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

   
                          AMENDMENT NO. 1 TO FORM 10-K
    

   
                                  FORM 10-K/A
    



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


  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-19890

                              LIFECELL CORPORATION

A DELAWARE                                          IRS EMPLOYER IDENTIFICATION
CORPORATION                                         NO. 76-0172936

                           3606 RESEARCH FOREST DRIVE
                           THE WOODLANDS, TEXAS 77381

                        Telephone Number (281) 367-5368

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         Common Stock, $.001 Par Value


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

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

   
         Aggregate market value of the voting stock (Common Stock and Series B
Preferred Stock, assuming conversion of such Preferred Stock into Common Stock
at the current conversion rate) held by non-affiliates of registrant as of
April 17, 1998: $120,480,000.
    

   
         Number of shares of registrant's Common Stock outstanding as of April
17, 1998: 11,147,143. (If the Series B Preferred Stock had converted into Common
Stock as of such date, there would be 15,060,013 shares of Common Stock
outstanding.)
    

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of registrant's proxy statement relating to the 1998 annual
meeting of stockholders have been incorporated by reference into Part III
hereof.



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The Company hereby amends its Annual Report on Form 10-K for 
the fiscal year ended December 31, 1997 (Commission File No.
0-19890 (the "Form 10-K")) as set forth below:
    


                               TABLE OF CONTENTS

                                  DESCRIPTION
<TABLE>
<CAPTION>

Item                                                                                                           Page
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<S>                                                                                                            <C>
PART I............................................................................................................3

   Item 1.     Business...........................................................................................3
               General............................................................................................3
               Technology.........................................................................................4
               Strategy...........................................................................................5
               Products and Product Development Activities........................................................6
               Marketing.........................................................................................12
               Sources of Materials..............................................................................12
               Government Regulation.............................................................................13
               Research and Development..........................................................................17
               Patents, Proprietary Information and Trademarks...................................................18
               Competition.......................................................................................19
               Environmental Matters.............................................................................19
               Employees.........................................................................................19
               Special Note Regarding Forward-Looking Statements.................................................19
               Risk Factors......................................................................................20
   Item 2.     Properties........................................................................................30
   Item 3.     Legal Proceedings.................................................................................30
   Item 4.     Submission of Matters to a Vote of Security Holders...............................................30

PART II..........................................................................................................31

   Item 5.     Market for the Registrant's Common Equity and Related Stockholder Matters.........................31
               Dividend Policy...................................................................................31
   Item 6.     Selected Financial Data...........................................................................32
   Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations.............32
               General and Background............................................................................33
               Results of Operations.............................................................................33
               Liquidity and Capital Resources...................................................................34
   Item 7A.    Quantitative and Qualitative Disclosure About Market Risk.........................................35
   Item 8.     Financial Statements and Supplementary Data.......................................................35
   Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............35

PART III.........................................................................................................35
   Item 10.    Directors and Executive Officers of the Registrant................................................35
   Item 11.    Executive Compensation............................................................................36
   Item 12.    Security Ownership of Certain Beneficial Owners and Management....................................36
   Item 13.    Certain Relationships and Related Transactions....................................................36

PART IV..........................................................................................................36
   Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................36
</TABLE>


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                                     PART I

         This Annual Report on Form 10-K contains, in addition to historical
information, "forward-looking statements" (within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended) that involve risks and uncertainties. See
"Business--Special Note Regarding Forward-Looking Statements."

ITEM 1.    BUSINESS

GENERAL

   
         LifeCell Corporation ("LifeCell" or "the Company") is a bioengineering
company engaged in the development and commercialization of tissue regeneration
and cell preservation products. The Company's patented tissue processing and
cell preservation technologies serve as platforms for a broad range of
potential products addressing significant clinical needs in multiple markets.
The Company's first commercial product is AlloDerm(R) acellular dermal graft
("AlloDerm"), a tissue graft consisting of an extracellular tissue matrix that
retains the essential biochemical and structural composition of human dermis.
The Company believes that AlloDerm is the only commercial tissue transplant
product that promotes the regeneration of normal human soft tissue. AlloDerm
currently is being marketed in the United States and internationally for use in
certain reconstructive plastic, dental and burn surgery applications. The
Company estimates that AlloDerm has been transplanted in over 20,000 patients.
LifeCell also is developing several additional products, including a micronized
form of AlloDerm, vascular grafts, nerve connective tissue grafts, composite 
skin grafts, heart valves, and ThromboSolTM platelet storage solution
("ThromboSol").
    

         LifeCell's strategy is to be a leader in the research, development,
sales and marketing of tissue regeneration and cell preservation products. The
primary elements of the Company's business strategy include (i) expanding
penetration of AlloDerm into current target markets, (ii) expanding the use of
AlloDerm into new applications and (iii) leveraging the Company's technology
platforms to develop new products.

         The Company's product development programs have been generated from
the following proprietary technologies: (i) a method for producing an
extracellular tissue matrix by removing antigenic cellular elements while
stabilizing the matrix against damage; (ii) a method for cell preservation that
protects cells during prolonged storage; and (iii) a method for freeze-drying
biological cells and tissues without the damaging effects of ice crystals.
LifeCell's tissue processing technology removes cells that would be the target
of rejection upon transplantation while preserving the essential biochemical
and structural composition of the extracellular tissue matrix. This process is
designed to create an acellular tissue that is not rejected by the body and
functions as a natural template or scaffold into which a patient's own cells
will migrate following transplantation. As a result, the tissue promotes normal
soft tissue regeneration. The Company believes its tissue processing technology
offers a number of other key benefits, including multiple product applications,
safety, prolonged shelf-life and high compatibility with other technologies.

         AlloDerm is an extracellular matrix tissue graft processed from
donated human skin. Following transplant, the AlloDerm graft becomes
repopulated with the patient's own cells and is revascularized (i.e., blood
supply is restored), becoming engrafted into the patient. As a result of its
ability to promote the regeneration of normal human soft tissue, AlloDerm has
multiple product applications. AlloDerm currently is used in certain
reconstructive plastic, dental and burn surgery applications. The Company
estimates, based on the most recently published industry data from various
sources, that each year in the United States there are approximately 1.0
million reconstructive plastic surgery procedures, 480,000 dental soft tissue
grafts, 230,000 dental bone-related grafts and more than 20,000 burn patients
requiring skin grafts.

         LifeCell markets AlloDerm to hospital-based surgeons in domestic and
selected international markets. In the United States, LifeCell utilizes its own
direct sales force, supplemented with a network of regional specialty
distributors. In addition, in June 1997, LifeCell entered into an agreement
with Lifecore Biomedical, Inc. ("Lifecore") for the exclusive distribution of
AlloDerm for dental applications in the United States. LifeCell also is
developing an international network of distributors to market AlloDerm for
multiple applications in markets outside the United States.

         The Company currently is evaluating the use of AlloDerm in additional
applications and is developing new products based on its technology platforms.
LifeCell is conducting research on the use of AlloDerm in urological 



                                       3
<PAGE>   4
   
surgery, neurosurgery, orthopedic surgery and general surgery. In addition,
LifeCell is developing a micronized form of AlloDerm for use in multiple
potential applications, including urological, dermatological and reconstructive
surgery. If successfully developed, a micronized form of AlloDerm would allow
for delivery of the product through the use of a syringe, rather than a
surgical incision, thereby creating additional market opportunities. LifeCell
also is conducting research on the use of its technologies in other product
opportunities, including vascular grafts, nerve connective tissue grafts,
composite skin grafts, heart valves, venous valves, ThromboSol and a solution
for the prolonged storage of transfusable red blood cells.
    

TECHNOLOGY

         The Company's product development programs have been generated from
the following proprietary technologies: (i) a method for producing an
extracellular tissue matrix by removing antigenic cellular elements while
stabilizing the matrix against damage; (ii) a method for cell preservation by
manipulating cells through signal transduction (i.e., manipulation of cellular
metabolism) to protect cells during prolonged storage; and (iii) a method for
freeze-drying biological cells and tissues without the damaging effects of ice
crystals.

         TISSUE PROCESSING TECHNOLOGY

         LifeCell's tissue processing technology removes antigenic cells from
the tissue matrix to eliminate the potential for specific rejection of the
transplanted tissue. The Company's tissue processing technology also (i)
stabilizes the tissue matrix to preserve its natural structure and biochemical
properties that promote cell repopulation and (ii) freeze-dries the tissue
matrix without significant ice crystal damage to allow for extended storage and
avoid a non-specific immune response upon transplantation.

         Soft tissue contains a complex, three-dimensional structure consisting
of multiple forms of collagen, elastin, proteoglycans, other proteins, growth
factors and vascular channels (the "tissue matrix"). Together, the tissue
matrix and the cells that populate it form the soft tissues of the body, such
as dermis, heart valves, blood vessels and other tissue types. As part of the
body's natural remodeling process, certain cells actively break down and
replace the tissue matrix on a continual basis. The tissue matrix itself,
however, cannot be regenerated by the body in the event that a large portion of
it is destroyed or lost as a result of trauma or surgery. The only method of
replacing large sections of the tissue matrix is through transplantation.

         Soft tissue transplants from one part of the patient's body to another
(autograft) generally are successful; however, the procedure results in the
creation of an additional wound site. Historically, the ability to transplant
tissue from one person to another (allograft) has been limited because the
donor's cells within the transplanted tissue may trigger an immune response,
resulting in rejection of the transplanted tissue. The Company believes that
previous attempts to remove cells from soft tissue grafts before performing an
allograft transplant have resulted in disruption or damage of the tissue
matrix, causing an inflammatory response and rejection of the tissue following
transplantation.

         LifeCell believes its tissue processing technology may offer some or
all of the following important benefits, depending on the specific application:

                  Natural Tissue Regeneration. Tissue grafts produced with
         LifeCell's tissue processing technology retain the structural and
         biochemical properties that stimulate natural cell repopulation and
         normal soft tissue regeneration. In addition, the Company's clinical
         studies with dermis and preliminary animal studies with heart valve
         leaflets and vascular grafts processed with the Company's technology
         indicate that such tissues can be remodeled by the recipient's own
         cells and may eventually become the recipient's own tissue.

                  Multiple Potential Applications. The Company believes that
         its tissue processing technologies may have the potential to generate
         additional products with multiple applications. In addition to the
         current commercial applications of AlloDerm (i.e., reconstructive
         plastic, dental and burn surgery), the Company believes that AlloDerm
         may provide additional benefits in neurosurgery, urological surgery
         and orthopedic surgery. The Company also is evaluating the
         applicability of its technologies to other tissues, including heart
         valves, blood vessels and nerves. The Company currently is conducting
         animal studies with heart valves and vascular grafts processed with
         the Company's technology. LifeCell has conducted certain cross-species
         studies that indicate its tissue processing technology also may
         potentially allow for transplantation of animal tissues into humans.




                                       4


<PAGE>   5
                  Safety. The Company's tissue processing technology is
         designed to produce products that will revascularize and integrate
         into the body's own tissues. The patient's immune cells also are able
         to penetrate into the transplanted tissue and thus aid in preventing
         infections. In contrast, certain synthetic implants do not allow
         penetration of the patient's immune cells, thereby compromising the
         body's natural ability to fight infections.

                  Prolonged Shelf-Life. The Company's proprietary tissue
         processing technology allows extended storage and ease of
         transportation of products. For example, AlloDerm can be stored at
         refrigerated temperatures for up to two years. In contrast, most
         traditional allograft tissues require special methods of storage and
         transportation.

                  Compatibility with Other Technologies. Several types of
         tissues processed with the Company's technology retain important
         biochemical sites (proteoglycans) which bind growth factors and stem
         cells, which can stimulate tissue regeneration. As a result, the
         Company believes it may be possible to utilize its technology to
         develop tissue-based delivery vehicles for these factors and cells.

