEMOLINK will receive all necessary
regulatory approvals and that HEMOLINK will be successfully introduced into the
market. See "Narrative Description of the Business - Risks and Uncertainties".

Some of the Company's other products are at earlier stages of
development. No assurance can be given that such products will receive approvals
to undergo clinical trials, that clinical trials will be successfully completed
in respect of such products, that such products will receive all necessary
regulatory approvals and that such products will be successfully introduced into
the market. See "Narrative Description of the Business - Risks and
Uncertainties".

CLINICAL HIGHLIGHTS

The Company has achieved significant progress in its clinical
trial activity in Canada, the U.S. and the U.K. See "Narrative Description of
the Business - Clinical Trials" below.

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Hemosol Phase II clinical trials in the U.S., one in primary
CABG surgery and a second in high blood loss orthopedic surgery. In addition,
Hemosol is in the process of initiating a Phase II clinical trial in a high-dose
application in life threatening blood loss and has been cleared to conduct a
study in chemotherapy-induced anemia. As noted above, as of March 2003, none of
these trials are actively enrolling new patients pending the completion of a
safety review prompted by the recommendation of the DSMB for the Phase II
clinical trial for the use of HEMOLINK in primary CABG surgery. A historical
summary of the Company's clinical trial activity is set out below:

- In February 1995, the Health Protection Branch of Health
Canada approved the initiation of the Phase I clinical trial
for HEMOLINK in Canada. The initial Phase I clinical trial was
completed in October 1995. As a result of Phase I clinical
trial findings, the Company undertook to evaluate the
modification of certain aspects of HEMOLINK to improve product
shelf-life and determine the cause and control of
gastro-intestinal effects seen at higher dose levels in the
Phase I clinical trials.

- In February 1997, Hemosol received clearance from the Health
Protection Branch of Health Canada to begin Phase II clinical
trials in Canada for HEMOLINK. Originally, this trial was
restricted to patients under 65 years of age who were
undergoing hip replacement surgery. During 1997, the Company
obtained regulatory approval to increase the number of trial
sites, to use HEMOLINK in both hip and knee replacement
surgery and to increase the age of the patient population to
75 years. This trial was successfully completed in June 1998
and involved a total of 16 patients who underwent either
primary hip or knee replacement surgery. There were no
clinically limiting side effects observed throughout this
trial. None of the 12 patients who received HEMOLINK required
donated (allogeneic) blood.

- In 1997, Hemosol obtained approval from the Health Protection
Branch of Health Canada to start an additional Phase II
clinical trial in Canada for HEMOLINK in patients with chronic
anemia associated with kidney failure. In April 1998, Hemosol
received clearance from the FDA to enroll U.S. patients in the
ongoing study. In November 1998, the enrolment target of 29
patients was achieved. There were no clinically limiting side
effects observed throughout this trial.

- In April 1998, Hemosol received approval from the British
Medicines Control Agency to undertake a Phase II clinical
trial in the U.K. using HEMOLINK as an alternative to blood
transfusion in patients undergoing orthopedic surgery. This
trial was successfully completed in October 1998 and involved
a total of 18 patients who underwent either hip or knee
replacement surgery. The Company gained approval in the U.K.
to amend the trial to include higher doses over extended
periods of time as well as include other orthopedic surgeries
such as spinal surgery. The amended trial protocol was
submitted for approval by the FDA in January 1999. The trial,
totaling 40 patients, is now complete and was conducted in the
U.K. and the U.S. There were no clinically limiting side
effects observed throughout the trial.

- In June 1998, Hemosol received approval from the Health
Protection Branch of Health Canada to start a Phase II
clinical trial for HEMOLINK in patients undergoing CABG
surgery. This was followed by approval in July 1998 by the
Medicines Control Agency in the U.K. This trial was completed
in March 1999 with no clinically limiting side effects
observed throughout this trial. Ninety percent of the

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HEMOLINK patients avoided allergenic blood compared with 53%
of the control patients, statistically a significant result.
These preliminary efficacy findings aided in design and choice
of the dose used in the Phase III clinical program. In August
1998, Hemosol received clearance from the FDA to undertake a
Phase II clinical trial in the U.S. in patients undergoing
CABG surgery. This trial was completed in December 1999 and
demonstrated HEMOLINK was safe in this patient population and
there were no clinically limiting side effects observed.

- In February 1999, Hemosol filed Investigational New Drug
applications with Canadian, U.S. and U.K. regulatory
authorities for Phase III clinical trials for HEMOLINK in
patients undergoing CABG surgery. Hemosol was cleared in the
U.K. in March 1999, and in Canada in April 1999 to commence a
Phase III clinical trial for HEMOLINK. This trial was
completed in Canada and the U.K. and safety and efficacy data
was reported in the second quarter of 2000 A U.S. Phase III
CABG trial was started in the fourth quarter of 2000.

- On August 13, 2001 Hemosol received verbal notification from
the FDA of changes that the FDA wanted made to its Phase III
clinical trial protocol for HEMOLINK to strengthen the
efficacy analysis for inclusion in a Biologic License
Application. As a result of these discussions with the FDA,
the Company suspended this trial in order to develop and
undertake a more comprehensive Phase II trial that would, in
turn, more effectively ground the resumption of a Phase III
clinical trial protocol for HEMOLINK.

- On November 21, 2001, Hemosol received approval from the FDA
to begin the aforementioned more comprehensive Phase II
clinical trial with HEMOLINK (HLK 213), in primary CABG
surgery. This trial was planned to include 180 patients
undergoing primary CABG surgery at approximately 40 centres in
the U.S. and the U.K.

- On January 31, 2002 the FDA notified Hemosol that it could
proceed with its Phase II trial in "re-do" CABG surgery. This
two-armed study planned to investigate the efficacy of
HEMOLINK in approximately 140 patients at approximately 40
centres in the U.S.

- On March 20, 2002 Health Canada advised Hemosol that its
Canadian New Drug Submission ("NDS") for HEMOLINK had not been
approved for marketing in Canada. Health Canada advised
Hemosol that it will require additional data in a re-filed
NDS. The Company continues to evaluate this situation and will
determine its Canadian regulatory strategy once additional
data is available.

- On March 26, 2002 the FDA notified Hemosol that it was cleared
to begin a Phase II clinical trial of HEMOLINK as a treatment
for chemotherapy-induced anemia. The single-blind,
dose-comparison study is designed to evaluate the safety and
tolerability of a short course of HEMOLINK in 50 patients in
the U.S. with lung or ovarian cancer who are being treated
with erythropoietin for chemotherapy-induced anemia.

- On April 10, 2002 Health Canada advised Hemosol that it could
proceed in Canada with its Phase II trial in primary CABG
surgery which is currently being conducted in the U.S. and the
U.K. and the planned Phase II trial in "re-do" CABG surgery.

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RECENT DEVELOPMENTS

In November 2002, Hemosol received clearance from the FDA to
begin a Phase II clinical trial (HLK210) to assess the efficacy and safety of
HEMOLINK in patients undergoing high blood loss orthopedic surgery. Based on
prior discussions with the FDA, Hemosol expected that the primary CABG surgery
trial, along with this new orthopedic surgery trial would form the basis for the
initiation of its Phase III program, pivotal for approval to market HEMOLINK in
the U.S. The completion of the ongoing "re-do" CABG surgery trial was not deemed
necessary by the FDA in order to proceed to Phase III.

In January 2003, the Company announced that John Kennedy, the
President and CEO was undergoing outpatient cancer treatment while continuing
his role and responsibilities within the Company.

In February 2003, Hemosol received clearance to proceed with a
trial to evaluate the safety and efficacy of HEMOLINK in patients with severe
acute anemia (life threatening blood loss) for whom red cell transfusion is not
a therapeutic option (patients cannot or will not accept red cell transfusion).

In April 2003, following the receipt by the Company of
information from the DSMB for the Phase II CABG study (HLK 213), Hemosol elected
to close enrolment of the study at 152 patients, slightly lower than the
originally planned enrolment of 180 patients. Enrolment was suspended in the
trial following DSMB's observation of an imbalance in the incidence of certain
adverse events between the HEMOLINK and control groups. While the DSMB had
cleared the trial to continue following the third and final interim safety
review, the DSMB's ongoing review of data indicated the potential for an
increase in certain cardiac adverse events in the HEMOLINK group. The Company
believes that the DSMB's observation from the CABG trial interim data may be due
to any number of reasons, including variables in the patient population. As a
precaution the Company also voluntarily suspended enrolment in its Phase II
clinical study involving the use of HEMOLINK in patients undergoing high blood
loss orthopedic surgery. Once Hemosol has completed a full review of the safety
data from the Phase II CABG study, further discussions with the relevant
regulatory agencies will be required prior to re-starting all Phase II studies
and proceeding with the severe acute anemia trial.

In April 2003, the Company took additional proactive steps to
manage its cash burn-rate and scale back all spending not related to the
analysis of the HLK 213 data, by giving eight week working notice to
substantially all of its employees. To preserve the greatest strategic
flexibility in the circumstances, retention packages were provided to a core
group of senior personnel. The expected cost of these severances and the
retention program is estimated to be between $1.5 million and $2 million. During
the data review period, the Company plans to continue a number of strategic
initiatives that included ongoing discussions with potential partners, exploring
merger and acquisition opportunities and the possible sale of certain assets.

In May 2003, the Company announced that it had reduced its
monthly burn rate to $1 million and that it anticipated that its existing credit
facility (see "Narrative Description of the Business - "Credit Facility") will
provide sufficient cash resources to support ongoing operations into the latter
half of 2003. As at February 2003, the Company had drawn down $10 million from
the credit facility and it expects to draw down the remaining $10 million prior
to the end of August 2003.

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In May 2003, Mr. John Kennedy, the President and Chief
Executive Officer took a medical leave of absence for an indeterminate period of
time and Mr. Lee Hartwell the Chief Financial Officer was appointed interim
Chief Executive Officer.

FINANCING AND STRATEGIC HIGHLIGHTS

In January 2000, the Company sold its option to acquire
948,214 of its issued common shares from Fresenius A.G. for $8,533,926.

In January 2000, Hemosol completed a bought deal offering of
5,520,000 common shares at $8.35 per common share for gross proceeds of
$46,092,000.

In April 2000, Hemosol completed a bought deal offering of
1,219,000 common shares at $19.00 per common share for gross proceeds of
$23,161,000.

In March 2001, the Company issued 8,050,000 common shares
pursuant to a public offering in the United States and Canada at U.S.$8.78 per
share for gross proceeds of U.S.$70,679,000.

In April 2002, the Company issued 4,900,000 units pursuant to
a public offering in Canada at $4.50 per unit for gross proceeds of $22,050,000.
Each unit consisted of one common share and one-half of one common share
purchase warrant. Each warrant entitled the holder to purchase one common share
at a price of $5.50. The warrants expired on April 18, 2003.

Hemosol has incurred losses in every year since its inception,
with a cumulative deficit of $241 million as at December 31, 2002.

ITEM 4 NARRATIVE DESCRIPTION OF THE BUSINESS

Hemosol is an integrated biopharmaceutical company developing
innovative life sustaining therapies, used initially for the treatment of acute
anemia. The Company's immediate focus is on the development and successful
commercialization of HEMOLINK.

HEMOLINK is a highly purified human-derived oxygen
therapeutic, designed to deliver oxygen immediately, effectively and safely to
the body's tissues and organs. Potential benefits of HEMOLINK therapy include:

- immediate efficient oxygen delivery to vital organs and
tissues;

- universal compatibility with all blood types;

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- greater assurance of safety from viral and bacterial
contamination;

- a reduced risk of allergic or immune reaction compared to
donor RBCs; and

- an extended shelf-life of approximately 30 months compared to
42 days for donor RBCs.

Hemosol believes that these potential benefits will provide
the medical community and the public with new ways to sustain life, and avoid
the effects of acute anemia while avoiding or reducing patient exposure to donor
blood.

BACKGROUND

Hemoglobin is a protein found in RBCs - the active carrier of
oxygen from the lungs to the body's tissues. This delivery of oxygen is
essential to sustain life. Anemia is a clinical condition experienced by
individuals with low hemoglobin levels. Anemia results from the loss of
circulating RBCs and can be chronic (long-term) or acute (short-term). Acute
anemia can either be of surgical origin, when blood is lost during surgery, or
of medical origin, when normal red blood cell production is interrupted either
by a disease or its treatment. Acute anemia is a serious clinical situation,
particularly when the hemoglobin deficiency is profound or if the patient is
medically compromised. Donor red blood cell transfusion is currently the only
accessible treatment option to attempt to regain adequate oxygen delivery for
most patients suffering from acute anemia.

Current transfusion practice with donor RBCs is associated
with several areas of concern and is subject to limitations. These include:

- DIMINISHED OXYGEN DELIVERY CAPACITY OF DONOR RBCS. The ability
of donor RBCs to offload oxygen efficiently begins to
deteriorate immediately upon collection. The longer donor RBCs
are stored, the greater this deterioration and the longer it
takes donor RBCs to regain maximum oxygen offloading
capability. Donor RBCs that have been stored for more than 14
days are often viewed as having seriously impaired value as a
therapy for acute anemia.

- RISK OF BLOOD TYPE MISMATCH REACTION. The membranes of RBCs
contain molecules that determine blood type. Before blood can
be given to a patient, it must be grouped and cross-matched to
ensure it is of the correct type. Cross-matching refers to the
matching of donor whole blood to the recipient's blood type.
If not matched and typed correctly, a unit of donor blood can
cause a serious and sometimes fatal reaction in the recipient.
Cross-matching is a labor-intensive and time-consuming process
susceptible to human error.

- POTENTIAL ADVERSE IMMUNE REACTIONS. Red blood cells or other
cells present in a transfusion of donor blood can suppress a
recipient's immune system, resulting in an increased risk of
post-surgical infection. In addition, donor blood transfusions
can result in the development of antibodies that may make
cross-matching more difficult or may result in immune
reactions. Patients frequently receive blood from several
different donors during a surgical procedure, increasing the
chance of such immune reactions.

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- RISK OF TRANSMISSION OF INFECTIOUS DISEASES. Transmission of
blood-borne infectious diseases has historically been a
concern with donor RBCs. Although improved testing and
screening methods have significantly reduced the risk of
transmission of infectious agents, such as HIV and hepatitis,
there is currently no 100% effective method for detecting
blood-borne diseases or for sterilizing donor blood. As a
result, the risk of disease transmission from donor blood is
an ongoing concern to physicians and patients.

- LIMITED STORAGE AND BURDENSOME INVENTORY MANAGEMENT. Current
transfusion standards require donor blood to be stored under
refrigerated conditions for not more than 42 days. At room
temperature, the shelf life of RBCs is less than 24 hours.
Donor RBCs must also be administered to the patient within two
hours after being removed from refrigeration. Given its
limited storage life, it is not practical to stockpile large
supplies of donor blood. Although freezing can extend the
storage life of RBCs, the freezing and thawing process
requires chemical treatment of these cells, which reduces
their efficacy after transfusion. In addition, all hospitals
impose strict administrative and procedural regulations on
donor blood, including:

- each individual unit must be carefully
tracked from the blood bank to the point of
transfusion;

- each unit of blood transfused requires
confirmation, usually from two nurses, that
the unit is given to the correct patient;
and

- the recipient must be monitored by a nurse,
both during transfusion and for a period of
time after each transfusion.

As a result of these factors, hospitals must devote
significant human and financial resources to managing their
inventory of donor blood.

- INCREASINGLY FREQUENT BLOOD SUPPLY SHORTAGES. The demand for
donor blood has been steadily increasing as a result of an
aging population and an increase in the number of
blood-intensive procedures, such as organ transplants. In
contrast, the overall supply of donor blood has been steadily
decreasing due to a declining donor base and more stringent
donor screening. Although the National Blood Data Resource
Centre has indicated that the demand for donor blood has been
increasing by approximately 1% annually, the supply of donor
blood in North America has been declining since 1992,
effectively narrowing the margin of surplus blood and creating
supply shortage concerns. Statements by the American Red Cross
indicate that local and regional shortages of donor blood are
becoming increasingly common.

Hemosol believes that the availability of a hemoglobin-based
product designed to act as an oxygen carrier that would address and alleviate
these concerns would find immediate medical application and commercial demand.

THE HEMOSOL SOLUTION: HEMOLINK

Hemosol has achieved significant progress towards developing a
commercially viable life sustaining oxygen therapeutic called HEMOLINK. The
development efforts for HEMOLINK have concentrated on two basic technologies:
(i) purifying the hemoglobin extracted from human RBCs to remove contaminating
material; and (ii) cross-linking and polymerizing the hemoglobin in a stable
form to provide oxygen-carrying properties.

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HEMOLINK is created through a series of proprietary
purification processes that separate the hemoglobin from RBCs, significantly
reducing the risk of viral contamination compared to a unit of donor RBCs.
Hemosol currently obtains hemoglobin from fully tested, outdated or fresh human
RBCs, which are then washed to remove plasma and other residual blood
components. The RBCs are broken apart to release the hemoglobin, which is then
extensively purified. The purification process includes steps which have been
demonstrated to destroy or remove infectious agents, such as blood-borne viruses
and bacteria that may have eluded extensive testing at the collection site.

In its natural environment within the red blood cell,
hemoglobin alternates between two molecular shapes, permitting oxygen to be
bound in the lungs and released in peripheral circulation. For cell-free
hemoglobin to be effective as an oxygen carrier, it must be modified and
chemically stabilized. Hemosol chemically modifies the highly purified
hemoglobin through a process called cross-linking, using a reagent prepared from
raffinose, a sugar molecule. This reagent forms linkages between the hemoglobin
molecules to produce hemoglobin polymers. This process creates stable links both
within and between the hemoglobin molecules, allowing for efficient oxygen
delivery, prolonged circulation time and extended shelf-life. The initial
technology relating to cross-linking evolved from basic scientific research
conducted in the early 1980s at Canada's Department of National Defence, which
has licensed the technology exclusively to Hemosol. The final product is
natural-sourced and ultra-purified, free from elements of the red cell membrane
as well as from other blood components, and can be used regardless of blood
type.

HEMOLINK APPLICATIONS

Oxygen therapeutics were initially projected to find clinical
application in conditions where RBCs are currently used. However, these products
are also optimally suited to sustaining life in clinical conditions where the
use of RBCs can be either ineffective or inappropriate.

Scheduled surgery constitutes the most appropriate clinical
model to evaluate hemoglobin replacement products in a controlled fashion and
provide data directly applicable in the development of trials for other
situations of acute hemoglobin deficiency. Potential applications for oxygen
therapeutics include the following:

- SCHEDULED SURGERY. Routine surgical procedures requiring
transfusion of blood donated by another individual carry a
small risk of infection as well as the risk of mismatched
transfusions and reactions to other components present in
RBCs. Also, donor RBCs are not always available when needed.
Scheduled surgeries are sometimes postponed because there is
no supply of a specific type of donor RBCs. For these reasons,
a safe, universally compatible hemoglobin replacement product
is an attractive alternative to donor blood during scheduled
surgery.

- ACUTE ANEMIA. For anemic patients who require an exogenous
source of erythropoietin to stimulate the production of RBCs,
hemoglobin replacement products may play an important role.
Erythropoietin is used to treat anemia caused by renal
insufficiency or surgery. Erythropoietin activates the
production of red cells over a 10 to 14 day period. Before the
benefits of erythropoietin are realized, HEMOLINK could fill
an important clinical need by providing a source of exogenous,
highly purified and affective hemoglobin until the body's
natural process of red blood cell

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production, stimulated by erythropoietin, is producing mature
red cells at adequate levels in the circulation.

- ISCHEMIC RESCUE. Ischemia refers to inadequate blood flow to a
tissue or organ, often caused by vessel blockage, leading to
oxygen deprivation. Ischemic rescue refers to overcoming the
damaging ischemic effects through restoration of tissue
perfusion, permitting restoration of oxygen delivery (e.g.,
with an oxygen carrier small enough to bypass a vessel
blockage). In various clinical situations of ischemia such as
myocardial infarction, stroke or in sickle cell anemia
patients, hemoglobin-based oxygen carriers may be able to
provide oxygen to the affected tissues due to their small
size. The circulating hemoglobin-based oxygen carrier may be
able to bypass the blockage and thus reduce the amount of
oxygen-deprived tissue.

CLINICAL TRIALS

GENERAL

In general, the development of products such as HEMOLINK
commences with discovery research followed by pre-clinical studies. Based on the
data generated in pre-clinical studies, applications are made to regulatory
authorities to conduct clinical trials. Clinical trials are normally conducted
in three sequential phases. Initially, Phase I clinical trials are conducted on
humans, using small doses and a limited number of healthy volunteers, to assess
the safety of a product. Upon successful completion of Phase I clinical trials,
Phase II clinical trials are conducted in human patients to further assess the
safety and also the efficacy of a product. Upon successful completion of Phase
II clinical trials, Phase III clinical trials are conducted. Phase III clinical
trials are comprehensive studies in human patients to assess the safety,
efficacy and drug interactions of a product.