         CELL PRESERVATION TECHNOLOGY

         Blood cells circulating within the body are exposed to multiple
factors which maintain their stability and prevent activation. When blood cells
are removed from the body for storage, these stabilizing influences are absent,
resulting in the destabilization and irreversible activation of the cells.
These damaging events currently limit the shelf-life of transfusable red blood
cells to 42 days under refrigeration and blood platelets to five days at room
temperature.

         LifeCell's cell preservation technology mimics the stabilizing
influences that are present in the body through manipulation of signal
transduction mechanisms that control cellular metabolism, combined with either
low temperature storage or the Company's patented freeze-drying technology. If
successfully implemented, LifeCell's cell preservation technology could result
in multiple products for the preservation of directly transfusable blood cells
with extended shelf-life which could be stored in a manner consistent with
current blood banking practices.

STRATEGY

         LifeCell's objective is to be a leader in the research, development,
sales and marketing of tissue regeneration and cell preservation products. The
Company currently is focusing primarily on the broad commercialization of its
first product, AlloDerm, which the Company estimates has been used to treat
over 20,000 patients since its commercial introduction in 1994. The Company's
strategy includes the following principal elements:

         EXPANDING PENETRATION OF ALLODERM INTO CURRENT TARGET MARKETS

         The Company intends to expand the penetration of its AlloDerm products
into certain target markets. The Company currently markets AlloDerm for use in
reconstructive plastic, dental and burn surgery in domestic and selected
international markets through its own sales force and through distributors. The
Company intends to increase the penetration of AlloDerm into these markets by
(i) conducting additional clinical studies to demonstrate the benefits of
AlloDerm compared to other current therapies, (ii) facilitating the publication
by surgeons of additional papers in leading scientific journals describing the
uses and benefits of AlloDerm, (iii) utilizing its expanded sales and marketing
staff to call on a broader audience of hospital-based surgeons, (iv)
establishing additional distribution relationships with leading suppliers of
medical products, both for domestic and selected international markets and (v)
utilizing direct mail and advertising campaigns, sponsoring educational and
training workshops on the use of AlloDerm and participating in trade shows.

         EXPANDING THE USE OF ALLODERM INTO NEW APPLICATIONS

         LifeCell intends to leverage its relationships with leading surgeons
and other physicians and its hospital-based sales force to identify and promote
new applications of AlloDerm. LifeCell intends to focus initially on new
markets that are synergistic with its current hospital surgeon-focused
distribution strategy, including neurosurgery, urological surgery, orthopedic
surgery and general surgery. The Company currently is planning or conducting
research, developmental and clinical activities to evaluate the use of AlloDerm
in these applications. The Company 



                                       5

<PAGE>   6
also is targeting leading surgeons in each of these fields to conduct studies
with AlloDerm and to publish scientific and clinical articles to generate
awareness of the applications of the product.

         LEVERAGING TECHNOLOGY PLATFORMS TO DEVELOP NEW PRODUCTS

   
         The Company plans to leverage its tissue processing and cell
preservation technology platforms to develop new products. The Company
currently is developing a micronized form of AlloDerm that it believes may be
useful in the treatment of urinary incontinence as well as in dermatological
and reconstructive applications. In addition, the Company intends to apply its
tissue processing technology in the development of products based on other
tissues, including vascular grafts, venous valves, nerve connective tissues and
heart valves. The Company also is utilizing its proprietary cell preservation
technology to extend the shelf-life of transfusable platelets and red blood
cells. LifeCell plans to establish collaborative out-licensing arrangements
with appropriate partners to fund the development and commercialization of
certain of these products.
    

PRODUCTS AND PRODUCT DEVELOPMENT ACTIVITIES

         The following table sets forth information about AlloDerm and the
Company's products under development.


   
<TABLE>
<CAPTION>



<S>                                      <C>                                           <C>
   CURRENT USES OF ALLODERM              APPLICATIONS (1)                              STATUS (2)
   Reconstructive Plastic Surgery        Soft tissue repair and replacement            Commercial
   Dental Surgery                        Gingival grafts                               Commercial
   Burns                                 Dermal grafts                                 Commercial

   POTENTIAL NEW USES OF ALLODERM        APPLICATIONS (1)                              STATUS (2)
   Neurosurgery                          Duraplasty                                    Development
   Urological Surgery                    Bladder sling                                 Development
                                         Bladder wall extension
   General Surgery                       Abdominal wall closure                        Development
                                         Prevention of surgical adhesions
   Orthopedic Surgery                    Capsular ligament reinforcement               Development

   OTHER PRODUCTS UNDER DEVELOPMENT      APPLICATIONS (1)                              STATUS (2)
   Micronized AlloDerm(TM)               Urinary incontinence                          Preclinical
                                         Revision of acne scars
   Vascular Grafts                       Coronary or below-knee peripheral bypass      Preclinical
   Nerve Connective Tissue               Nerve regeneration                            Preclinical
   Composite Skin Grafts                 Treatment of third-degree burns and chronic   Preclinical
                                           ulcers
   ThromboSol                            Platelet storage solution                     Clinical
                                                                                         Feasibility
   Heart Valves                          Heart valve replacement                       Research
   Venous Valves                         Chronic venous insufficiency                  Research
                                         Venous stasis ulcers
   Red Blood Cell Preservation           Extended storage of red blood cells           Research

</TABLE>
    


                  (1) LifeCell markets AlloDerm for the repair or replacement
         of damaged or inadequate integumental tissue. LifeCell may not promote
         AlloDerm for certain uses without approval of the United States Food
         and Drug Administration (the "FDA"). Products other than AlloDerm may
         require separate filings with and approvals of the FDA. See
         "--Government Regulation."



                                       6
<PAGE>   7

                  (2) "Research" denotes a project in which proof-of-concept
         has not yet been established. "Preclinical" denotes a project in which
         animal studies have been conducted, are being conducted or are
         planned. "Development" denotes a project in which proof-of-concept has
         been established through in vitro or early-stage animal studies or
         post-market clinical use and the Company is conducting or intends to
         conduct further animal studies and clinical studies. "Clinical
         feasibility" denotes an early-stage trial in humans is being
         conducted. "Commercial" indicates applications for which surgeons
         currently are using the product. However, commercial does not
         necessarily denote that all factors, such as long-term efficacy, have
         been determined.

         The products or products under development listed in the preceding
table are in various stages of research, development or commercialization.
There can be no assurance that the products under development will be
successfully developed or manufactured. Certain of the products under
development will require regulatory approval before commercialization.
Additionally, the regulatory status of AlloDerm when promoted for certain uses
is currently uncertain. There can be no assurance that any product or product
under development will receive regulatory approval if required, meet price or
performance objectives, be developed on a timely basis or prove to be as
effective or as well received as competing products. See "--Government
Regulation."

         ALLODERM PRODUCTS

         AlloDerm is an extracellular tissue matrix graft processed from
donated human (cadaveric) skin. The Company believes that AlloDerm is the only
transplant tissue product on the market today that promotes the regeneration of
normal human soft tissue. Following transplant, the AlloDerm graft becomes
repopulated with the patient's own cells and is revascularized (i.e., blood
supply is restored), becoming engrafted into the patient. As a result of its
ability to promote the regeneration of normal human soft tissue, AlloDerm has
multiple surgical applications. AlloDerm currently is used in reconstructive
plastic, dental and burn surgery. The Company believes AlloDerm may be used in
additional applications and is conducting activities to extend the use of
AlloDerm to urological surgery, neurosurgery, orthopedic surgery and general
surgery.

         LifeCell obtains donated human skin from unaffiliated tissue banks in
the United States. LifeCell requires that the tissue banks supplying the
Company with tissue comply with the FDA's human tissue regulations. In
addition, the Company requires supplying tissue banks to comply with procedural
guidelines outlined by the American Association of Tissue Banks.
Microbiological and other quality assurance testing is conducted by LifeCell
before AlloDerm tissue products are released for shipment. See "--Government
Regulation."

         LifeCell has established what it believes to be adequate sources of
donated skin tissue at acceptable costs to satisfy the foreseeable demand for
AlloDerm tissue products. However, there can be no assurance that the future
availability of donated human skin will be sufficient to meet LifeCell's demand
for such materials. AlloDerm is shipped at ambient temperature by overnight
delivery services and has a two-year refrigerated shelf-life. See
"--Sources of Materials."

   
    

         RECONSTRUCTIVE PLASTIC SURGERY. In November 1995, LifeCell began
marketing AlloDerm to reconstructive plastic surgeons. Such surgeons currently
use or potentially may use AlloDerm generally as a soft tissue implant to
repair or replace tissue deficits, as an interpositional graft for tissue
closure or repair, as a graft or implant for scar revision, as a protective
sheath covering nerves and tendons and as a sling to support tissue following
nerve or muscle damage. Also, the Company believes that AlloDerm has additional
uses in reconstructive surgery related to oncological reconstructive
procedures.




                                       7

<PAGE>   8


         Based on industry sources, the Company estimates that there are
approximately 1.0 million reconstructive plastic surgical procedures performed
annually in the United States in which AlloDerm could be used. Competitive
products include synthetic materials, bovine collagen injections and autologous
tissue. The Company believes AlloDerm has advantages over synthetic material
because AlloDerm fully integrates into the patient and because certain
synthetic materials are susceptible to infection, mobility and occasional
extrusion. The Company also believes AlloDerm has advantages over bovine
collagen, which tends to be resorbed after two to 12 months, requiring
reapplication. The use of autologous tissue requires additional surgery,
creating a separate wound and trauma to the patient.

         DENTAL SURGERY. LifeCell began marketing AlloDerm to dental surgeons
in September 1995. The Company has an agreement, effective June 1997, with
Lifecore Biomedical, Inc. for the exclusive distribution in the United States
of AlloDerm for use in dental applications. Dental surgeons use AlloDerm tissue
in free-gingival grafting and as a subepithelial connective tissue graft,
procedures used to increase the amount of attached gum tissue supporting the
teeth. Until the development of AlloDerm, these procedures could only be
performed with autologous tissue excised from the roof of the patient's mouth
and then transplanted to the gum or, to a limited extent, with freeze-dried
allograft skin. The Company believes that AlloDerm provides significant
clinical benefits for this procedure by eliminating the need for an autograft
and by avoiding scar formation often associated with freeze-dried allograft
skin. In clinical case studies performed by periodontists, AlloDerm grafts
functioned comparably to autografts, spared the patient the pain and discomfort
associated with the excision of the autograft and reduced surgical time.

         AlloDerm tissue products also are used as barrier membranes in guided
bone regeneration. In this function, the AlloDerm tissue serves as a barrier
over allograft bone grafts or bone substitutes, which are used to restore a
degenerated jaw bone and surrounding gingival tissue. AlloDerm tissue products
also are used to repair soft tissue defects of the gum.

         According to the most recently published data from the American Dental
Association, there were approximately 480,000 soft tissue grafts and 230,000
bone-related grafts performed in 1990 in the United States. Competitive
procedures use autologous tissue as well as synthetic material. The Company
believes that AlloDerm has advantages over autologous tissue because of the
reduced trauma to the patient, and over certain non-resorbable synthetic
materials because it integrates into the patient and does not require a
separate procedure for removal.

         BURNS. During 1994, LifeCell began commercial sales of AlloDerm for
use in the treatment of third-degree and deep second-degree burns requiring
skin grafting. The Company estimates that approximately 75,000 people are
hospitalized each year in the United States due to burns and that more than
20,000 of such patients are admitted with major burns requiring skin grafts.

         Skin is the body's largest organ and is the first line of defense
against invasion of foreign substances. It contains two functional layers, the
upper surface consisting primarily of cells (epidermis) and an underlying
foundational layer consisting primarily of extracellular matrix proteins and
collagen (dermis). The epidermis functions as a water barrier and maintains
hydration. The dermis provides other important skin properties including
tensile strength, durability and elasticity. Dermis, like many other tissues of
the body, is not capable of regenerating itself. Currently, third-degree and
deep second-degree burns are treated with split-thickness skin autografts (the
epidermal layer and a portion of the dermis) taken from uninjured areas of the
patient's body. The use of AlloDerm with ultra-thin split-thickness skin
autografts (the epidermal layer and a much thinner portion of the dermis) has
produced comparable results to normal autografts while reducing donor site
trauma.

         OTHER POTENTIAL APPLICATIONS OF ALLODERM. During 1997, the use of
AlloDerm as dura mater (the protective lining between the brain and skull)
replacement was developed by an independent hospital through a clinical
evaluation in approximately 100 neurosurgery patients. The Company currently is
conducting animal studies for the use of AlloDerm to repair or replace damaged
dura mater.

         Currently, surgeons primarily use autologous tissue, allograft dura
mater or bovine pericardium as a replacement for damaged dura. The use of
bovine products and allograft dura mater has declined because of concerns over
disease transmission. The Company believes that AlloDerm may be preferred over
allograft dura mater because certain neurological diseases, such as Creutzfeld
Jacob Disease, have not been documented to occur in dermis, the source material
for AlloDerm. The Company believes that AlloDerm also may be preferable to
autologous tissue because of the elimination of donor site trauma.



                                       8

<PAGE>   9
   
         The FDA currently regulates allograft dura mater as a medical device
and the product is subject to premarket notification requirements. In December
1997, the FDA notified the Company that AlloDerm, when labeled and promoted for
use in dura mater replacement procedures, will be classified as a medical
device. The Company believes, however, that the use of AlloDerm as a dura mater
replacement falls within the FDA classification of "human tissue" intended for
transplantation. The Company met with the FDA during April 1998 to discuss this
matter further, but no conclusions were reached at the meeting nor has the FDA
indicated a change in its position since the meeting. There can be no assurance
that the FDA will change its position that AlloDerm should be regulated as a
medical device or biologic when it is labeled and promoted for use as a dura
mater replacement. If the FDA continues to assert that the product, when
intended for use as dura mater replacement, is a device, the Company intends to
seek FDA clearance or approval to market AlloDerm for this intended use. See
"--Government Regulation."
    

         The Company believes that AlloDerm also may be used as a bladder or
urethral sling to treat certain forms of urinary incontinence and as a surgical
material to expand bladder walls. Currently, autologous tissue (fascia),
allograft tissue and synthetic materials are used for bladder sling procedures
and autologous tissue is used to expand bladder walls. If successfully
developed, AlloDerm in such applications could offer several advantages because
of the product's ability to promote normal soft tissue regeneration and to
eliminate donor site trauma. See "--Government Regulation."

         The Company has been advised by a small number of surgeons that
AlloDerm also has been used to reinforce the capsular ligament surrounding
certain joints. Based on preliminary results of these procedures reported to
the Company by these surgeons, the Company intends to explore the use of
AlloDerm to repair several defects associated with joints. These procedures may
include capsular ligament reinforcement, ligament repair, and articular and
meniscal cartilage repair. See "--Government Regulation."

   
         FDA STATUS OF ALLODERM. The FDA has notified the Company that the use
of AlloDerm for replacement or repair of damaged or inadequate integumental
tissue is "human tissue" within the meaning of the human tissue for
transplantation regulations. The FDA has recently notified the Company that
AlloDerm should be regulated as a medical device when it is labeled and promoted
as a dura mater replacement. However, it is unclear whether the FDA would agree
that the following indications for which AlloDerm has been used by physicians
(and for which the Company may want to promote AlloDerm in the future) is human
tissue or whether the FDA would regulate AlloDerm under its medical device
authorities for these indications: (i) graft for guided bone regeneration; (ii)
oncological reconstruction; (iii) urological applications; (iv) certain
orthopedic surgeries; and (v) general surgeries. There can be no assurance that
the FDA will not require the submission of premarket approval applications
supported by extensive clinical data for these products. See "--Government
Regulation."
    

   
         MICRONIZED ALLODERM
    

   
         LifeCell is developing a micronized form of AlloDerm (AlloDerm reduced
to the size necessary for needle injection) for use in multiple applications,
including urological, dermatological and reconstructive applications. The
Company has conducted preliminary animal studies to evaluate a micronized form
of AlloDerm. Based on these studies, the Company intends to conduct broader
animal and clinical studies to evaluate further this potential product. If
successfully developed, a micronized form of AlloDerm would allow for delivery
of the product through the use of a syringe, rather than a surgical incision,
thereby creating additional market opportunities.
    

   
         The Company believes that one of the principal urological uses of
Micronized AlloDerm may be for the treatment of urethral sphincter deficiency, a
common cause of urinary incontinence. A variety of treatments exist for urethral
sphincter deficiency, including injecting bovine collagen to bulk the sphincter
muscle. Based on an independent market research report, the Company estimates
that there were approximately 118,000 injections of bovine collagen in 1996 to
treat urinary incontinence for 33,000 individuals in the United States.
Additionally, certain dermatological procedures, such as the revision of acne
scars, wrinkle filling and lip augmentation, use bovine collagen injections.
According to such research report, there were approximately 178,000 dermal
implants in 1996 in the United States. One of the disadvantages of bovine
collagen has been its limited persistence over time due to resorption, generally
requiring additional injections after two to 12 months. The Company believes
that Micronized AlloDerm may potentially persist longer than bovine collagen,
possibly reducing the requirement for patients to have multiple injections.
    

   
         The regulatory status of micronized forms of AlloDerm in the United
States is uncertain. Although the Company believes that this form of AlloDerm
should be classified as human tissue intended for transplantation, 
    



                                       9


<PAGE>   10
   
there can be no such assurance. Additionally, certain configurations of
Micronized AlloDerm, such as those packaged to facilitate use by the physician,
as well as certain clinical applications may be regulated as a medical device.
If the product is classified as a device by the FDA, extensive delays may be
encountered before the time, if ever, that the product may be commercially
distributed. See "--Government Regulation."
    

         COMPOSITE SKIN GRAFTS

         LifeCell is developing a method for constructing a composite,
bi-layered tissue product containing an AlloDerm dermal layer and an epidermis
consisting of primordial keratinocytes (epidermal cells) isolated from the
patient. If successfully developed, a composite skin graft product would
effectively eliminate the requirement of taking an autologous skin graft from
burn patients and possibly may be useful in the treatment of chronic ulcers.
Preliminary animal studies conducted by the Company indicate the ability of the
composite skin product to achieve wound closure. See "--Government Regulation."

         XENODERM

         LifeCell has conducted development activities for XenoDermTM processed
porcine dermis, which is processed in a manner similar to AlloDerm to remove
the cells that are targets for rejection and to preserve the dermal matrix.
LifeCell believes that, if successfully developed, XenoDerm tissue products
would have the advantage of a potentially increased raw material supply and
could facilitate regulatory approval in and distribution to certain
international markets. See "--Sources of Materials" and "--Government
Regulation." Preliminary animal studies conducted by LifeCell indicate that
XenoDerm tissue does not cause a significant immune response when transplanted
cross-species. Preliminary animal studies conducted by unaffiliated
laboratories have shown that XenoDerm tissue is potentially as effective as
AlloDerm tissue in treating full-thickness skin loss. Non-viable animal to
human transplants are classified by the FDA as devices, requiring regulatory
approval prior to commercialization. See "--Government Regulation."

         CARDIOVASCULAR TISSUE PRODUCTS

         LifeCell is conducting animal studies to evaluate small-diameter
vascular graft products for potential use in cardiovascular and vascular
surgery. If successfully developed, a vascular graft would potentially be used
in coronary artery bypass procedures or used to restore peripheral blood
circulation in patients with vascular insufficiency, such as below-knee bypass
procedures. Approximately 200,000 coronary artery bypass procedures are
performed annually in the United States, according to an independent market
research report. LifeCell currently is using allograft blood vessels for this
development project, but may extend the technology to xenografts. See
"--Government Regulation."

         LifeCell also currently is conducting preliminary research to
determine the feasibility of developing venous valve products for the treatment
of chronic venous insufficiency and venous stasis ulcers. LifeCell expects such
products to be allograft venous valves developed using its patented technology.
If successfully developed, such grafts would restore the normal function of
certain venous valves in the leg and provide a treatment for or reduce the
development of venous stasis ulcers. According to industry sources,
approximately seven million people in the United States suffer from chronic
venous insufficiency and approximately 500,000 people in the United States are
treated annually for venous stasis ulcers. See "--Government Regulation."

         In 1994, LifeCell and Medtronic, Inc. ("Medtronic") entered into a
license and development agreement for the development and potential
commercialization of xenograft heart valves processed with LifeCell's
technology. If successfully developed, the porcine heart valve would be
surgically implanted to replace human heart valves that have become defective
through disease or aging and that may not otherwise be repaired.

   
         As part of the Company's agreement with Medtronic for the development
of heart valves, LifeCell granted Medtronic certain rights of first refusal to
evaluate technology and negotiate license and development agreements for
vascular graft products utilizing LifeCell's technology. See "--Research and
Development."
    

         Based on an independent market research report, the Company estimates
that there are approximately 80,000 heart valve replacement procedures
performed each year in the United States, of which 45,000 are mechanical heart
valves, 30,000 are animal tissue valves and 5,000 are human donor valves.
Animal tissue heart valves on the market today generally are subject to
progressive calcification, which hardens the valve and prevents it from
functioning properly, requiring replacement seven to 12 years after
transplantation. Mechanical heart valves 




                                      10
<PAGE>   11
are more durable, often lasting the lifetime of the patient, but lack the blood
flow dynamics of tissue valves and require the patient to remain on
anticoagulants for life to prevent strokes. Human donor valves are used in a
limited number of the procedures because of limited availability of donated
valves suitable for transplantation.

         Based on early-stage research, the Company believes that it may be
possible to develop porcine heart valves based on the same technology that the
Company uses to produce AlloDerm tissue products. The Company would process
porcine heart valves to remove the cells that would be recognized by the body
as foreign while substantially maintaining the structure and biochemistry of
the valve matrix. By making the transplanted heart valves non-immunogenic,
LifeCell believes that such a valve could become less susceptible to
calcification than other tissue valves and could become part of the recipient's
body.

         Preliminary animal studies conducted by LifeCell have shown that the
LifeCell heart valve leaflets transplanted in the thoracic descending aorta
became repopulated with the recipient's own cells and were not rejected by the
recipient. Other animal studies conducted by LifeCell have shown that the
valves do not undergo significant calcification. An extensive FDA approval
process would be required for xenograft heart valves, which could significantly
delay or prevent product entry into this market. See "--Government Regulation."

         The Company may be required to obtain a license under one or more
patents prior to commercializing any heart valve or vascular product, if
developed. There can be no assurance that such a license will be available, or
if available, that a license will be granted on terms which are commercially
acceptable to the Company.

         NERVE CONNECTIVE TISSUE

         LifeCell is conducting research for the development of nerve matrix
grafts using the Company's proprietary technology. If successfully developed,
such products would provide the template for nerve regeneration following
trauma. The Company's research program seeks to determine whether nerve tissue
processed with the Company's technology to preserve significant biochemical or
other matrix-based characteristics will enhance or promote the regeneration of
nerves. See "--Government Regulation."

         BLOOD CELL PRESERVATION

         LifeCell is developing ThromboSol platelet storage solution to extend
the shelf-life of transfusable platelets and other methods to extend the
shelf-life of red blood cells, white blood cells and stem cells.

         THROMBOSOL. LifeCell is developing ThromboSol, a proprietary
biochemical formulation designed to protect transfusable platelets from damage
during storage at low temperatures. The expected use of the product would be by
blood banks to extend the shelf-life of transfusable platelets, thereby
increasing the supply of available platelets, as well as to store autologous
platelets in advance for individuals expecting to undergo surgery or
chemotherapy. There were approximately 8.3 million platelet units transfused in
the United States in 1992, according to an industry survey.