After the satisfactory completion of the clinical trial
process, a new drug submission is submitted to the health regulators in the
U.S., Europe or other jurisdictions where marketing approval is sought.
Following review of these license applications, each regulator will inspect or
otherwise assess an applicant's manufacturing and testing facilities and, if
everything is deemed satisfactory, that regulator will license the facilities.

To date, Hemosol has completed eight clinical trials of
HEMOLINK:

- three in cardiovascular surgery, including a pivotal Phase III
clinical trial in Canada and the U.K. in CABG surgery;

- three in orthopedic surgery;

- one in anemia; and

- one in healthy volunteers.

PHASE I CLINICAL TRIALS

In February 1995, Hemosol received approval from Health Canada
to initiate a Phase I clinical trial for HEMOLINK in Canada. Hemosol completed
this initial clinical trial in October 1995. Hemosol gave 33 healthy volunteers
doses of up to 600 milligrams of HEMOLINK per kilogram of body weight to assess
dose tolerance, clinical pharmacology and to identify any associated adverse
reactions. Summaries of clinical data provided to regulatory authorities in both
Canada and the U.S. indicated that HEMOLINK caused no clinically significant
cardiovascular, pulmonary or renal effects, although individuals that received
more

-13-

than 500 milligrams of HEMOLINK per kilogram of body weight experienced moderate
gastro-intestinal discomfort. Some of Hemosol's competitors reported similar
gastro-intestinal effects at much lower doses in Phase I clinical trials they
had conducted.

Based on the Phase I clinical trial results and knowledge that
others in the field had noted similar gastro-intestinal effects, Hemosol
undertook to evaluate the cause of these effects, methods of controlling them
and to confirm that HEMOLINK could be formulated with a shelf-life beyond 12
months at normal refrigerator temperature of 4 degrees C. Hemosol determined
that common surgical medications would adequately control gastro-intestinal
discomfort and that HEMOLINK could be formulated with a shelf-life beyond 12
months at normal refrigerator temperature of 4 degrees C.

PHASE II CLINICAL TRIALS

In October 1996, Hemosol filed an application with Health
Canada for a Phase II orthopedic clinical trial for HEMOLINK. Hemosol obtained
approval from Health Canada in February 1997 to proceed with this Phase II
clinical trial which commenced in May 1997 at The Toronto General Hospital.
Originally this trial was restricted to patients under 65 years old who were
undergoing hip replacement surgery. During 1997, Hemosol obtained regulatory
approval to increase the number of trial sites, to use HEMOLINK in both hip and
knee replacement surgery and to increase the age of the patient population to 75
years. The trial was completed in June 1998 and involved a total of 16 patients
who underwent either primary hip or knee replacement surgery. Of these 16
patients, 12 patients received HEMOLINK and the remaining four patients received
other treatment as a comparator to HEMOLINK. Patients were given escalated doses
of up to 50 grams (500 milliliters) to test the product's efficacy and safety.
These doses were higher than those given in the Phase I clinical trials. No
clinically limiting side effects were observed throughout the Phase II clinical
trial. None of the 12 patients who received HEMOLINK required donated blood.

In November 1996, Hemosol's scientists showed that HEMOLINK
substantially enhances the in vitro growth of RBCs induced by erythropoietin. In
1997, Hemosol conducted an additional Phase II clinical trial in Canada for
HEMOLINK in conjunction with erythropoietin in patients with chronic anemia
associated with kidney failure. In April 1998, Hemosol received clearance from
the FDA to expand this Phase II clinical trial into the U.S. In November 1998,
the enrolment target of 29 patients for the trial in Canada and the U.S. was
achieved. This trial provided evidence of HEMOLINK's safety in multiple doses in
this patient population. Data obtained from this Phase II clinical trial has
encouraged Hemosol to conduct additional trials in this and other acute anemias,
such as those associated with the treatment of cancer. Hemosol initiated a Phase
II clinical trial for HEMOLINK in the U.S. in the fourth quarter of 2000 for
acute anemia in cancer patients undergoing aggressive chemotherapy.

In April 1998, the Medicines Control Agency, the government
agency in the U.K. that regulates public health and safety, approved
commencement of a Phase II clinical trial in the U.K. using HEMOLINK as an
alternative to blood transfusion in patients undergoing orthopedic surgery. This
trial initially involved a total of 18 patients who underwent either hip or knee
replacement surgery. Of these 18 patients, 12 were given escalated doses of up
to 50 grams (500 milliliters) to test the product's efficacy and safety. This
trial was completed in October 1998. No clinically limiting side effects were
observed throughout this trial. Hemosol subsequently obtained approval to amend
the original protocol and extend the study with an additional 22

-14-

patients treated at higher doses over longer periods of time, as well as to
include other orthopedic surgeries such as spinal surgery. Hemosol submitted the
amended trial protocol for approval to the FDA in January 1999. The amended
trial was conducted in the U.K. and the U.S., involved a total of 40 patients
and was completed in July 1999. No clinically limiting side effects were
observed throughout the trial.

In June 1998, Hemosol received approval from Health Canada and
the Medicines Control Agency to start an additional Phase II clinical trial in
Canada and the U.K. for HEMOLINK in patients undergoing CABG surgery. Hemosol
completed the Canada/U.K. trial in March 1999. No clinically limiting side
effects were observed throughout this trial. Half of the patients in this trial
received up to 100 grams (1000 ml) of HEMOLINK, while the other half received up
to 75 grams (750 milliliters) of pentastarch, an established volume expander.
Ninety percent of patients that received HEMOLINK avoided the use of donor
blood, compared with 53% of the control patients, a statistically significant
result. These efficacy findings aided in the design and choice of the dose used
in the Phase III clinical program.

In August 1998, Hemosol received clearance from the FDA to
undertake a similar Phase II clinical trial in the U.S. for HEMOLINK in patients
undergoing CABG surgery. This trial evaluated increasing doses of HEMOLINK in
the 250-750 ml range. Hemosol completed the U.S. trial in December 1999 and has
subsequently evaluated the data and completed a final report. Based on the
review of the data obtained from this trial, Hemosol believes that this trial
demonstrated that HEMOLINK was safe in this patient population. No clinically
limiting side effects were observed and the use of HEMOLINK was effective at
reducing the need for donor blood in the patient population that received 75
grams (750 ml) of hemoglobin.

Hemosol is currently conducting two additional Phase II
clinical trials in the U.S., one in primary CABG surgery and a second in high
blood loss orthopedic surgery. In March 2003, the Company voluntarily suspended
enrolment in both of these Phase II clinical trials pending a full review of the
safety data from the Phase II CABG trial. Further discussions with the relevant
regulatory agencies will be required prior to re-starting any of the Company's
Phase II trial activities. See "Recent Developments"

PHASE III CLINICAL TRIALS

In February 1999, Hemosol filed applications to conduct Phase
III clinical trials for HEMOLINK in Canada, the U.S. and the U.K. Hemosol was
permitted to commence a Phase III clinical trial for HEMOLINK in patients
undergoing CABG surgery in the UK in March 1999 and in Canada in April 1999.
Hemosol completed the first Phase III clinical trial for patient treatment in
CABG surgery at sites in Canada and the U.K. in June 2000. A total of 299
patients were treated in this trial.

The results of this pivotal Phase III clinical trial
demonstrated that HEMOLINK was highly effective in reducing the need for a
transfusion of donor RBCs in patients undergoing routine CABG surgery. In an
efficacy analysis conducted in a subset of 288 patients, results showed that 27%
of the control group received a transfusion of donor RBCs compared with only 17%
of the HEMOLINK group where 83% of patients avoided transfusion of donor RBCs.
This was a statistically significant difference. Furthermore, in the HEMOLINK
treated group:

- the amount of donor blood used in patients requiring
transfusion was significantly reduced;

-15-

- time to first transfusion of donor RBCs was significantly
longer; and

- significantly less other blood products were used, including
plasma and platelets.

REGULATORY MATTERS

The production and marketing of human therapeutic products are
governed by a variety of laws in Canada, the U.S., Europe and other countries.
These laws increase the difficulty, time and costs involved in commercializing
such products. They mandate licensing of manufacturing and testing facilities,
rigorous pre-clinical and clinical testing and government review and approval of
new products prior to release for commercial distribution and sale. They also
govern such matters as the labeling, storage, record keeping, pricing,
advertising and promotion of new products. Compliance with these requirements
involves substantial expenditures.

New product applications generally include complete
descriptions of the manufacturing and testing facilities, the production
processes, including filling and packaging, the tests performed on the product,
all the clinical and animal data collected with the appropriate interpretations
and summaries, the proposed labeling and package insert and any other relevant
information with respect to the product and its use. The results of the testing
must establish the purity, safety and efficacy of the product for each intended
use. Following review of the license applications, manufacturing and testing
facilities undergo on-site inspections and, if everything is deemed
satisfactory, a license is issued. Oftentimes, regulators require additional
commitments from the applicant, such as additional trials or other testing of
the product, as a condition to issuing a license.

The manufacture, marketing and sale of approved products is
also subject to ongoing government regulation, including inspection and market
surveillance for compliance with Good Manufacturing Practice Regulations and
other requirements. Health regulators could withdraw a previously approved
product from the market upon receipt of newly discovered information or require
the license holder to conduct additional, and potentially expensive, studies in
areas outside approved indications. Unanticipated changes in existing
regulations or the adoption of new regulations could affect the manufacture and
marketing of approved products as well.

In July 2000, based on the successful results of the Phase III
clinical trial in Canada and the U.K., Hemosol submitted a new drug submission
to Health Canada. This application sought approval to market HEMOLINK for use in
scheduled surgery, such as CABG, to avoid or reduce the use of donor RBCs. On
August 25, 2000, Health Canada granted priority review status to the HEMOLINK
new drug submission. Priority review status is granted to a small number of
potentially important new products. The target review period of 180 days for
priority products is significantly shorter than the usual review period. Hemosol
was advised by Health Canada that its priority review period commenced on
September 22, 2000. On April 25, 2001, Hemosol announced that Health Canada had
completed its first review of its new drug submission. Health Canada provided
Hemosol with a comprehensive set of questions relating to the new drug
submission. The Company responded to these questions and, on March 20, 2002,
Health Canada advised Hemosol that its New Drug Submission ("NDS") for HEMOLINK
could not be approved for marketing in Canada at that time and that Health
Canada will require additional data in a re-filed NDS. The Company continues to
assess this situation and will

-16-

determine its Canadian regulatory strategy once additional data is available
including results from its two suspended U.S. Phase II trials.

In February 2001, Hemosol submitted an application to the
Medicines Control Agency ("MCA"), the regulatory authority in the U.K., for
marketing approval of HEMOLINK in the U.K. Hemosol intends to follow the Mutual
Recognition Procedure registration route for HEMOLINK in the rest of Europe,
with the U.K. as the reference member state. Under this procedure, the reference
member state is responsible for the primary review of the marketing application.
Once the review is complete and if the HEMOLINK application is judged to be
satisfactory and receives approval in the U.K., other selected European
countries will be asked to recognize the approval. By May 2001, the MCA had
completed its review of the marketing application and provided a series of
questions for Hemosol. A complete response by the Company to the MCA will not be
possible until additional clinical trial data is available.

On August 13, 2001 Hemosol received verbal notification from
the FDA of changes that the FDA wanted made to its Phase III clinical trial
protocol for HEMOLINK to strengthen the efficacy analysis for inclusion in a
Biologic License Application. On November 21, 2001, following discussions with
the FDA and making changes to the clinical trial protocol to address the FDA's
concerns, Hemosol received clearance from the FDA to begin a Phase II clinical
trial with HEMOLINKin primary CABG surgery. Under the revised protocol, this
trial was to include 180 patients undergoing primary CABG surgery at
approximately 40 centres in the U.S. and the U.K.

On January 31, 2002 the FDA notified Hemosol that it could
proceed with a second Phase II trial in "re-do" CABG surgery. This two-armed
study planned to investigate the efficacy of HEMOLINK in approximately 140
patients at approximately 40 centres in the U.S.

In November 2002, Hemosol received clearance from the FDA to
begin a Phase II clinical trial to assess the efficacy and safety of HEMOLINK in
patients undergoing high blood loss orthopedic surgery. Based on prior
discussions with the FDA, Hemosol expected that the primary CABG surgery trial,
along with the orthopedic surgery trial would form the basis for the initiation
of its Phase III program, pivotal for approval to market HEMOLINK in the U.S.
The completion of the "re-do" CABG surgery trial was not deemed necessary by the
FDA in order to proceed to Phase III.

In February 2003, Hemosol received clearance to proceed with a
study to evaluate the safety and efficacy of HEMOLINK in patients with severe
acute anemia (life threatening blood loss) for whom red cell transfusion is not
a therapeutic option (patients cannot or will not accept red cell transfusion).

In April 2003, , following the receipt by the Company of
information from the DSMB for the Phase II CABG study, Hemosol elected to close
enrolment of the study at 152 patients, slightly lower than the originally
planned enrolment of 180 patients. Enrolment was suspended in the trial
following the DSMB's observation of an imbalance in the incidence of certain
adverse events between the HEMOLINK and control groups. Although the DSMB had
cleared the trial to continue following the third and final interim safety
review, the DSMB's ongoing review of data indicated the potential for an
increase in certain cardiac adverse events in the HEMOLINK group. This
observation from the cardiac trial interim data may be due to any number of
reasons, including variables in the patient population. As a precaution the
Company also voluntarily suspended enrolment in its Phase II clinical study
involving the use of

-17-

HEMOLINK in patients undergoing orthopedic surgery. Once Hemosol has completed a
full review of the safety data from the Phase II CABG study, further discussions
with the relevant regulatory agencies will be required prior to re-starting any
Phase II studies and proceeding with the sever acute anemia trial.

MARKET

The cost to hospitals associated with the transfusion of a
unit of RBCs has been estimated to exceed US$500 per unit, as more stringent
safety measures are being implemented to provide the best available screening,
testing and handling methodologies.

It is estimated that approximately US$4.5 billion is spent
annually in North America to treat acute anemia. Globally, the acquisition cost
alone for RBCs to manage acute anemia is estimated to be as high as US$15
billion. However, oxygen therapeutics have potential application beyond where
RBCs are currently employed. Specifically they may provide enhanced outcomes in
other medical situations where therapeutically enhanced oxygen delivery may be
beneficial to patients, such as in cancer chemo or radiation therapy or
situations of life threatening blood loss.

It is estimated that approximately 60% of all donor RBC
transfusions are used to manage acute anemia due to surgery. According to a 1996
publication, approximately 600,000 Americans and 250,000 Europeans undergo CABG
surgery each year, and nearly half of these patients already receive acute
anemia therapy under current practice. However, all such patients are at risk of
experiencing acute anemia due to their surgery, and the use of HEMOLINK may
allow these patients to avoid the consequences of reduced oxygen delivery during
the pre-operative period. Hemosol's internal forecasts, based on the annual
incidence of cardiac surgery in North America alone, indicate that the overall
potential for HEMOLINK is approximately 1.5 million 25-gram therapeutic doses
per year, assuming all cardiac surgery patients receive HEMOLINK to treat or
avoid acute anemia.

COMPETING PRODUCTS

Hemoglobin-based oxygen carriers are part of a larger class of
products known as oxygen therapeutics. Oxygen therapeutic products currently
fall into two major categories: approaches based on hemoglobin (human or bovine)
and those based on perfluorocarbon technology. In the case of the
hemoglobin-based oxygen carriers ("HBOCs"), hemoglobin properties are modified
by cross-linking, and by polymerization of the modified hemoglobin itself. HBOCs
bind and release oxygen in a manner similar to that of endogenous hemoglobin
contained within RBCs. In contrast, perfluorocarbon oxygen carriers are
water-soluble organic liquids that dissolve oxygen (as well as other gases) as a
means of transporting this life-sustaining gas to tissues.

HEMOLINK is a hemoglobin replacement product which falls into
the class of human-derived HBOCs. It was the first HBOC to have successfully
completed and fully reported on a Phase III clinical trial.

Clinical studies by Hemosol's competitors using both human and
bovine-derived HBOCs manufactured by Northfield Laboratories Inc. and Biopure
Corporation, respectively, as well as at least one perfluorocarbon, are underway
in various stages for elective surgical indications. Indications under
evaluation by Hemosol's competitors include cardiovascular surgery (CABG surgery
and aortic aneurysm repair), orthopedic surgery (hip, knee and spine),

-18-

and general surgery (including digestive and urinary tract procedures). At the
time of filing of this AIF, Biopure Corporation has an application being
reviewed by the FDA for approval to market its HBOC in the U.S. for use in adult
patients undergoing elective orthopedic surgery.. Since the Company believes
that demand for oxygen therapeutics will exceed the ability of the industry to
manufacture these products, production capacity is expected to be a critical
success factor in determining respective market shares. Among the HBOC
competitors, Hemosol believes that during the important launch phase, it will
have a strong manufacturing position and the attendant ability to supply product
to meet market demand due to construction of its new commercial production
facility in Mississauga, Ontario.

RAW MATERIALS

The purification and cross-linking technology Hemosol uses
enables it to process hemoglobin derived from humans. High-quality raw materials
are readily available. Hemosol's current source is outdated RBCs collected from
various FDA-approved collection centres in the U.S. As demand for HBOCs grows,
Hemosol expects that the blood system will evolve to make additional RBCs
available for manufacture. Hemosol believes that it will be in the interest of
suppliers to make RBCs available to companies like Hemosol.

Hemosol also continues to source RBCs through the Pennsylvania
Plasma Company ("Pennsylvania"), a wholly owned subsidiary of BioLifeSciences, a
Division of Baxter Pharmaceuticals. Hemosol has established agreements with a
number of FDA-approved collectors of RBCs and Pennsylvania administers the
collection activity of RBCs for use in the production of HEMOLINK on behalf of
the Company. Pennsylvania is the Company's exclusive collection agent for RBCs.
The cost of a single unit of RBCs is approximately $25 and the Company does not
foresee any difficulty with respect to the procurement of sufficient RBCs to
meet its commercial goals.

INTELLECTUAL PROPERTY

Patent, trademarks, trade-secrets, technology, know-how and
other proprietary rights are important to Hemosol's business. Hemosol actively
seeks patent protection in the U.S., Canada and abroad, and closely monitors
patent activities related to its business areas. Hemosol has an exclusive
license to three issued U.S. patents and owns four additional U.S. patents
covering the hemoglobin purification and crosslinking technologies used in the
manufacturing of its hemoglobin-based oxygen carrier named HEMOLINK. Hemosol has
full patent applications covering 12 patent families pertaining to potential new
products that are based on technologies covering hemoglobin-based oxygen
carriers, hemoglobin-based drug delivery and cell expansion. All of Hemosol's
current employees have entered into confidentiality and intellectual property
assignment agreements. In addition, Hemosol has trademark applications or
registration for HEMOLINK in Canada, U.S. and other countries. Hemosol is
pursuing and/or has obtained trademark registration in Canada, the U.S. and
selected countries for HEMOSOL, Hemosol's H logo, and/or other trademarks
related to the HEMOLINK product and Hemosol's pipeline technologies.

LICENSED TECHNOLOGY

Under an amended and restated licence agreement dated as of
March 1, 1999 between Hemosol and the Department of National Defence, Hemosol
licenses an invention which enables the preparation of a hemoglobin-based oxygen
carrier using a process of

-19-

pasteurization of a hemoglobin solution in the carbonmonoxylated form (i.e.,
reacted with carbon monoxide) and cross-linking hemoglobin using oxidized
oligosaccharides, including oxidized raffinose (o-raffinose). This licence is
exclusive to Hemosol and gives Hemosol exclusive rights to use the technologies
in 25 countries. Under this licence, Hemosol is required to pay to the Canadian
government royalties based upon net sales of products produced using the
licensed technology, as well as a percentage of annual consideration received
for sublicensing this technology. Hemosol is required to pay in advance minimum
annual royalties to the Canadian government equal to the greater of $10,000 and
20% of the royalty payable during the immediately preceding year. Hemosol has
the right to commute future royalties payable to the Canadian government by
paying the greater of $4 million or an amount equal to five times the previous
year's royalties. Hemosol believes that this licence is presently in good
standing. All patents in this series are now issued.

In October 2000, Hemosol purchased from Baxter Biotech
S.a.r.l., a subsidiary of Baxter Healthcare Corporation, certain intellectual
property related to drug delivery technology. Pursuant to the purchase
agreement, Hemosol must make cash payments to Baxter over a three-year period
and pay Baxter a 4% royalty on sales of products incorporating the intellectual
property purchased pursuant to the agreement.

PROPRIETARY TECHNOLOGY

Hemosol filed a patent application entitled "Selective
Crosslinking of Hemoglobin by Oxidized Ring-Opened Saccharides", initially in
the U.S. in March 1993. Subsequently, Hemosol extended this application to cover
Canada, Europe, Mexico, Australia, New Zealand, South Korea, Japan and China.
The patent has been issued in all countries where the application was filed.
These patents cover methods to increase crosslinking specificity with oxidized
di- and tri-saccharides, including o-raffinose. In addition, Hemosol is pursuing
protection of various innovations to the manufacturing process and other
inventions related to its core activities.