         Platelets are blood cells that initiate clotting. Untreated platelets
are sensitive to storage at low temperatures and cannot be effectively
refrigerated. Presently, platelets are stored at room temperature and, due to
the risk of microbial contamination, have a limited shelf-life of five days.
LifeCell has shown in laboratory tests that the addition of ThromboSol solution
preserves the functional aspects of refrigerated platelets for up to nine days
and frozen platelets for more than six months.

         LifeCell initiated preliminary toxicity studies for ThromboSol
platelet storage solution in late 1994 and began preclinical animal studies in
1995. A pilot clinical study under a physician-sponsored Investigational New
Drug ("IND") currently is being conducted. LifeCell intends to license this
product to major pharmaceutical and other companies after conducting initial
feasibility clinical studies. Other companies are developing products to
inactivate bacterial or viral contaminants in donated platelets. The successful
development of such products could affect the demand for products developed by
LifeCell. See "--Government Regulation."

         RED BLOOD CELLS. LifeCell is conducting research to develop procedures
to freeze and freeze-dry red blood cells. Such technology would be used by
blood banks for long-term storage of donated units of red blood cells,
extending the available blood supply, and for storage of autologous red blood
cells for individuals expecting to require blood transfusions as part of
planned surgery.



                                      11

<PAGE>   12
         Approximately 13 million units of blood are donated each year in the
United States. Red blood cells currently may be stored up to 42 days under
refrigeration. Current procedures to freeze red blood cells require the use of
cryoprotectant solutions that are toxic to the recipient and must be removed by
washing the cells prior to transfusion. This removal procedure is
labor-intensive and requires the immediate transfusion of the thawed blood. The
Company believes that the successful development of non-toxic low temperature
methods of storage could simplify the use of frozen blood and potentially allow
widespread storage of autologous blood.

         Numerous companies are attempting to develop blood substitute products
and others are developing technologies to inactivate bacterial or viral
contaminants in donated blood. Successful development of these products could
affect the demand for any products developed by LifeCell. Any product developed
will require extensive regulatory approvals, including approval of an IND by
the FDA to conduct clinical trials. See "--Government Regulation."

         CRYOPRESERVED ALLOGRAFT SKIN

In April 1995, LifeCell began processing and distributing cryopreserved
allograft skin for use as a temporary or transitional covering for severe burn
wounds. For patients with extensive burns, allograft skin assists in
stabilizing the patient and preparing the wound bed for a permanent graft.
Revenues from the sale of cryopreserved allograft skin were approximately
$132,000, $403,000 and $470,000 during 1995, 1996 and 1997, respectively.

MARKETING

         The Company currently distributes AlloDerm in the United States for
most surgical applications through the Company's network of direct technical
sales representatives and regional specialty distributors. Dental applications
of AlloDerm in the United States are marketed through LifeCell's exclusive
United States distributor, Lifecore Biomedical, Inc.. The Company currently
intends to develop and commercialize additional tissue products processed from
cardiovascular, neurological and other tissues in conjunction with corporate
partners.

   
         As of April 17, 1998, LifeCell had a sales and marketing staff of 31
persons, including 15 domestic sales personnel, three international sales and
marketing personnel, and 13 domestic marketing and other personnel. The
Company's sales representatives are responsible for interacting with surgeons,
primarily plastic surgeons and burn surgeons, and educating them regarding the
use and anticipated benefit of AlloDerm tissue grafts. LifeCell also
participates in national and international conferences and trade shows,
participates in or funds certain educational symposia or fellowship programs
and advertises in industry trade publications.
    

   
         The  Company has 14 regional  specialty  distributors  in the United  
States with  approximately 63 sales representatives.
    

   
     The Company currently is seeking foreign regulatory approvals where
necessary to import AlloDerm into significant foreign markets and is developing
a network of country-based distributors. The Company currently has appointed
distributors in Canada, the United Kingdom, Italy, Sweden, The Netherlands,
Ireland, Turkey, Belgium, Taiwan, Israel and South Africa. The Company also has
engaged distributors for Germany, Egypt, Saudi Arabia, Hong Kong, Thailand,
Singapore, Czech Republic, Argentina, Colombia, Mexico, Korea, Brazil, Greece
and Spain, but formal approvals to import products have not yet been received.
The Company currently is seeking regulatory approval in France to import
AlloDerm, but has not yet engaged a distributor. The Company expects to conduct
clinical trials in Japan to seek approval to import AlloDerm.
    

SOURCES OF MATERIALS

     LifeCell pays a procurement fee to and obtains allograft skin and other
tissues from unaffiliated tissue banks in the United States. LifeCell is
expanding its current procurement of skin and other tissues to include any of
approximately 150 tissue banks, including approximately 36 skin banks.
Procurement of certain human organs and tissue for transplantation is subject to
the restrictions of the National Organ Transplant Act, which prohibits purchase
and sale of human organs and related tissue for "valuable consideration." See
"--Government Regulation."

         Pursuant to contractual arrangements, LifeCell reimburses tissue banks
for recovering and shipping to LifeCell donated human skin suitable for
processing into AlloDerm and allograft skin as a temporary wound 



                                      12
<PAGE>   13
dressing. In obtaining such tissues, LifeCell competes with treatment centers
that use donated skin for temporary wound dressings.

         The Company has established what it believes to be adequate sources of
donor skin at acceptable costs to satisfy the foreseeable demand for AlloDerm
tissue products during 1998. Although the Company has not experienced any
material difficulty in procuring adequate supplies of donor skin, there can be
no assurance that the future availability of donated human skin will be
sufficient to meet LifeCell's demand for such materials. Any supply shortage of
available tissues in the future would have a material adverse effect on
LifeCell's business financial condition and results of operations.

         The Company currently does not have procurement arrangements for other
tissues related to products under development, and does not intend to develop
such arrangements until such time as the products approach commercialization.

         In November 1997, LifeCell received notification that it had been
awarded accreditation by the American Association of Tissue Banks ("AATB"). The
AATB is recognized for the development of industry standards and its program of
inspection and accreditation. The AATB provides a standards-setting function
similar to the FDA's quality system regulations for medical device companies,
and has procedures for accreditation similar to the International Standards
Organization ("ISO") standards. LifeCell began the accreditation process in
1995. The AATB decision was made after a detailed audit of LifeCell's
operations and procedures. The accreditation must be renewed every three years
and is for the processing, storage and distribution of material used in
AlloDerm and allograft skin.

GOVERNMENT REGULATION

         Government regulation, both domestic and foreign, is a significant
factor in the manufacture and marketing of LifeCell's current and developing
products. In the United States, the Company's currently marketed human skin
allograft and AlloDerm products are subject to regulation by the United States
Food and Drug Administration (the "FDA"). The United States Food, Drug and
Cosmetics Act (the "FDC Act"), the Public Health Service Act (the "PHS Act")
and other federal statutes and regulations govern or influence the testing,
manufacture, labeling, storage, record keeping, approval, advertising and
promotion of such products. Non-compliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to
authorize the marketing of new products or to allow the Company to enter into
supply contracts, and criminal prosecution.

         In July 1997, the FDA published a final rule that became effective in
January 1998 regulating "human tissue." The rule clarifies and modifies an
earlier interim rule and defines human tissue as any tissue derived from a
human body which is (i) intended for administration to another human for the
diagnosis, cure, mitigation, treatment or prevention of any condition or
disease and (ii) recovered, processed, stored or distributed by methods not
intended to change tissue function or characteristics. The FDA definition
excludes, among other things, tissue that currently is regulated as a human
drug, biological product or medical device and excludes kidney, liver, heart,
lung, pancreas or any other vascularized human organ. Unlike certain drugs,
biologicals and medical devices, human tissue is not subject to premarket
notification or approval by the FDA.

         In September 1996, the Company received a letter from the FDA to the
effect that AlloDerm intended for use for replacement or repair of damaged or
inadequate integumental tissue is human tissue within the meaning of the
interim final rule. This FDA position reversed the preliminary agency
determination that AlloDerm should be regulated under the medical device
authorities. The provisions of the interim rule relied upon by the FDA in the
September 1996 letter were unchanged in the final rule. Consequently, AlloDerm
is not subject to premarket notification or approval by the FDA and the Company
may promote and sell AlloDerm for use in the treatment of wounds, such as
third-degree burns, in periodontal surgical procedures, such as free-gingival
grafting and guided tissue regeneration, and in reconstructive plastic surgery
procedures, such as contracture release grafting and scar revision. The agency
also informed the Company that this decision applies only to AlloDerm when it
is intended for use in transplantation, and the regulatory status of the
product when it is promoted for other uses, such as a void filler for soft
tissue, for cosmetic augmentation or as a wound healing agent (the "Additional
Indications"), would need to be determined by the FDA on a case-by-case basis.

         While the Company's marketing efforts had not previously focused on
the Additional Indications, as a follow-up to its September 1996 letter, the
FDA informed the Company that AlloDerm for Additional Indications 


                                      13
<PAGE>   14
would have to be formally presented to the FDA to determine if, with these
indications, AlloDerm would continue to fall within the scope of the interim
rule for human tissue and thus not require premarket clearance as a medical
device. The Company was asked to indicate what changes in advertisement and
promotion it would make for AlloDerm. The Company responded to the FDA letter
in October 1996, and informed the agency that the Company believes that the
distinctions drawn regarding the definition of transplantation and human tissue
and between integumental tissue and all other tissue in the September 1996
letter were fairly novel and ones for which the Company would require
clarification from the FDA as it goes forward. The Company believes that
AlloDerm, when used for cosmetic augmentation and as a void filler, may still
qualify as human tissue. Similarly, the Company advised the FDA that since
almost every replacement or repair of damaged or inadequate tissue involves a
cosmetic aspect, the Company believes that many cosmetic uses of AlloDerm are
within the purview of human tissue. Nevertheless, the Company informed the FDA
that it intends to follow the agency's decision and, until this matter is
clarified on a case-by-case basis, will not promote AlloDerm for the Additional
Indications.

   
     During late 1997, the Company notified the FDA that it believes that
AlloDerm, when promoted for use in dura mater replacement procedures, is human
tissue within the scope of the FDA's interim and final regulations. The Company
requested a meeting to further discuss this matter. In December 1997, the FDA
notified the Company that it believes that AlloDerm, when promoted for such use,
should be classified as a medical device. The Company met with the FDA during
April 1998 to discuss this matter further, but no conclusions were reached at
the meeting nor has the FDA indicated a change in its position since the
meeting. There can be no assurance that the FDA will alter its initial
determination that the labeling and promotion of AlloDerm for use in dura mater
replacement procedures should be regulated as a medical device.
    

   
         Additionally, it is unclear whether the FDA would regulate AlloDerm
under its medical device authorities for these indications: (i) graft for
guided bone regeneration; (ii) oncological reconstruction; (iii) urological
applications; (iv) certain orthopedic surgeries; and (v) general surgeries. In
addition, further discussion with the FDA is required to determine the level of
regulation that may be applied with regard to the promotion and marketing of
Micronized AlloDerm.
    

         There can be no assurance that the FDA will not finally conclude that
use of AlloDerm for the Additional Indications or other indications should be
regulated as a medical device and require a 510(k) premarket notification or
premarket approval application for AlloDerm for such indications. If the FDA
were to conclude definitively that the Company is required to obtain agency
clearance of a 510(k) notification or approval of a premarket approval
application for AlloDerm for duraplasty, for the Additional Indications or for
other uses, the FDA may require the Company to conduct laboratory testing and
preclinical and clinical studies of AlloDerm to support a marketing
application. Testing, preparation of necessary applications and processing of
those applications by the FDA is expensive and any required laboratory testing
or preclinical or clinical studies that the Company would be required to
conduct could take several years to complete. There can be no assurance that
any required testing could be completed successfully, or that if successfully
completed, would provide sufficient data and information to enable the FDA to
determine, on a timely basis, if at all, that when AlloDerm is used for
duraplasty, for the Additional Indications or for other uses, it is
substantially equivalent to a legally marketed predicate device or is safe and
effective for such uses and to permit the product to be marketed for such uses.
Failure of the Company to receive any required FDA clearance or approval of
AlloDerm for such uses on a timely basis would preclude promotion of AlloDerm
for such uses and could have a material adverse effect on the Company's
business, financial condition and results of operations.

         In October 1997, the FDA inspected LifeCell's facilities. No Form 483
Notice of Observations was left with the Company, although the agency did take
copies of numerous documents relating to the AlloDerm production process and
promotional material relating to AlloDerm. Notwithstanding the fact that no
Form 483 was received, there can be no assurance that the FDA will not raise
regulatory issues with respect to the documents taken for review.

         In February 1997, the FDA issued a comprehensive "proposed approach"
to the regulation of cellular and tissue-based products, other than human
tissue for transplantation. The FDA proposal sets forth a tiered approach to
cell and tissue regulation that ranges from no regulatory requirements for
cells or tissue that are removed and transplanted into the same patient in a
single surgical procedure to full premarket approval requirements for biologics
and medical devices that raise potential health, safety or efficacy concerns.
Although the FDA has notified the Company that AlloDerm is not now subject to
premarket notification or approval, there can be no assurance that the FDA will
not impose additional or different regulatory requirements on AlloDerm after
the agency finalizes its approach to the regulation of cellular and
tissue-based products.





                                      14


<PAGE>   15
         The FDA's final human tissue regulation requires establishments
engaged in the procurement, processing, and distribution of human tissue to
conduct and maintain records of tissue donor screening procedures and blood
testing. In addition, tissue processing establishments are periodically
inspected by the FDA to ensure compliance with these requirements. LifeCell
believes that the Company's operations substantially comply with the
requirements of the FDA's final human tissue regulation.

         LifeCell requires that the tissue banks supplying the Company with
tissue comply with the FDA's human tissue regulation. In addition, the Company
requires supplying tissue banks to comply with procedural guidelines outlined
by the American Association of Tissue Banks. The FDA has stated that it will
propose additional requirements for human tissue. Additional requirements could
include registration of tissue banking establishments and tissue listing with
the FDA. Other requirements may include donor-recipient tracking, Good Tissue
Practices and clinical evaluation of tissues that are determined to have
undergone other than "minimal manipulation." If significant additional
regulatory requirements were to be established, the Company could incur
significant additional costs in order to comply with such requirements.

   
         The regulatory status in the United States of micronized forms of
AlloDerm is uncertain. Although the Company believes that this form of AlloDerm
should be classified as human tissue intended for transplantation, there can be
no such assurance. Additionally, certain configurations of Micronized AlloDerm,
such as those packaged to facilitate use by the physician, as well as certain
clinical applications may be regulated as a medical device. If the product is
classified as a device by the FDA, extensive delays may be encountered before
the time, if ever, that the product may be commercially distributed.
    

         LifeCell believes that its allograft tissue products in development,
including vascular grafts and nerve connective tissue, should be classified as
"human tissue" under the FDA's regulations. However, further discussion with
the FDA is required to determine the level of regulation the FDA will adopt
with regard to the promotion and marketing of these products. There can be no
assurance that the FDA will not require the submission of premarket approval
application supported by extensive clinical data for these products.

         LifeCell's proposed xenograft heart valve product and other xenograft
tissue transplantation products, including XenoDerm tissue and xenograft
vascular grafts, likely will be subject to regulation by the FDA as medical
devices. LifeCell's proposed blood cell preservation products, including
ThromboSol platelet storage solution, will be subject to regulation as
biologics. Accordingly, such products will require FDA premarket approval or
clearance prior to commercialization. To obtain FDA approval or clearance for
these products, the Company must submit proof of the safety and efficacy of
these products. In most cases, this entails extensive pre-clinical and clinical
testing performed in accordance with the FDA's regulations. The testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and time consuming and will take several years to
complete. There is no assurance that the FDA will act favorably or quickly in
making such reviews, and significant difficulties or costs may be encountered
by the Company in its efforts to obtain the FDA approvals or clearances that
could delay or preclude the Company from marketing any product it may develop.
The FDA also may require post-market testing and surveillance to monitor the
effects of approved products and may place conditions on approvals that could
restrict commercial applications of such products. Product marketing approvals
or clearances may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing. In addition,
delays imposed by the governmental approval process may materially reduce the
period during which the Company may have the exclusive right to commercialize
patented products.

         The FDA reviews medical devices for marketing approval or clearance
through two different procedures, the 510(k) premarket notification process and
the premarket approval process, which is significantly more complex, costly and
time consuming than the 510(k) clearance procedure. LifeCell will need to
pursue one of these routes with respect to each product determined to be a
medical device. The determination of which process will be required for any
particular product will depend in part upon how the FDA has regulated similar
products by the time LifeCell is ready to pursue its own approvals or
clearances. Under the 510(k) premarket notification procedure, the applicant or
"sponsor" submits an application containing data that demonstrates the
"substantial equivalence" of the product to a device marketed prior to the
enactment of the Medical Device Amendments of 1976 or to a device legally
marketed thereafter pursuant to a 510(k). The FDA may require a 510(k)
applicant to submit additional, and possibly extensive, clinical data
establishing the safety and effectiveness of the product for each proposed
indication. Prior to conducting the necessary clinical trials, an applicant may
be required to submit an investigational device exemption ("IDE") protocol to
the FDA for approval. An IDE application typically contains data from
laboratory and animal testing demonstrating that the product is sufficiently
safe for study in humans as well as a description of 

                                      15
<PAGE>   16

the proposed study methods and protocol. Clinical studies must be conducted
according to a written protocol and pursuant to the approval and oversight of
one or more Institutional Review Boards. In addition, clinical investigators
must adhere to good clinical practices. The FDA may order the temporary or
permanent discontinuation of a clinical trial at any time for non-compliance
with its regulations, because of safety issues or for other reasons. The
collection of data and preparation of a 510(k) application can be costly and
time consuming, and a 510(k) applicant may not market the product until a
favorable decision is received from the FDA. The FDA review of a 510(k)
premarket notification can take anywhere from a few months to several years.
There can be no assurance that marketing clearance ultimately will be obtained
for any of LifeCell's products that are the subject of 510(k) premarket
notifications.

         The Pre-Market Approval ("PMA") process is significantly more complex,
costly and time consuming than the 510(k) clearance procedure. To obtain
premarket approval, the applicant is required to submit extensive preclinical
and clinical data to the FDA. An IDE will be required to conduct the clinical
trials. Upon completion and analysis of clinical studies, the applicant
assembles and submits a PMA application setting forth the preclinical,
clinical, manufacturing and other data. Typically, the FDA will also inspect
the manufacturing facility for compliance with the Quality System regulation.
FDA review and approval of a PMA can take several years. There can be no
assurance that PMA approvals will be obtained for any of LifeCell's proposed
products.

         With respect to LifeCell's proposed biological blood cell preservation
products, the Company or its contracted designee must obtain both a product
license and an establishment license from the FDA prior to marketing. A product
license application ("PLA") and establishment license application ("ELA") must
be submitted and supported by extensive data, including preclinical and
clinical data that demonstrate that the manufactured product meets prescribed
standards of safety and efficacy. Before conducting the required clinical
testing of a biological product, an applicant must submit an investigational
new drug application ("IND") to the FDA, containing preclinical data
demonstrating the safety of the product for human investigational use,
information about the manufacturing processes and procedures and the proposed
clinical protocol. Clinical trials of biological products typically are
conducted in three sequential phases, but may overlap. Phase I trials test the
product in a small number of healthy subjects, primarily to determine its
safety and tolerance at one or more doses. In Phase II, in addition to safety,
the efficacy, optimal dose and side effects of the product are evaluated in a
patient population somewhat larger than the Phase I trial. Phase III involves
further safety and efficacy testing on an expanded patient population at
geographically dispersed test sites. All clinical studies must be conducted in
accordance with FDA approved protocol and are subject to the approval and
monitoring of one or more Institutional Review Boards. In addition, clinical
investigators must adhere to good clinical practices. Completion of all three
phases of clinical studies may take several years, and the FDA may temporarily
or permanently suspend a clinical study at any time. Upon completion and
analysis of clinical trials, the applicant assembles and submits a PLA and an
ELA. The ELA contains a complete description of the manufacturing process.
Before the licenses can be granted, the Company or its designee must undergo a
successful establishment inspection. FDA review and approval of a biological
product can take several years. There can be no assurance that LifeCell will
obtain the required approvals for any of its proposed biological products.

         All products marketed by LifeCell pursuant to the above-described
approvals and clearances will be subject to pervasive and continuing regulation
by the FDA. Products must be manufactured in registered establishments and must
be produced in accordance with Quality System regulations (QSR), the successor
to the FDA's GMP regulations. There are post-marketing surveillance and
reporting requirements. Manufacturing facilities and processes are subject to
periodic FDA inspection. Labeling and promotional activities are also subject
to FDA scrutiny and, in certain instances, by the Federal Trade Commission. The
export of devices and biologics is also subject to regulation and may require
prior FDA clearance. From time to time, the FDA may modify such regulations and
impose additional or different requirements. It is impossible to predict how
such revisions would affect the Company's operations. Failure to comply with
any applicable FDA requirements could result in civil and criminal enforcement
actions and penalties.

         Sales of medical devices and biological products outside the United
States are subject to foreign regulatory requirements that vary widely from
country to country. Approval of a product by comparable regulatory authorities
of foreign countries must be obtained prior to commercialization of the product
in those countries. Certain countries regulate AlloDerm as a pharmaceutical
product, requiring extensive filings and regulatory approvals to market the
product. Certain countries classify AlloDerm as "human tissue" but may restrict
its import or sale. Other countries have no applicable regulations regarding
the import or sale of products similar to AlloDerm, creating uncertainty


                                      16

<PAGE>   17
regarding the import or sale of the product. The inability to classify AlloDerm
as a medical device has restricted LifeCell's ability to obtain an appropriate
regulatory designation for the product for Western Europe, which would provide
a clearer marketing path in the European Union. The time required to obtain
foreign approvals may be longer or shorter than that required for FDA approval
and there can be no assurance that approvals would be obtained for any of the
Company's products. AlloDerm currently is being marketed in certain foreign
countries, and LifeCell is actively pursuing clearance to market AlloDerm in
additional countries. There can be no assurance that the uncertainty of
regulations in each country will not delay or impede the marketing of AlloDerm
or impede the ability of LifeCell to negotiate distribution arrangements on
favorable terms.

         In addition, the National Organ Transplant Act ("NOTA") prohibits the
acquisition, receipt or transfer of certain human organs, including skin and
heart valves and vascular grafts for "valuable consideration," but permits the
payment of reasonable expenses associated with the removal, transportation,
processing, preservation, quality control and storage of human tissue and skin.
Assuming that NOTA applies to LifeCell's products, it may be interpreted to
limit the prices that LifeCell may charge for processing and transporting such
human tissue products. LifeCell includes in its AlloDerm pricing structure
certain of its educational costs associated with the processing and
transportation of human tissue. Although LifeCell believes that recovery of
educational costs is permitted under NOTA, a future inability of LifeCell to
pass these costs on to purchasers of its products could adversely affect
LifeCell's business and prospects. Assuming that NOTA applies to LifeCell's
products, LifeCell intends to comply with NOTA, but there can be no assurance
that the government will not adopt interpretations of NOTA that would adversely
affect LifeCell's pricing structure or otherwise call into question one or more
aspects of LifeCell's method of operation. Certain foreign countries have laws
similar to NOTA. These laws may restrict the amount that the Company can charge
for AlloDerm, and may restrict the importation or distribution of AlloDerm to
licensed not-for-profit organizations.

         LifeCell also is subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, and the use, handling and
disposal of hazardous or potentially hazardous substances used and produced in
connection with LifeCell's research and development work. See "--Environmental
Matters." Although LifeCell believes it is in compliance in all material
respects with these laws and regulations, there can be no assurance that the
Company will not incur significant additional costs to comply with these laws
or regulations in the future.