In June 1998, a U.S. patent was issued providing protection
for the HEMOLINK product itself, a chemically modified, cross-linked hemoglobin
composition which is useful as an oxygen carrier in the treatment of anemia and
in transfusion applications. This patent describes chemically-linked hemoglobin
molecules having molecular weights between 64,000 and less than 600,000 daltons
while avoiding very large molecules.

Hemosol has filed patent applications for its displacement
chromatography process in the U.S., Europe, Mexico, Australia, South Korea,
South Africa, Israel, China, Japan, Korea, Czech Republic, Hungary, Poland,
Russian Federation, Slovakia and Ukraine. Hemosol filed a continuation in-part
application in the U.S. to cover later developments in the technology. The
patent has been issued in all these countries except Japan where it is still
pending. Two U.S. patents have also been issued. The "Displacement
Chromatography Process" patents cover the process by which Hemosol obtains
extensively purified hemoglobin prior to cross-linking as well as other
potential applications for the technology.

Hemosol constantly monitors relevant patents applied for or
issued to its competitors. Upon locating a patent or patent application of a
third party which appears to Hemosol to pose a threat to its operations or
proposed operations, Hemosol takes steps to evaluate the significance of the
threat, including in certain cases, obtaining outside counsel's opinions. In
several instances, Hemosol has entered and prosecuted formal opposition to the

-20-

grant of European patents to potential competitors, in some instances in concert
with other companies in the industry. In 2002, Hemosol was an active opponent to
four European patents. One case that was under appeal by the patentee was fully
resolved to Hemosol's satisfaction. Another case was scheduled for Hearing and
Hemosol filed additional arguments but, at the request of the patentee, the
Hearing was postponed to 2003. The other two cases are still pending and
activities are not expected before 2004. Hemosol has established an effective
mechanism of cooperation with international legal counsel to monitor and
evaluate European patents and patent applications. Hemosol will prepare and
prosecute other European patent oppositions as and when it believes they are
warranted.

OTHER PRODUCTS IN DEVELOPMENT

Hemosol has a rich and diverse pipeline of new product
candidates, several of which are now undergoing pre-clinical evaluation. These
product candidates have been developed using technologies that are based upon
the expertise of Hemosol scientists in protein bioconjugation and cell
expansion. HEMOLINKis one example of protein bioconjugation in which human
hemoglobin, a protein, has been stabilized and polymerized using o-raffinose, a
cross-linker. Other types of hemoglobin conjugates in development include
conjugates of hydroxyethyl starch, anti-oxidants, and therapeutic drugs.

As a means of establishing it own source of human hemoglobin,
Hemosol has been conducting discovery research in expanding human blood-forming
stem cells through cell culture. These efforts have lead to methods to induce an
established cell line to produce high levels of human hemoglobin, as well as the
development of a T cell therapy for the treatment of cancer.

Where appropriate, Hemosol has filed patent applications in
Canada, the U.S. and Europe for these technologies. Hemosol has also acquired
key patents to broaden its intellectual property protection in hemoglobin-based
drug delivery.

HIGH VOLUME BLOOD LOSS INDICATION

Hemosol is developing HRC 101 as a potential treatment for
high-volume and post-surgical blood loss. Invasive surgical procedures and
trauma can result in the loss of substantial amounts of blood, leading to acute
anemia and complications resulting from severely reduced blood pressure. The
current practice for treating high-volume blood loss often involves the infusion
of non-oxygen carrying volume expanders that, while restoring the patient's
blood volume, does not address the accompanying anemia and requirement for
tissue oxygenation.

HRC 101 is a proprietary high molecular weight conjugate
comprised of a chemically modified approved volume expander called hydroxyethyl
starch (HES) and purified human hemoglobin. HRC 101 is designed to combine the
volume-expansion capabilities of HES and the oxygen-delivery capabilities of
hemoglobin to restore and maintain blood volume and to provide extended oxygen
delivery to tissues. In 2002, Hemosol conducted extensive pre-clinical screening
of several proprietary formulations of HRC 101. Advances were also made in the
development of a commercially scaleable process.

-21-

ISCHEMIA-REPERFUSION INJURY INDICATION

HRC 102 is an HBOC developed by Hemosol scientists designed to
prevent oxidative stress while simultaneously providing necessary oxygen to
tissue. Oxidative stress is a serious cause of tissue damage resulting from the
rapid reoxygenation of tissue during certain surgical procedures and is
associated with pathological conditions and complications of organ
transplantation. This condition is often referred to as ischemia-reperfusion
injury. The oxidative stress results from the formation of reactive oxygen
species at the site of reoxygenation, resulting in tissue damage. However, such
reactive oxygen species may be effectively neutralized by anti-oxidants. HRC 102
is a proprietary conjugate of cross-linked hemoglobin and a powerful
anti-oxidant based on vitamin E. Unlike RBCs, which are not easily modified,
anti-oxidants may be readily attached to hemoglobin to create a product that
delivers oxygen while simultaneously locating anti-oxidants at sites of
oxidative stress. In 2002, a rapid in vitro assay was developed to characterize
the anti-oxidant activity of various HRC 102 formulations, and HRC 102 is now
poised for pre-clinical development to identify the most appropriate clinical
indication. Pre-clinical models have been identified for evaluation of the
anti-oxidant activity of HRC 102.

LIVER DISEASE INDICATIONS

Hemosol has developed a hemoglobin-based drug delivery
platform technology called HEPSELECT(TM). The HEPSELECT technology is based upon
the specific attachment of therapeutic drugs and diagnostic agents to hemoglobin
for selective delivery of such agents to the liver using the body's natural
pathway for hemoglobin clearance. The ability to selectively deliver drugs to
the liver may lead to improvement in the treatment of liver disease. For
example, anti-viral and anti-tumour drugs may be linked to hemoglobin and the
conjugates administered to patients as a treatment for hepatitis C and liver
cancer, respectively. The HEPSELECT technology offers the opportunity to improve
drug efficacy by targeting the drug to the liver, increasing drug stability and
reducing systemic drug toxicity. Targeted delivery to the liver combined with an
extended drug half-life may translate into improved dosing regimens and to the
more effective use of certain therapeutic drugs that may otherwise be unsuitable
for systemic administration.

In pre-clinical studies of viral hepatitis, a
hemoglobin-anti-viral drug conjugate (HRC 203) showed an improved therapeutic
index relative to the free drug, providing efficacy at a reduced dose compared
to administration of the free drug. These results support proof-of-concept for
HEPSELECT and suggest that this drug delivery platform can be used to improve
the therapeutic index of established drugs. Current development of HRC 203 is
focused on pre-clinical studies in additional models of hepatitis C infection
and on establishing the safety and efficacy of HRC 203.

HRC 204 is a conjugate of hemoglobin and an anti-cancer agent
for the treatment of primary liver cancer. HRC 204 has been synthesised and
characterised. Current activities are focused on pre-clinical evaluation in a
model of liver cancer.

HRC 201 is a conjugate of hemoglobin and a radioactive imaging
agent that may be used for diagnostic imaging and radiotherapy of primary liver
cancer. Pre-clinical imaging studies showed rapid uptake of and localisation of
HRC 201 in the liver, providing high fidelity images with low background
interference. Current development of HRC 201 is focused on

-22-

further pre-clinical imaging studies in order to optimize liver imaging and to
support proof-of-concept for the HEPSELECT drug delivery platform.

HEMOGLOBIN SOURCE

Hemosol is developing cell expansion technology in two main
areas. One program (HRC 301) is directed to the development of an alternative,
and more controlled, supply of human hemoglobin for Hemosol's hemoglobin-based
products. Such an alternative source of hemoglobin would be independent of the
existing blood collection and distribution system. Hemosol scientists have
developed cell culture methods to grow cells producing hemoglobin at levels more
than twice that of mature RBCs and at cell densities sufficient to support
scaled-up hemoglobin production for potential commercial extraction. The cell
culture-derived hemoglobin has been purified and cross-linked using Hemosol's
cross-linking technology to create a product with physical and functional
characteristics very similar to HEMOLINK.

CELL THERAPY

The second program in cell expansion at Hemosol is directed to
investigate specific factors controlling blood cell formation and expansion.
Work on growing blood-forming stem cells has lead to the development of
technology to expand human gamma delta (gamma delta) T cells (HRC 302), a rare T
cell with broad potential in the treatment of cancer and infectious diseases.
Hemosol scientists have succeeded in expanding highly purified populations of
(gamma delta) T cells from small samples of peripheral blood, permitting the
reinfusion of large numbers of the therapeutic cells back into patients. Hemosol
has received regulatory approval from Health Canada to conduct a Phase I
clinical trial in Canada using autologous, ex vivo expanded (gamma delta) T
cells in patients with chronic myelogenous leukemia. It is hoped that this form
of T cell therapy will help in eradicating residual disease in patients
undergoing autologous bone marrow transplantation who are intolerant of, or
refractory to, other forms of therapy. If effective, the (gamma delta) T cell
therapy should have application in many other forms of cancer, as well as in the
treatment of certain types of infection.

HUMAN RESOURCES

Hemosol has been successful in recruiting a cadre of
experienced research, development, manufacturing, quality assurance, quality
control, clinical administrative and regulatory personnel needed to advance
through clinical studies. As at December 31, 2002, Hemosol employed
approximately 150 employees. Hemosol also utilizes the services of several
consultants.

On April 7, 2003 Hemosol gave working notice to substantially
all of its employees. Following the provision of this working notice, Hemosol's
full time staff will be reduced to approximately 40 employees at the end of the
notice period. In the event that Hemosol resumes its clinical trial program
following its safety review of the DSMB's observations, Hemosol expects to
maintain and recruit the staff required for such purposes.

-23-

SALES AND MARKETING

Provided that a positive review of safety data is received
from the HLK 213 Phase II clinical trial, Hemosol intends to recruit and train a
specialty sales and marketing staff as required.

In October 2000, Hemosol entered into a memorandum of
understanding with Dompe Farmaceutici S.p.A., an Italian pharmaceutical company,
pursuant to which Hemosol agreed to negotiate exclusively with Dompe to form a
strategic alliance for the promotion, marketing, sale and distribution of
HEMOLINK in Southern and Eastern Europe. Formation of the strategic alliance
between Hemosol and Dompe is subject to negotiation and execution of definitive
agreements. The memorandum was amended during fiscal 2001 to extend the deadline
for finalization of definitive agreements. Hemosol anticipates that if these
agreements are finalized, Dompe will have exclusive marketing rights to HEMOLINK
in Italy, Spain, Portugal, Greece, Turkey, Poland, Hungary, Russia, Austria and
Switzerland. Pursuant to the memorandum of understanding, in November 2000,
Dompe invested $5 million in Hemosol by purchasing 333,333 common shares. In
addition, Hemosol granted Dompe a 16-month option to purchase an additional
222,222 common shares at $22.50 per share. This option has since expired.