RESEARCH AND DEVELOPMENT

         LifeCell has historically funded the development of its tissue
products and blood cell preservation products primarily through external
sources, including a corporate alliance and government grants and contracts, as
well as through the proceeds from equity offerings. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." LifeCell's research and
development costs in 1995, 1996 and 1997 for all programs, including those
programs funded through corporate and government support, were approximately
$2.2 million, $1.6 million, $2.0 million, respectively.

         The Company has received a substantial portion of its government grant
funding pursuant to the United States government's Small Business Innovation
Research ("SBIR") program. The SBIR grant program provides funding to evaluate
the scientific and technical merit and feasibility of an idea. To date,
LifeCell has been awarded approximately $4.6 million through 14 approved SBIR
program awards and Department of Defense contracts. LifeCell intends to
continue to seek funding through the SBIR programs, as well as to pursue
additional government grant and contract programs. Generally, LifeCell has the
right to patent any technologies developed from government grants and contract
funding, subject to the United States government's right to receive a
royalty-free license for federal government use and to require licensing to
others in certain circumstances.

         In 1994, LifeCell entered into a license and development agreement
with Medtronic to develop jointly the Company's heart valve products. Pursuant
to the agreement, Medtronic paid LifeCell an initial $1.5 million license fee.
Medtronic funds in part the cost of research and development under a mutually
agreed upon budget, has the exclusive right to market any resulting commercial
products and must pay LifeCell royalties on sales of products covered by the
agreement. LifeCell's research and development funding by Medtronic in 1995,
1996 and 1997 was approximately $825,000, $546,000, $218,000, respectively.
Royalties payable to LifeCell under the agreement are limited to an aggregate
maximum of $25.0 million. Medtronic may terminate the agreement at any time if
in its sole business judgment it deems the development and commercialization of
products thereunder not to be in its best interests or otherwise to be
imprudent. In such event, and if the agreement is terminated under certain
other 



                                      17
<PAGE>   18
circumstances, the $1.5 million initial license fee paid by Medtronic will be
converted into shares of Common Stock, subject to certain limitations, at the
market price at the time of conversion, and any unrecovered portion of the fee
will be refunded to Medtronic.

         In 1994, Medtronic also invested $500,000 in LifeCell by purchasing
approximately 64,000 shares of Common Stock in exchange for rights of first
refusal to negotiate licenses for LifeCell's vascular graft products.
Medtronic's rights of first refusal expire during 1998.

PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS

   
         LifeCell's ability to compete effectively with other companies is
materially dependent upon the proprietary nature of its technologies. LifeCell
relies primarily on patents, trade secrets and confidentiality agreements to
protect its technologies. LifeCell currently licenses the exclusive right to
nine United States patents and related foreign patents and the non-exclusive
right to 14 United States patents. In addition, LifeCell has been issued three
United States utility patents, one United States design patent and has seven
pending United States patent applications.
    

   
         The Company's technology is protected by three primary families of
patents and patent applications. One United States patent covers methods of
producing the Company's tissue-based products. Two United States patents and
three pending patent applications cover methods of extending the shelf-life of
platelets, red blood cells and other blood cells. Eight additional United
States patents supplement the Company's other patents and cover methods of
freeze-drying without the damaging effects of ice crystal formation.
    

         LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.

   
         During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). Under the terms of
the settlement agreement, Integra and MIT agreed not to assert the Integra
Patents against current or future products produced using LifeCell's current
technology. LifeCel also obtained the right to develop and commercialize future
products using Integra's technology through a license to certain of Integra's
patents. For a further discussion of the settlement terms and other litigation
also settled, see "Legal Proceedings."
    

         In general, the patent position of biotechnology and medical product
firms is highly uncertain and involves complex legal, scientific and factual
questions. There can be no assurance that any other patents will be granted
with respect to the patent applications filed by the Company. Furthermore,
there can be no assurance that any patents issued or licensed to the Company
will provide commercial benefit to the Company or will not be infringed,
invalidated or circumvented by others. The United States Patent and Trademark
Office currently has a significant backlog of patent applications, and the
approval or rejection of patents may take several years. Prior to actual
issuance, the contents of United States patent applications are generally not
made public. Once issued, such a patent would constitute prior art from its
filing date, which might predate the date of a patent application on which the
Company relies. Conceivably, the issuance of such a patent, or the discovery of
"prior art" of which the Company is currently unaware, could invalidate a
patent of the Company or its licensor or prevent commercialization of a product
disclosed therein.

         No assurances may be given that the Company's products or planned
products may not be the subject of additional infringement actions by third
parties. Any successful patent infringement claim relating to any products or
planned products could have a material adverse effect on the Company. Further,
there can be no assurance that any patents or proprietary rights owned by or
licensed to LifeCell will not be challenged, invalidated, circumvented, or
rendered unenforceable based on, among other things, subsequently discovered
prior art, lack of entitlement to the priority of an earlier, related
application or failure to comply with the written description, best mode,
enablement or other applicable requirements.

         The Company generally does not conduct an extensive review of issued
patents prior to engaging in research or development activities. Accordingly,
the Company may be required to obtain a license from others to 




                                      18

<PAGE>   19
commercialize any of its products under development. There can be no assurance
that any such license that may be required could be obtained on favorable terms
or at all.

         LifeCell may decide for business reasons to retain certain knowledge
that it considers proprietary as confidential and elect to protect such
information as a trade secret, as business confidential information, or as
know-how. In that event, LifeCell must rely upon trade secrets, know-how and
continuing technological innovation to maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to or disclose such
information.

         LifeCell has federal trademark or service mark registrations that it
currently uses for LifeCell(R), which concerns processing and preserving tissue
samples, and AlloDerm(R), which concerns LifeCell's commercial acellular dermal
graft product.

COMPETITION

         The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and
commercialize its technology. There are many companies and academic
institutions that are capable of developing products based on similar
technology, and that have developed and are capable of developing products
based on other technologies, which are or may be competitive with LifeCell's
products. Many of those companies and academic institutions are
well-established, have substantially greater financial and other resources,
research and development capabilities and more experience in conducting
clinical trials, obtaining regulatory approvals, manufacturing and marketing
than LifeCell. These companies and academic institutions may succeed in
developing competing products that are more effective than LifeCell's products
or that receive government approvals more quickly than LifeCell's products,
which may render the Company's products or technology uncompetitive,
uneconomical or obsolete.

         For most current applications of AlloDerm, the principal form of
competition is with the use of the patient's autologous tissue. LifeCell
anticipates direct competition for AlloDerm tissue products and all of its
proposed transplantable tissue products, as well as indirect competition from
advances in therapeutic agents, such as growth factors now used to enhance
wound healing. LifeCell believes that therapeutic growth factors may be used in
conjunction with its proposed products and may potentially enhance the
products' efficacy. LifeCell is not aware of any person or entity currently
marketing transplantable tissue products with features similar to AlloDerm or
LifeCell's other proposed transplantable products. There can be no assurance,
however, that LifeCell will be able to compete effectively with other
commercially available products or that development of other technologies will
not detrimentally affect LifeCell's commercial opportunities or competitive
advantage.

ENVIRONMENTAL MATTERS

         LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have an adverse effect on LifeCell's
business.

EMPLOYEES

   
         At April 17, 1998, the Company had 95 full-time and three part-time
employees of which 31 were employed in sales and marketing, 33 in engineering,
production and quality assurance, 20 in research and development and clinical
studies, and 14 in administration and accounting. As of April 17, 1998, the
Company employed, full-time, two persons with M.D. degrees and eight persons
with Ph.D. degrees.
    

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-K includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Act of 1934, as amended. All statements other
than statements of historical facts included herein, including, without
limitation, statements regarding the Company's financial position, business
strategy, products, products under development, markets, budgets and plans and
objectives of management for future operations, are forward-looking statements.
 



                                      19

<PAGE>   20
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are disclosed under "Risk Factors" and elsewhere herein, including,
without limitation, in conjunction with the forward-looking statements included
herein. All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.

RISK FACTORS

         In addition to the other  information in this Annual Report on Form 
10-K, the following factors should be considered carefully in evaluating the
Company. Special Note: Certain statements set forth below constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. See "--Special Note Regarding Forward-Looking
Statements."

         HISTORY OF OPERATING LOSSES; SUBSTANTIAL ACCUMULATED EARNINGS DEFICIT

         Since its inception in 1986, the Company has generated only limited
revenues from product sales and has incurred substantial losses, including
losses of approximately $3.9 million, $4.1 million and $6.1 million for the
years ended December 31, 1995, 1996, and 1997, respectively. At December 31,
1997, the Company had an accumulated deficit of approximately $36.4 million.
The Company expects to incur additional operating losses as well as negative
cash flow from operations at least through 1998 as it continues to use
substantial resources to expand its marketing efforts with respect to AlloDerm
and to expand its product development programs. There can be no assurance that
the Company will ever become profitable. The Company's ability to increase
revenues and achieve profitability and positive cash flows from operations will
depend on increased market acceptance and sales of AlloDerm and
commercialization of products under development. There can be no assurance that
the Company will be successful in expanding AlloDerm sales or that the
Company's development efforts will result in commercially available products,
that the Company will obtain required regulatory clearances or approvals for
any new products in a timely manner, or at all, that the Company will be
successful in introducing any new products or that any new products will
achieve a significant level of market acceptance. The development and
commercialization of new products will require additional development, sales
and marketing, manufacturing and other expenditures. The required level and
timing of such expenditures will affect the Company's ability to achieve
profitability and positive cash flows from operations. There can be no
assurance that the Company will ever achieve higher levels of revenues or a
profitable level of operations or that profitability, if achieved, can be
sustained on an ongoing basis. See "--Risk Factors--No Assurance of Additional
Necessary Capital," "--Risk Factors--Uncertainty of Market Acceptance" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

         NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL

   
         The Company intends to expend substantial funds for product research
and development, expansion of sales and marketing activities, expansion of
manufacturing capacity, product education efforts, and other working capital
and general corporate purposes. Although the Company believes that through its
existing resources and anticipated cash flows from operations will be
sufficient to satisfy its capital needs through at least 1999, there can be no
assurance that the Company will not require additional financing before that
time. The Company's actual liquidity and capital requirements will depend upon
numerous factors, including the costs and progress of the Company's research
and development efforts; the number and types of product development programs
undertaken; the costs and timing of expansion of sales and marketing
activities; the costs and timing of expansion of manufacturing capacity; the
amount of revenues from sales of the Company's existing and new products;
changes in, termination of, and the success of existing and new distribution
arrangements; the cost of maintaining, enforcing and defending patents and
other intellectual property rights; competing technological and market
developments; developments related to regulatory and third-party reimbursement
matters; and other factors. In the event that additional financing is needed,
the Company may seek to raise additional funds through public or private
financing, collaborative relationships or other arrangements. Any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve significant restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require the Company
to relinquish its rights to certain of its technologies, products or marketing
territories. Failure to raise capital when needed could have a material adverse
effect on the Company's business, financial 
    


                                      20


<PAGE>   21
   
condition and results of operations. There can be no assurance that such
financing, if required, will be available on terms satisfactory to the Company,
if at all. If adequate funds are not available, the Company expects it will be
required to delay, scale back or eliminate one or more of its product
development programs. See "Management's Discussion and Analysis of Financial 
Condition and Results of Operations" and "Legal Proceedings."
    

         GOVERNMENT REGULATION--ALLODERM

         In July 1997, the United States Food and Drug Administration (the
"FDA") published a final rule that became effective in January 1998 regulating
"human tissue." The rule clarifies and modifies an earlier interim rule and
defines human tissue as any tissue derived from a human body which is (i)
intended for administration to another human for the diagnosis, cure,
mitigation, treatment or prevention of any condition or disease and (ii)
recovered, processed, stored or distributed by methods not intended to change
tissue function or characteristics. The FDA definition excludes, among other
things, tissue that currently is regulated as a human drug, biological product
or medical device and excludes kidney, liver, heart, lung, pancreas or any
other vascularized human organ. Unlike certain drugs, biologicals and medical
devices, human tissue is not subject to premarket notification or approval by
the FDA.

         In September 1996, the Company received a letter from the FDA to the
effect that AlloDerm intended for use for replacement or repair of damaged or
inadequate integumental tissue is human tissue within the meaning of the
interim final rule. This FDA position reversed the preliminary agency
determination that AlloDerm should be regulated under the medical device
authorities. The provisions of the interim rule relied upon by the FDA in the
September 1996 letter were unchanged in the final rule. Consequently, AlloDerm
is not subject to premarket notification or approval by the FDA and the Company
may promote and sell AlloDerm for use in the treatment of wounds, such as
third-degree burns, in periodontal surgical procedures, such as free-gingival
grafting and guided tissue regeneration, and in reconstructive plastic surgery
procedures, such as contracture release grafting and scar revision. The agency
also informed the Company that this decision applies only to AlloDerm when it
is intended for use in transplantation, and the regulatory status of the
product when it is promoted for other uses, such as a void filler for soft
tissue, for cosmetic augmentation or as a wound healing agent (the "Additional
Indications"), would need to be determined by the FDA on a case-by-case basis.

         While the Company's marketing efforts had not previously focused on
the Additional Indications, as a follow-up to its September 1996 letter, the
FDA informed the Company that AlloDerm for Additional Indications would have to
be formally presented to the FDA to determine if, with these indications,
AlloDerm would continue to fall within the scope of the interim rule for human
tissue and thus not require premarket clearance as a medical device. The
Company was asked to indicate what changes in advertisement and promotion it
would make for AlloDerm. The Company responded to the FDA letter in October
1996, and informed the agency that the Company believes that the distinctions
drawn regarding the definition of transplantation and human tissue and between
integumental tissue and all other tissue in the September 1996 letter were
fairly novel and ones for which the Company would require clarification from
the FDA as it goes forward. The Company believes that AlloDerm, when used for
cosmetic augmentation and as a void filler, may still qualify as human tissue.
Similarly, the Company advised the FDA that since almost every replacement or
repair of damaged or inadequate tissue involves a cosmetic aspect, the Company
believes that many cosmetic uses of AlloDerm are within the purview of human
tissue. Nevertheless, the Company informed the FDA that it intends to follow
the agency's decision and, until this matter is clarified on a case-by-case
basis, will not promote AlloDerm for the Additional Indications.

   
         During late 1997, the Company notified the FDA that it believes that
AlloDerm, when promoted for use in dura mater replacement procedures, is human
tissue within the scope of the FDA's interim and final regulations. The Company
requested a meeting to discuss this matter further. In December 1997, the FDA
notified the Company that it believes that AlloDerm, when promoted for such
use, should be classified as a medical device. The Company met with the FDA
during April 1998 to discuss this matter further, but no conclusions were
reached at the meeting nor has the FDA indicated a change in its position since
the meeting.
    

   
         Additionally, it is unclear whether the FDA would regulate AlloDerm
under its medical device authorities for these indications: (i) graft for
guided bone regeneration; (ii) oncological reconstruction; (iii) urological
applications; (iv) certain orthopedic surgeries; and (v) general surgeries. In
addition, further discussion with the FDA is required to determine the level of
regulation that may be applied with regard to the promotion and marketing of
Micronized AlloDerm.
    




                                      21

<PAGE>   22
       There can be no assurance that the FDA will alter its initial
determination that AlloDerm, when labeled and promoted for use as a dura mater
replacement, should be regulated as a medical device. Additionally, there can
be no assurance that the FDA will not finally conclude that use of AlloDerm for
the Additional Indications or other indications should be regulated as a
medical device and require a 510(k) premarket notification or premarket
approval application for AlloDerm for such indications. If the FDA were to
conclude definitively that the Company is required to obtain agency clearance
of a 510(k) notification or approval of a premarket approval application for
AlloDerm for duraplasty, for the Additional Indications or for other uses, the
FDA may require the Company to conduct laboratory testing and preclinical and
clinical studies of AlloDerm to support a marketing application. Testing,
preparation of necessary applications and processing of those applications by
the FDA is expensive and any required laboratory testing or preclinical or
clinical studies that the Company would be required to conduct could take
several years to complete. There can be no assurance that any required testing
could be completed successfully, or that if successfully completed, would
provide sufficient data and information to enable the FDA to determine, on a
timely basis, if at all, that when AlloDerm is used for duraplasty, for the
Additional Indications or for other uses, it is substantially equivalent to a
legally marketed predicate device or is safe and effective for such uses and to
permit the product to be marketed for such uses. Failure of the Company to
receive any required FDA clearance or approval of AlloDerm for such uses on a
timely basis would preclude promotion of AlloDerm for such uses and could have
a material adverse effect on the Company's business, financial condition and
results of operations.

         In October 1997, the FDA inspected LifeCell's facilities. No Form 483
Notice of Observations was left with the Company, although the agency did take
copies of numerous documents relating to the AlloDerm production process and
promotional material relating to AlloDerm. Notwithstanding the fact that no
Form 483 was received, there can be no assurance that the FDA will not raise
regulatory issues with respect to the documents taken for review.

         In February 1997, the FDA issued a comprehensive "proposed approach"
to the regulation of cellular and tissue-based products, other than human
tissue for transplantation. The FDA proposal sets forth a tiered approach to
cell and tissue regulation that ranges from no regulatory requirements for
cells or tissue that are removed and transplanted into the same patient in a
single surgical procedure to full premarket approval requirements for biologics
and medical devices that raise potential health, safety or efficacy concerns.
Although the FDA has notified the Company that AlloDerm is not now subject to
premarket notification or approval, there can be no assurance that the FDA will
not impose additional or different regulatory requirements on AlloDerm after
the agency finalizes its approach to the regulation of cellular and
tissue-based products.

         Human tissue is regulated by the FDA in a manner the agency has deemed
necessary to protect the public health from the transmission of various
infectious diseases, including human immunodeficiency virus ("HIV") infection,
syphilis and hepatitis infection, through transplantation of tissue from donors
with or at risk of these diseases. Under the FDA regulations, all facilities
engaged in the procurement, processing, storage or distribution of human tissue
intended for transplant are required to assure that certain infectious disease
testing and donor screening is performed and that records documenting such
testing for each tissue are available for inspection by the FDA. The
regulations also provide authority for the FDA to conduct inspections of human
tissue facilities and to detain, recall or destroy tissue for which appropriate
documentation is not available. Although the Company believes that it conducts
its operations in compliance in all material respects with such requirements,
no assurances may be given in such regard. Non-compliance with applicable
requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to authorize the marketing of new products or to allow the Company
to enter into supply contracts and criminal prosecution.

         The National Organ Transplant Act ("NOTA") prohibits the acquisition,
receipt or transfer of certain human organs, including skin, for "valuable
consideration." NOTA permits the payment of reasonable expenses associated with
the removal, transportation, processing, preservation, quality control and
storage of human tissue and skin. NOTA may be interpreted to limit the prices
that LifeCell may charge for processing and transporting its human tissue
products. This could result in limited revenues which could adversely affect
LifeCell's business, financial condition and results of operations. See
"--Government Regulation."

   
    


                                      22


<PAGE>   23
   
    

         GOVERNMENT REGULATION--PROPOSED PRODUCTS

         Many if not all of LifeCell's products under development will require
regulatory approval or clearance prior to commercialization. Human therapeutic
products are subject to rigorous preclinical and clinical testing as a
condition of approval by the FDA and by similar regulatory authorities in
foreign countries. The lengthy process of obtaining these approvals and
clearances and the ongoing process of compliance with applicable federal
statutes and regulations will require the expenditure of substantial resources,
and there can be no assurance that FDA or foreign approvals will be obtained
for any of the Company's proposed products.

   
         The regulatory status of micronized forms of AlloDerm in the United
States is uncertain. Although the Company believes that this form of AlloDerm
should be classified as human tissue intended for transplantation, there can be
no such assurance. Additionally, certain configurations of Micronized AlloDerm,
such as those designed to facilitate use by the physician, may be regulated as
a medical device. If the product is classified as a device by the FDA,
extensive delays may be encountered before the time, if ever, that the product
may be commercially distributed. See "--Government Regulation."
    

         LifeCell believes that its allograft tissue products in development,
including vascular grafts and nerve connective tissue, should be classified as
"human tissue" under the FDA's regulations. However, further discussion with
the FDA is required to determine the level of regulation the FDA will adopt
with regard to the promotion and marketing of these products. There can be no
assurance that the FDA will not require the submission of premarket approval
application supported by extensive clinical data for these products. See
"--Risk Factors--Government Regulation--Proposed Products."

         LifeCell's proposed xenograft heart valve and other xenograft tissue
transplantation products will be subject to regulation as medical devices. The
Company's proposed blood cell preservation products will be subject to
regulation as biologics. Such products require FDA premarket clearance or
approval prior to commercialization in the United States. To obtain FDA
approval for these products, the Company must submit proof of their safety and
efficacy. Testing, preparation of necessary applications and processing of
those applications by the FDA is expensive and time consuming. There can be no
assurance that the FDA will act favorably or quickly in making such reviews,
and significant difficulties or costs may be encountered by the Company in its
efforts to obtain FDA clearances that could delay or preclude the Company from
marketing any product it may develop. The FDA may also place conditions on
clearances that could restrict commercial applications of such products.
Product marketing approvals or clearances may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur following initial
marketing. Delays imposed by the governmental clearance process may materially
reduce the period during which the Company has the exclusive right to
commercialize patented products.

         Products marketed by LifeCell pursuant to FDA or foreign approval will
be subject to pervasive and continuing regulation. In the United States,
devices and biologics must be manufactured in registered establishments and
must be produced in accordance with the FDA's "Quality System" regulation for
medical devices or "Good Manufacturing Practices" ("GMP") regulations for
biologics. Manufacturing facilities and 





                                      23



<PAGE>   24
processes are subject to periodic FDA inspection. Labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The export of devices and biologics is also
subject to regulation and may require FDA approval. From time to time, the FDA
may modify such requirements, imposing additional or different requirements.
Failure to comply with any applicable FDA requirements could result in civil
and criminal enforcement actions and other penalties. In addition, there can be
no assurance that the various states in which LifeCell's products are sold will
not impose additional regulatory requirements or marketing impediments.

         The National Organ Transplant Act prohibits the acquisition, receipt
or transfer of certain human organs, including heart valves and vascular
grafts, for "valuable consideration," which could affect the commercialization
of certain of the Company's proposed human tissue products. See "--Risk
Factors--Government Regulation--AlloDerm" and "--Government Regulation."

         FOREIGN REGULATORY STATUS OF ALLODERM

         The regulation of AlloDerm outside the United States varies by
country. Certain countries regulate AlloDerm as a pharmaceutical product,
requiring extensive filings and regulatory approvals to market the product.
Certain countries classify AlloDerm as a transplant tissue but may restrict its
import or sale. Other countries have no applicable regulations regarding the
import or sale of products similar to AlloDerm, creating uncertainty regarding
the import or sale of the product. There can be no assurance that the various
foreign countries in which LifeCell's products are sold will not impose
additional regulatory requirements.

         AlloDerm currently is being marketed in certain foreign countries, and
LifeCell is pursuing clearance to market AlloDerm in additional countries.
There can be no assurance that the uncertainty of regulations in each country
will not delay or impede the marketing of AlloDerm or impede the ability of
LifeCell to negotiate distribution arrangements on favorable terms. Certain
foreign countries have laws similar to the United States' National Organ
Transplant Act. These laws may restrict the amount that the Company can charge
for AlloDerm and may restrict the importation or distribution of AlloDerm to
licensed not-for-profit organizations. See "--Government Regulation."