PROPERTY, PLANTS AND EQUIPMENT

Hemosol's facilities are comprised of a leased facility near
Toronto's Pearson International Airport (the "Skyway facility") and the new
corporate headquarters and manufacturing facility in Mississauga, Ontario (the
"Meadowpine facility"). In aggregate, these facilities comprise approximately
150,000 square feet and house all of Hemosol's principal operations. Hemosol
also has a U.S. office in Parsippany, New Jersey, comprising approximately 4,000
square feet.

Hemosol has completed validation and scale-up of the Skyway
facility, which currently has an annual capacity of 25,000 units of HEMOLINK.

The construction of the Meadowpine facility was completed on
schedule. In December 2001, Hemosol moved its offices and laboratories to this
location. Installation of process equipment is complete and validation of this
facility began in early 2003 and is ongoing. The Meadowpine facility will have
initial production capacity of 300,000 units of HEMOLINK per year and further
potential for expanding production capacity to 600,000 units per year. Hemosol
expects that the total cost of constructing, commissioning and validating this
facility will be approximately $90 million, of which Hemosol had expended
approximately $85.8 million as of December 31, 2002.

ENVIRONMENTAL MATTERS

Hemosol's operations are subject to Canadian federal,
provincial and municipal environmental laws. Hemosol believes that it is
currently in material compliance with all applicable environmental laws.

Licensed contractors collect Hemosol's biomedical waste solids
and liquid chemical waste for disposal. Hemosol discharges process waste waters
containing trace blood components as effluent to municipal sanitary sewers.
Waste water samples taken by the

-24-

municipality confirm that the effluent discharge is within the limits prescribed
by the municipal sewer use by-law.

Hemosol also uses small quantities of radioisotopes in
research activities. The use and management of these radioisotopes is authorized
and governed by a federal license granted to Hemosol.

Hemosol has adopted an environmental policy that commits it to
compliance with applicable environmental laws. Hemosol has established an
environmental management system to manage, control and restrict the potential
environmental impact of its operations and to ensure continued compliance with
applicable environmental laws.

CREDIT FACILITY

On October 25, 2002 The Bank of Nova Scotia agreed to provide
a $20 million term loan to Hemosol (the "Loan"). The Loan has a term of 18
months and is extendible to 30 months. Hemosol's obligations in connection with
the Loan are secured by a fixed and floating first charge in favour of the Bank
of Nova Scotia over all of Hemosol's real and personal property assets. The Loan
replaces Hemosol's undrawn $35 million senior credit facility which had a Cdn.
$15 million cash collateral requirement. Terms of the Loan include less
restrictive covenants and interest at the reduced rate of prime plus 2% per
annum compared to prime plus 3% per annum for the unused senior credit facility.
As a result, Hemosol formally terminated the senior credit facility on November
22, 2002. In addition, an unused $12.5 million subordinate credit facility was
also formally terminated on November 22, 2002. Total deferred debt issue costs
of approximately $6.5 million were written off during the fiscal year as a
result of the cancellation of the $35 million senior and $12.5 million
subordinate credit facilities. These costs represented both cash and non cash
items.

On October 22, 2002, Hemosol entered into a memorandum of
understanding with MDS Inc., pursuant to which MDS agreed to guarantee the Loan.
Under this guarantee, the Bank of Nova Scotia agreed to request payment from MDS
prior to exercising its remedies under the security granted by Hemosol and MDS
will be subrogated to and take an assignment of the rights and remedies of the
Bank of Nova Scotia under the Loan and the security granted by Hemosol in
connection with the Loan.

In consideration of providing the guarantee, Hemosol issued
6,000,000 warrants to MDS. Each warrant entitles MDS to subscribe for and
purchase one common share of Hemosol at a price of $1.00. 5,000,000 warrants are
exercisable, in whole or in part, from and after the date upon which the
guarantee was delivered by MDS (the "Guarantee Date ") and prior to the later of
the third anniversary of the Guarantee Date and, if the Loan is not repaid
within 15 months of the Guarantee Date (the "Initial Term"), 12 months following
the date upon which the Loan is repaid in full.

For each whole or part month that the Loan remains outstanding
beyond the Initial Term (to a maximum of three additional months) (each such
whole or part month being an "Extension Month"), MDS may exercise warrants
entitling it to subscribe for 333,333 common shares (333,334 in the final
Extension Month, to reach a potential total of 1,000,000) at any time and from
time to time during the period from and after the first day of the subject
Extension Month and prior to the third anniversary of such date.

-25-

If the 5,000,000 warrants which are immediately exercisable
were to be exercised, MDS would directly or indirectly control 12,991,203 Common
shares (28.2% of Hemosol's issued and outstanding common shares). If the Loan is
not repaid by Hemosol within the first 15 months and the Loan remains
outstanding for an additional three months, up to 1,000,000 of the issued
warrants would become exercisable. If all of these warrants become exercisable
and are exercised by MDS, MDS would hold 13,991,203 common shares (30.3% of
Hemosol's issued and outstanding common shares).

The memorandum of understanding contemplates that, in the
event that regulatory approval is obtained to issue an additional 4,000,000
Warrants (the "Additional Warrants") to MDS on a date which is at least six
months from the Guarantee Date to entitle MDS to subscribe for and purchase up
to 4,000,000 Common Shares at a price of Cdn. $1.00 per Common Share, the Loan
may be extended for up to 12 additional months (to a maximum of 30 months in the
aggregate). In such case, the Company will issue 4,000,000 Additional Warrants
to MDS following receipt of regulatory approval to do so. For each whole or part
month that the Loan remains outstanding beyond 18 months (to a maximum of 12
additional months) (each such whole or part month being an "Additional Extension
Month"), MDS may exercise Additional Warrants entitling it to subscribe for
333,333 Common Shares (333,337 in the final Additional Extension Month, to reach
a total of 4,000,000) at any time and from time to time during the period from
and after the first day of the subject Additional Extension Month and prior to
the earlier of the third anniversary of such date and the fifth anniversary of
the Guarantee Date.

RISKS AND UNCERTAINTIES

Hemosol's products are in development and have not yet been
marketed commercially. The business of the Company entails significant risks,
including the costs and time involved to obtain required regulatory approvals,
the uncertainties involved in clinical testing, the availability of capital to
continue development and commercialization of Hemosol's products, and
competition from other biopharmaceutical companies.

REQUIREMENT FOR REGULATORY APPROVALS

In the near term, Hemosol's success will depend on its ability
to commercialize HEMOLINK. However, Hemosol's ability to commercialize HEMOLINK
is subject to the regulatory applications that have been submitted U.K. Hemosol
intends to market HEMOLINK in the U.S., Europe and other international markets
and will require separate regulatory approval from each jurisdiction. If Hemosol
does not receive the appropriate regulatory approvals, it will not be able to
market or sell HEMOLINK, and its business will be adversely affected. Regulatory
authorities also require separate approval for each additional proposed
indication for the use of HEMOLINK. Hemosol cannot guarantee that the regulatory
authorities will approve HEMOLINK for each indication proposed.

LIMITED MANUFACTURING CAPABILITIES

To date, Hemosol has carried out its production activities
only on research and pilot scales. In order to commercialize HEMOLINK
successfully, Hemosol must be able to manufacture HEMOLINK in commercial
quantities, in compliance with regulatory requirements, at acceptable costs and
in a timely manner.

-26-

In an effort to significantly shorten the time to profitable
commercialization, Hemosol has built the Meadowpine facility with an annual
capacity of 300,000 units of HEMOLINK, in anticipation of regulatory approvals.
This facility can be expanded at added cost to produce in excess of 600,000
units annually. Hemosol's profitability will be affected if Hemosol is unable to
achieve sufficient capacity and timely completion and validation of the new
facility. The facility will also have to be approved by regulators in the
various jurisdictions in which Hemosol seeks marketing approval for HEMOLINK.

PRODUCT DEVELOPMENT

Hemosol's operations to date have consisted primarily of
developing and testing its products. Hemosol has no operating history upon which
to evaluate its business and prospects. To succeed, Hemosol must develop its
products commercially, including obtaining appropriate regulatory approvals and
selling adequate quantities of its products at a high enough price to generate a
profit.

DEPENDENCE ON HEMOLINK FOR REVENUE

Hemosol will be highly dependent on HEMOLINK sales because the
Company anticipates that HEMOLINK will account for substantially all of its
revenue for the foreseeable future. To date, the size of the market for
hemoglobin-based products, such as HEMOLINK, has been described primarily in
terms related to the estimated number of red blood cell units utilized in blood
transfusions and the potential for some portion to be replaced with such
products. In addition, Hemosol expects several entirely new markets to emerge
for clinical indications in which RBCs are not currently used. If Hemosol's
assumptions and expectations concerning applications for HEMOLINK and its
markets are incorrect, it may not be able to successfully commercialize HEMOLINK
and may not become profitable.

PROJECTIONS

Hemosol's expectations regarding the success of HEMOLINK and
its business are based on projections which may not bear out as expected. In
press releases and other public documents, Hemosol has forecast the
accomplishment of objectives material to its success, such as the commencement
and completion of clinical trials, anticipated regulatory approval and time of
product launch. The actual timing of these events can vary dramatically due to
factors such as delays or failures in clinical trials, the uncertainties
inherent in the regulatory approval process and delays in achieving
manufacturing capacity and marketing infrastructure sufficient to commercialize
HEMOLINK. Hemosol cannot assure that clinical trials involving HEMOLINK will be
successfully completed, that Hemosol will make regulatory submissions or receive
regulatory approvals as forecasted or that Hemosol will be able to adhere to its
current schedule for product launch. If Hemosol is unable to meet its
projections, Hemosol will need additional financing in the future.

ADDITIONAL FINANCING

Hemosol requires substantial working capital to properly
develop, manufacture and sell its products. Hemosol believes that, following the
proactive steps taken in April, 2003 to reduce cash burn (see "Recent
Developments), its current cash resources, together with the proceeds of its
revised credit facility (see Narrative Description of the Business - "Credit
Facility"), will be sufficient to fund its anticipated operating and capital
expenditures through

-27-

the end of December, 2003 at which point additional financing will be required.
Hemosol's planned cash requirements may vary materially in response to a number
of factors, including:

- the analysis of safety data related to the HLK 213 clinical
trial;

- research and development and clinical trial results generally;

- delays in start-up of Hemosol's new manufacturing facility;

- changes in any aspect of the regulatory process; and

- delays in obtaining regulatory approval for HEMOLINK and for
the Meadowpine facility.

Hemosol's capital-raising efforts could involve the issuance
and sale of additional common shares and/or the sale of certain assets. Hemosol
may not be able to raise any debt or equity financing if and when it is needed.
If any financing Hemosol may require in the future is not made available, the
Company's ability to continue as a going concern will be in substantial doubt.

CLINICAL TRIALS

In order to seek regulatory approval for the marketing and
sale of Hemosol's products, it must first successfully complete both
pre-clinical studies and clinical trials. These studies and trials must
demonstrate that the products are safe and effective for the clinical use for
which approval is sought.

Hemosol is developing other HBOCs in addition to HEMOLINK as
well as hemoglobin-based drug delivery technology and cell expansion technology
for alternative sources of hemoglobin - all of which are in pre-clinical
studies. Hemosol has been cleared to conduct a Phase I clinical trial in Canada
for cell and immune therapy application for Hemosol's cell expansion technology.

Even if regulatory authorities approve HEMOLINK, its
manufacture, marketing and sale will be subject to ongoing regulation, including
inspection and market surveillance for compliance with Good Manufacturing
Practice Regulations in Canada and other jurisdictions. In addition, regulatory
authorities could withdraw a previously approved product from the market upon
receipt of newly discovered information and/or require additional and
potentially expensive studies in areas outside existing approved indications.
Adverse results from or unanticipated delays in clinical trials or failure to
receive the appropriate regulatory approvals could adversely impact Hemosol's
business. Unanticipated changes in existing regulations or adoption of new
regulations could adversely affect the manufacture and marketing of Hemosol's
products. Ongoing government regulation and plant inspections could cause
unexpected delays and adversely impact on Hemosol's business.

MARKET AND DISTRIBUTION RISKS

Hemosol's success will also depend on its ability to market
and distribute HEMOLINK effectively. However, Hemosol does not yet have in place
the sales force and other distribution arrangements it will need to market
HEMOLINK effectively, and Hemosol has no experience in commercial sales. In
addition, HEMOLINK's commercial success will depend on its acceptance by the
medical community and third-party medical insurers as clinically useful,
cost-effective and safe.

- 28 -

PERSONNEL

Hemosol's products require sophisticated management, research
and development, marketing and sales, regulatory and clinical development
personnel. Hemosol's success depends on its ability to attract, train and retain
such personnel. The market for the highly trained personnel Hemosol requires is
very competitive, due to the limited number of people available with the
necessary technical skills and understanding of its products and technology. If
Hemosol fails to attract and retain qualified personnel, its business operations
and product development efforts will suffer. In addition, following the
provision of notice to substantially all employees (see Narrative Description of
the Business - "Human Resources"), the Company may resumes it clinical trials
for HEMOLINK and require the services of employees who are no longer available
or difficult to replace in a commercially reasonable time-frame or at
competitive compensation rates.

INTELLECTUAL PROPERTY MATTERS

Hemosol relies on patent, copyright, trade secret and
trademark laws to limit the ability of others to compete with Hemosol using the
same or similar technology. However, these laws afford only limited protection
and may not adequately protect its rights to the extent necessary to sustain any
competitive advantage Hemosol may have. Its patents may be challenged,
invalidated or designed around by third parties. Its patent applications may not
issue as patents in a form that will be advantageous to Hemosol or at all. If
Hemosol's intellectual property does not provide sufficient protection against
competition, its competitors could compete more directly with Hemosol. Moreover,
if Hemosol loses any key personnel, it may not be able to prevent the
unauthorized disclosure or use of its technical knowledge or other trade secrets
by those former employees despite the existence of nondisclosure and
confidentiality agreements and other contractual restrictions to protect
Hemosol's proprietary technology.

Third parties may claim that Hemosol's products infringe their
intellectual property rights. This risk is exacerbated by the fact that the
validity and breadth of medical technology patents involve complex legal and
factual questions for which important legal principles remain unresolved.
Hemosol's competitors or others may assert that its products and the methods
Hemosol employs may be covered by patents held by them.

In addition, because patent applications can take many years
to issue, there may be currently pending applications of which Hemosol is
unaware, which may later result in issued patents which its products infringe.
There could also be existing patents of which Hemosol is not aware that its
products may infringe. As Hemosol commercializes HEMOLINK and as competitors
commercialize other hemoglobin replacement products in the future, the
possibility of patent infringement claims against Hemosol may increase.

If Hemosol loses a patent infringement lawsuit, it could be
required to pay substantial monetary damages. Moreover, Hemosol could be
prevented from selling its products unless it can obtain a license to use
technology or ideas covered by any such patent or is able to redesign its
products to avoid infringement. A license may not be available at all or on
terms acceptable to Hemosol, or Hemosol may not be able to redesign its products
to avoid any infringement. Modification of its products or development of new
products could require Hemosol to conduct additional clinical trials and to
revise its filings with health regulatory agencies, which could be
time-consuming and expensive. Hemosol will be materially harmed if

- 29 -

it is unable to successfully defend any infringement litigation relating to
these patents or is unable to obtain any required license or sublicense to these
patents.

SOURCES OF HEMOGLOBIN AND OTHER MANUFACTURING COMPONENTS

Although Hemosol expects to be able to purchase sufficient
quantities of human RBCs to support the early stages of HEMOLINK's
commercialization, it may need to develop other sources of hemoglobin if this
source of supply is disrupted or if the market demand for HEMOLINK is greater
than anticipated. Hemosol is advancing proprietary cell expansion technology for
the purpose of developing an additional or alternative supply of hemoglobin from
cells grown outside the body. However, Hemosol's cell expansion technology is
still in the early stages of development.

Hemosol utilizes a number of other raw materials and
components that are currently provided by sole sourced suppliers. Hemosol will
need to identify and qualify alternative backup sources for these components
and/or identify other actions to ensure continuous supply of key materials.

PRODUCT LIABILITY CLAIMS

The testing and marketing of medical products, even after
regulatory approval, has an inherent risk of product liability. Hemosol
maintains product liability insurance coverage in the total amount of $30
million relating to Phase I, II, and III clinical trials. Hemosol intends to
obtain more extensive coverage as the development of its products progresses.
Hemosol's profitability would be adversely affected by a successful product
liability claim in excess of its insurance coverage. Hemosol cannot guarantee
that product liability insurance will be available in the future or be available
on reasonable terms.

HEMOGLOBIN COULD CONTAIN INFECTIOUS AGENTS

Any product derived from human blood, notwithstanding the
rigorous testing procedures now used for the selection of donor blood, can
conceivably carry infectious agents, known or as yet unknown, that were present
in the source blood. In the manufacture of HEMOLINK the procedure by which the
hemoglobin is purified includes a sequence of validated steps to remove or
inactivate viral and other potentially infectious material. While Hemosol is
confident that its process has achieved the highest standard of purity, there is
a theoretical and remote risk that an infectious agent could remain in the
product or resist these stringent procedures. If the RBCs Hemosol obtains
contains infectious agents, it could result in a loss of, or a delay in, the
commercialization of HEMOLINK. Such defects could cause adverse publicity,
damage the Company's reputation and impair its ability to market its products.
In addition, Hemosol may be subject to significant liability claims.

TECHNOLOGICAL DEVELOPMENTS IN THE BIOMEDICAL FIELD

The biomedical field, which is the market for Hemosol's
products, is characterized by rapid technological change, new and improved
product introductions, changes in regulatory requirements and evolving industry
standards.

Although Hemosol is currently developing a new series of
products based on research and development activities conducted to date, Hemosol
may not be successful in

- 30 -

developing or introducing to the market these or any other new products or
technology. If Hemosol fails to develop and deploy new products on a successful
and timely basis, Hemosol may become non-competitive and unable to recoup the
research and development and other expenses incurred to develop and test new
products.

HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES

Hemosol has had losses from operations for each fiscal year
since its inception. Hemosol expects to continue to incur losses from operations
until it is able to commercialize HEMOLINK. Hemosol expects net cash outflows
and operating and net losses to increase for the near term. If Hemosol's
products under development are not commercially viable, it may never achieve
profitability. Even if Hemosol achieves profitability, it may not be able to
sustain or increase profitability on an ongoing basis.

GOVERNMENT REGULATION

Even if regulatory authorities approve HEMOLINK, its
manufacture, marketing and sale will be subject to ongoing regulation, including
inspection and market surveillance for compliance with Good Manufacturing
Practice regulations in Canada and other jurisdictions. Any enforcement action
resulting from Hemosol's failure to comply with these requirements could
adversely affect the manufacture and marketing of HEMOLINK. In addition,
regulatory authorities could withdraw a previously approved product from the
market upon receipt of newly discovered information and/or require additional,
and potentially expensive, studies in areas outside existing approved
indications. Unanticipated changes in existing regulations or the adoption of
new regulations could adversely affect the manufacture and marketing of its
products. Ongoing government regulation and plant inspections could cause
unexpected delays and adversely impact the business. Failure to comply with
applicable regulatory requirements may also result in criminal prosecution,
civil penalties, recall or seizure of products, or partial or total suspension
of production.

- 31 -

ITEM 5 SELECTED CONSOLIDATED FINANCIAL INFORMATION

LAST THREE FINANCIAL YEARS

Year ended Year ended Year ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------

Revenue - - -
Net Loss $ (54,834,000) $ (38,577,000) $ (27,597,000)
Total Assets $ 124,312,000 $ 144,417,000 $ 70,428,000
Deficit $ (240,761,000) $ (183,858,000) $ (136,388,000)
Net Loss per $ (1.23) $ (0.98) $ (0.88)
Common Share

LAST EIGHT QUARTERS

Net Loss per
Revenue Net Loss Common Share
------- ------------- ------------

December 31, 2002 - $ (11,400,000) $ (0.25)
September 30, 2002 - $ (11,754,000) $ (0.26)
June 30, 2002 - $ (19,923,000) $ (0.47)
March 31, 2002 - $ (11,749,000) $ (0.29)
December 31, 2001 - $ (10,748,000) $ (0.26)
September 30, 2001 - $ (6,865,000) $ (0.17)
June 30, 2001 - $ (14,042,000) $ (0.35)
March 31, 2001 - $ (6,922,000) $ (0.20)

DIVIDEND POLICY

Hemosol has paid no dividends to date on its common shares and
does not expect that earnings will be available for the payment of dividends in
the foreseeable future. If and when earnings become available, it is expected
that they will be retained to finance the growth of the Company's business and
to expand its research and product development activities.

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial conditions
and results of operations contained in the Company's 2002 Annual Report is
incorporated herein by reference.

ITEM 7 MARKET FOR SECURITIES

The common shares of Hemosol are listed and posted for trading
on the Toronto Stock Exchange and the NASDAQ National Market. The warrants of
Hemosol are listed for trading on the Toronto Stock Exchange.

- 32 -

ITEM 8 DIRECTORS AND OFFICERS

The following tables set forth the names and municipalities of
residence, the position held with Hemosol and the principal occupation during
the preceding five years of each of the directors and officers of Hemosol. All
directors are elected to hold office until the next annual meeting of
shareholders of Hemosol or until his successor is elected or appointed.

DIRECTORS

NAME, MUNICIPALITY OF PERIOD OF
RESIDENCE AND OFFICE HELD PRINCIPAL OCCUPATION SERVICE
------------------------- -------------------- -------

Edward K. Rygiel, Toronto, ON Executive Chairman MDS Capital Corp. (a health Since 1987
Chairman of the Board and Director related venture capital firm) and Executive Vice
President, MDS Inc. (a health and life sciences
company)

George W. Masters, Church Point, NS Chairman, Yorkton Biocatalyst Inc. (a venture Since 1989
Vice-Chairman of the Board and Director capital and management services company); prior
thereto Vice Chairman and Chief Executive Officer
Seragen Inc. (a biopharmaceutical company) and
prior thereto Chief Executive, Officer Verax Corp.
(a healthcare company)

John W. Kennedy, Oakville, ON President and Chief Executive Officer of the Since 1998
President, Chief Executive Officer and Company; prior thereto Vice President, Marketing,
Director (currently on indefinite medical Serono Laboratories (a healthcare company)
leave)

Mitchell J. Kostuch, Toronto, ON President, SB Capital Corporation (a venture Since 1987
Director capital investment firm) prior thereto, President,
NAVF II Liquidating Trust c/o North American
Ventures Management II Ltd. (a venture capital
investment and funds management company)

R. Ian Lennox, Oakville, ON Director President and Chief Executive Officer, MDS Drug Since 1997
Discovery & Development (a clinical research
organization) prior thereto, President and Chief
Executive Officer, Phoenix Life Sciences Inc. (a
clinical research organization) prior thereto,
President and Chief Executive Officer, Drug
Royalty Corporation Inc. (a pharmaceutical royalty
interest acquisition company); and prior thereto,
President and Chief Executive Officer, Monsanto
Canada Inc. (a life sciences and chemicals
company)

Wilfred G. Lewitt, Toronto, ON Director Chairman, MDS Inc. (a health and life sciences company) Since 1987

Edward E. McCormack, Toronto, ON President, Almad Investments Limited (a real Since 2002
Director estate investment firm), prior to that, Chief
Financial Officer and Director, Novopharm Limited.

Robert H. Painter, Toronto, ON Director Professor Emeritus of Biochemistry and Immunology, Since 1990
Faculty of Medicine, University of Toronto

C. Robert Valeri, Marblehead, Mass. Director of Naval Blood Research Laboratory, Since 1992
(U.S.A) Boston University School of Medicine, Professor of
Director Medicine and Research, Professor of Surgery,
Boston University School of Medicine

Nelson M. Sims, Key West, Florida Corporate Director: Since 2001
(U.S.A) Retired Executive Eli Lilly and Company
Director Former President Eli Lilly Canada Inc.

- 33 -

The Board of Directors has the following standing committees:

- AUDIT COMMITTEE, the current members of which are Mitchell J.
Kostuch (Chairman), George W. Masters, Nelson M. Sims and
Edward E. McCormack;

- CORPORATE GOVERNANCE AND NOMINATING COMMITTEE, the current
members of which are Wilfred G. Lewitt (Chairman) and Edward
K. Rygiel;

- HUMAN RESOURCES AND COMPENSATION COMMITTEE, the current
members of which are Edward K. Rygiel (Chairman), John W.
Kennedy, George W. Masters and R. Ian Lennox;

- RESEARCH AND REGULATORY COMMITTEE, the current members of
which are George W. Masters (Chairman), Robert H. Painter and
C. Robert Valeri;

- ENVIRONMENTAL, HEALTH AND SAFETY COMMITTEE, the current
members of which are Mitchell J. Kostuch (Chairman) and Robert
H. Painter;

- FINANCE COMMITTEE, the current members of which are Wilfred G.
Lewitt (Chairman), Mitchell J. Kostuch and R. Ian Lennox; and

- MARKETING COMMITTEE, the current members of which are Nelson
M. Sims (Chairman), R. Ian Lennox and John W. Kennedy.

- 34 -

OFFICERS

NAME AND MUNICIPALITY OF
RESIDENCE PRESENT PRINCIPAL OCCUPATION
- --------------------------------- -----------------------------------------------------

Lee Hartwell, Toronto, ON Interim Chief Executive Officer (effective May 5,
2003), Chief Financial Officer, Vice President
Corporate Development and Secretary of the Company;
prior thereto, Vice President/Chief Financial Officer,
Bracknell Corp.

Dirk Alkema, Stayner, ON Vice President, Operations of the Company; prior
thereto, Director of Manufacturing, Langford
Laboratories Ltd. (biological products)

David Bell, Oakville, ON Vice President, Drug Discovery of the Company; prior
thereto, Director, Stem Cell Research of the Company;
prior thereto, Group Leader, Cancer Biology, BioChem
Therapeutics Inc. (a healthcare company)

Michael Mathews, Tiverton, Rhode Vice President, U.S. Operations of the Compan; prior
Island thereto President of the Blood Bank Division,
Haemonetics Corporation and prior thereto, executive
positions within the merged Baxter Healthcare and
American Hospital Supply corporations.

Lee Ann Malcolm, Boonton, New Vice President, Marketing of the Company; prior
Jersey thereto, principal and consultant with Genexe
Biomedical Marketing Inc.

Jacquelyn Saad, Toronto, ON Vice President Organizational Development of the
Company; prior thereto, Senior Vice President, Bank of
America.

Jan Sedgeworth, Oakville, ON Vice President, Regulatory Affairs of the Company

Michael Shannon, Picton, ON Vice President, Medical Sciences of the Company, prior
thereto Director General for the Laboratory Centre for
Disease Control of Health Canada and prior thereto
Chief Medical Advisor to the Assistant Deputy Minister
of the Health Protection Branch and Senior Advisor to
the Minister of Health.

Susan Wilkie, Mississauga, ON Assistant Secretary of the Company; prior thereto,
Administrative Assistant, Timminco Ltd. (a mining
company)

Collectively, the directors and executive officers beneficially own 192,955
common shares, which constitutes less than 1% of the issued and outstanding
common shares.

- 35 -

SCIENTIFIC ADVISORY BOARD ("SAC")

The following sets out the principal occupation and experience of each
of the members of Hemosol's Scientific Advisory Board:

NAME PRINCIPAL OCCUPATION AND EXPERIENCE
---- -----------------------------------

George Biro, M.D., M.Sc., Ph.D. Senior Scientific Advisor of the Company.
Chairman of the SAC

A. Gerson Greenburg, M.D., Ph.D., F.A.C.S. Surgeon-in-Chief, The Miriam Hospital, Professor of
Surgery, Brown University, Providence, Rhode
Island. Dr. Greenburg has been an active developer
and investigator in many aspects of red cell
substitute research.

Armand Keating, M.D. Chief, Medical Services, Ontario Cancer
Institute/Princess Margaret Hospital; Professor and
Head, Department of Medical Oncology and
Hematology, The Toronto Hospital, Princess Margaret
Hospital and Mount Sinai Hospital; Gloria and
Seymour Epstein Chair in Cell Therapy and
Transplantation, University of Toronto. Dr. Keating
has published extensively in the fields of
leukemia, transplantation and hemotopoiesis.

Robert H. Painter, B.Sc., Ph.D., C.Chem., Professor Emeritus of Biochemistry and Immunology,
FRSC (U.K.) University of Toronto and former Provost of Trinity
College. Dr. Painter is a member of the Company's
board of directors.

C. Robert Valeri, M.D. Director, Naval Blood Research Laboratory, Boston
University. Dr. Valeri is acknowledged as a
pre-eminent researcher, having registered a range
of FDA-approved blood products for use by the U.S.
Navy during his tenure as its Director. He also
serves on several U.S. government panels as well as
on Hemosol's board of directors.

Richard D. Weisel, M.D. Chairman, Division of Cardiac Surgery, University
of Toronto; Associate Director, Centre for
Cardiovascular Research, The Toronto Hospital;
Cardiac Surgeon, The Toronto Hospital. Dr. Weisel
has conducted very extensive research, both
preclinical and clinical, on many aspects of
cardiac surgery, with particular reference to
preservation of the myocardium.

- 36 -

ITEM 9 ADDITIONAL INFORMATION

The following documents shall be provided to any person upon
request to the Secretary of Hemosol:

(a) when the securities of Hemosol are in the course of a
distribution pursuant to a short form prospectus or a
preliminary short form prospectus has been filed in respect of
a distribution of its securities:

(i) one copy of Hemosol's Annual Information
Form ("AIF"), together with one copy of any
document, or the pertinent pages of any
document, incorporated by reference in the
AIF,

(ii) one copy of the comparative financial
statements of Hemosol for its most recently
completed financial year for which financial
statements have been filed together with the
accompanying report of the auditor and one
copy of the most recent interim financial
statements of Hemosol that have been filed,
if any, for any period after the end of its
most recently completed financial year,

(iii) one copy of the information circular of
Hemosol in respect of its most recent annual
meeting of shareholders that involved the
election of directors or one copy of any
annual filing prepared in lieu of that
information circular, as appropriate, and

(iv) one copy of any other documents that are
incorporated by reference into the
preliminary short form prospectus or short
form prospectus and are not to be provided
under (i) to (iii) above, or

(b) at any other time, one copy of any other documents referred to
in (a)(i), (ii) and (iii) above, provided Hemosol may require
the payment of a reasonable charge if the request is made by a
person who is not a security holder of Hemosol.

Additional information, including directors' and officers'
remuneration and indebtedness, principal holders of Hemosol's common shares and
warrants, options to purchase common shares and warrants and interests of
insiders in material transactions, if applicable, is contained in Hemosol's
management information circular with respect to the annual and special meeting
of shareholders of Hemosol to be held on Thursday, June 16, 2003. Additional
financial information is provided in Hemosol's comparative financial statements
that are included in the Company's annual report of Hemosol for the 12-month
period ended December 31, 2002. A copy of such documents may be obtained upon
request from the Secretary of Hemosol.