         UNCERTAINTY OF MARKET ACCEPTANCE

         Much of the Company's ability to increase revenues and to achieve
profitability and positive cash flow will depend on expanding the use and
market penetration of its AlloDerm product and the successful introduction of
its products in development. Products based on the Company's technologies
represent new methods of treatment. Physicians will not use the Company's
products unless they determine that the clinical benefits to the patient are
greater than those available from competing products or therapies. Even if the
advantage of the Company's products is established as clinically significant,
physicians may not elect to use such products for any number of reasons. As
such, there can be no assurance that any of the Company's AlloDerm products or
products under development will gain any significant degree of market
acceptance among physicians, health care payors and patients. Broad market
acceptance of the Company's products may require the training of numerous
physicians and clinicians, as well as conducting or sponsoring clinical studies
to demonstrate the benefits of such products. The amount of time required to
complete such training and studies could result in a delay or dampening of such
market acceptance. Moreover, health care payors' approval of reimbursement for
the Company's products in development will be an important factor in
establishing market acceptance. See "--Risk Factors--Limited Third-Party
Reimbursement."

         DELAYED OR UNSUCCESSFUL PRODUCT DEVELOPMENT

         The Company's growth and profitability will depend, in part, upon its
ability to complete development of and successfully introduce new products. The
Company may be required to undertake time-consuming and costly development
activities and seek regulatory clearance or approval for new products. Although
the Company has conducted animal studies on many of its products under
development which indicate that the product may be feasible for a particular
application, there can be no assurance that the results obtained from expanded
studies will be consistent with earlier trial results or be sufficient for the
Company to obtain any required regulatory approvals or clearances. There can be
no assurance that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products, that regulatory clearance or approval of these or any new products
will be granted on a timely basis, if ever, or that the new products will
adequately meet 



                                      24

<PAGE>   25
the requirements of the applicable market or achieve market acceptance. The
completion of the development of any of the Company's products under
development remains subject to all the risks associated with the
commercialization of new products based on innovative technologies, including
unanticipated technical or other problems, manufacturing difficulties and the
possible insufficiency of the funds allocated for the completion of such
development, which could result in a change in the design, delay in the
development or the abandonment of such products. Consequently, there can be no
assurance that any of the Company's products under development will be
successfully developed or manufactured or, if developed and manufactured, that
such products will meet price or performance objectives, be developed on a
timely basis or prove to be as effective as competing products. The inability
to complete successfully the development of a product or application, or a
determination by the Company, for financial, technical or other reasons, not to
complete development of any product or application, particularly in instances
in which the Company has made significant capital expenditures, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

         DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL

   
         The success of LifeCell will be dependent largely on the efforts of its
executive officers, including Paul M. Frison, Chairman of the Board, President
and Chief Executive Officer of the Company, and Stephen A. Livesey, M.D., Ph.D.,
Executive Vice President, Chief Science Officer and a director of the Company.
The loss of Mr. Frison's and Dr. Livesey's services would have a material
adverse effect on LifeCell's business, financial condition and results of
operations. LifeCell has obtained "keyman" life insurance on Mr. Frison and Dr.
Livesey of $1.0 million and $3.0 million, respectively. Dr. Livesey, a citizen
of Australia, has applied for permanent residence status in the United States.
There can be no assurance that he will be able to obtain such status. The
Company does not have employment agreements with any of its employees. Further,
the success of LifeCell is also dependent upon its ability to hire and retain
qualified operating, marketing and technical personnel. The competition for
qualified personnel in the biomedical industry is intense and, accordingly,
there can be no assurance that LifeCell will be able to hire or retain such
personnel.
    

         DEPENDENCE ON CORPORATE COLLABORATORS

   
         The Company expects to rely in the future on corporate collaborative
partners for the development and commercialization of certain products and to
conduct certain clinical trials, obtain regulatory approvals and manufacture and
market any resulting products. Although the Company believes that any such
collaborative partners would have an economic motivation to commercialize any
products that might result from such arrangements, the amount and timing of
resources devoted to these activities by such parties could depend on the
achievement of technical and research goals by the Company and generally would
be controlled by such partners. Moreover, collaborative arrangements generally
provide that they may be terminated by the collaborator prior to their
expiration under circumstances that also may be outside the control of the
Company. Any eventual sale of products may depend further on the successful
completion of arrangements with other partners, licensees or distributors in
each territory. There can be no assurance that the Company will be successful in
establishing any such collaborative arrangements on acceptable terms, if at all,
or that any such future collaborator would be successful in commercializing any
resulting products. In 1994, LifeCell entered into a license and development
agreement with Medtronic, Inc. ("Medtronic") to develop jointly the Company's
heart valve products. Pursuant to the agreement, Medtronic paid LifeCell an
initial $1.5 million license fee, funds certain costs of research and
development under a mutually agreed upon budget, including clinical trials, if
any, and will pay royalties of up to an aggregate of $25.0 million on sales of
products covered by the agreement. There can be no assurance that Medtronic will
perform its obligations under the agreement, will provide material funding
for the Company's heart valve development program, will not terminate the
agreement, that Medtronic or LifeCell will successfully develop or market any
products under the agreement or that LifeCell will ever receive royalties under
the agreement. Furthermore, there can be no assurance that Medtronic or future
collaborators will not pursue existing or alternative technologies in preference
to potential products being developed in collaboration with the Company.
    

         DEPENDENCE ON DISTRIBUTOR SALES

         Sales to distributors constitute a significant portion of the
Company's revenues. The Company has only recently entered into certain of its
current distribution arrangements. The Company may be required to enter into
additional distribution arrangements to achieve broad distribution of AlloDerm
or any future products. There can be no assurance that the Company will be able
to maintain its current distributor arrangements or, in the event of
termination of any of these arrangements, that a new distributor will be found,
or that the Company will be able to enter into and maintain arrangements with
additional distributors on acceptable terms, or on a timely basis, if ever. 



                                      25

<PAGE>   26
   
The Company's distributors generally purchase and maintain inventories of
AlloDerm in anticipation of future sales to dentists, surgeons and hospitals.
The termination of the distributor's relationship with the Company may have an
adverse effect on LifeCell's sales until such inventories are sold. There can be
no assurance that these distributors will devote the resources necessary to
provide effective sales and marketing support to the Company or market the
Company's products at prices that can achieve market acceptance. In addition,
the Company's distributors may give higher priority to the products of other
medical suppliers or their own products, thus reducing their efforts to sell the
Company's products. If any of the Company's distributors becomes unwilling or
unable to promote, market and sell the Company's products, the Company's
business, financial condition and results of operations could be materially
adversely affected. The Company has engaged Lifecore Biomedical, Inc. as the
exclusive distributor for AlloDerm for dental applications in the United States,
and other distributors also may be granted exclusive distribution rights. To the
extent any exclusive distributor fails adequately to promote, market and sell
the Company's products, the Company may not be able to secure a replacement
distributor until after the term of the distribution contract is complete or
until such contract can otherwise be terminated. See "--Marketing."
    

         DEPENDENCE ON CERTAIN SOURCES OF MATERIALS

         The Company's business will be dependent on the availability of
donated human skin, cardiovascular tissue and other tissues. A finite supply of
donated tissue is available. Although the Company has established what it
believes to be adequate sources of donated human skin to satisfy the expected
demand for AlloDerm during 1998, LifeCell has not yet developed a supply of
other tissues and there can be no assurance that the availability of donated
human skin and other tissues will be sufficient to meet LifeCell's demand for
such materials. Any significant interruption in supply of such tissue would
likely have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Sources of Materials."

         The Company acquires donated human skin from various non-profit
organizations which procure skin and other donated human tissue. The
procurement of skin generally constitutes a small portion of the operating
funds for such non-profit organizations. The development of products that
replace the need for donated tissue, such as the development of synthetic bone
substitutes to replace allograft bone procured by the organizations, could
threaten the existence of the non-profit organizations and, therefore,
adversely affect the supply of donated human skin to LifeCell or increase the
required payments from LifeCell.

         The Company has performed limited activities to develop products using
porcine dermis and other animal tissues as a substitute for donated human skin.
If successfully developed, animal tissue could replace the need for human
tissue as a raw material. There can be no assurance that such animal tissue
products can be successfully developed, that such development and required
regulatory approvals could result in timely replacement of human tissue used by
LifeCell in the event of a reduced supply of human tissue or that the cost of
such animal tissue would not materially adversely affect the business,
financial condition and results of operations of the Company.

         Donors of organs and tissues, including donated human skin, have
various motivations. Although LifeCell does not promote the use of AlloDerm for
cosmetic applications, AlloDerm has been used by surgeons in a variety of
applications that may be considered "cosmetic." Knowledge of such use by
potential donors could impact their willingness to donate skin for such uses.
See "--Risk Factors--Product Liability and Insurance" and "--Risk
Factors--Sources of Materials."

         TECHNOLOGICAL CHANGE AND COMPETITION

         The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and
commercialize efficient and effective products based on its technology. There
are many companies and academic institutions that are capable of developing
products based on similar technology, and that have developed and are capable
of developing products based on other technologies, which are or may be
competitive with LifeCell's products. Many of these companies and academic
institutions are well-established, have substantially greater financial and
other resources, research and development capabilities and more experience in
conducting clinical trials, obtaining regulatory approvals, manufacturing and
marketing than LifeCell. These companies and academic institutions may succeed
in developing competing products that are more effective than LifeCell's
products, or that receive government approvals more quickly than LifeCell's
products, which may render the Company's products or technology uncompetitive,
uneconomical or obsolete. See "--Competition."



                                      26



<PAGE>   27
         LIMITED THIRD-PARTY REIMBURSEMENT

         Generally, hospitals, physicians and other health care providers
purchase products, such as the products being sold or developed by LifeCell,
for use in providing care to their patients. These parties typically rely on
third-party payors, including Medicare, Medicaid, private health insurance and
managed care plans, to reimburse all or part of the costs of acquiring those
products and costs associated with the medical procedures performed with those
products. Cost control measures adopted by third-party payors in recent years
have had and may continue to have a significant effect on the purchasing
practices of many health care providers, generally causing them to be more
selective in the purchase of medical products. Significant uncertainty exists
as to the reimbursement status of newly approved health care products. The
Company believes that certain third-party payors provide reimbursement for
medical procedures at a specified rate without additional reimbursement for
products, such as those being sold or developed by LifeCell, used in such
procedures. There can be no assurance that adequate third-party payor
reimbursement will be available for the Company to maintain price levels
sufficient for realization of an appropriate return on its investment in
developing new products. In addition, government and other third-party payors
continue to refuse, in some cases, to provide any coverage for uses of approved
products for indications for which the FDA has not granted marketing approval.
Many uses of AlloDerm have not been granted such marketing approval and there
can be no assurance that any such uses will be approved. Further, certain of
the Company's products are used in medical procedures that typically are not
covered by third-party payors, such as "cosmetic" procedures, or for which
patients sometimes do not obtain coverage, such as dental procedures. These and
future changes in third-party payor reimbursement practices regarding the
procedures performed with LifeCell's products could adversely affect the market
acceptance of LifeCell's products. See "--Government Regulation."

         DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS

   
         LifeCell's ability to compete effectively with other companies is
materially dependent upon the proprietary nature of its technologies. LifeCell
relies primarily on patents and trade secrets to protect its technologies.
LifeCell currently licenses the exclusive right to nine United States patents
and related foreign patents and non-exclusive rights to 14 patents. In
addition, LifeCell has been issued three United States utility patents, one
United States design patent and has seven pending United States patent
applications. There can be no assurance that LifeCell will obtain any
additional patents or other protection, that the patents currently applied for
will be granted, that, if the patents currently applied for are granted, the
claims allowed will be sufficient to protect LifeCell's technology, or that
existing patents or proprietary rights owned by or licensed to LifeCell will
provide significant commercial benefits. Further, there can be no assurance
that any patents or proprietary rights owned by or licensed to LifeCell will
not be challenged, invalidated, circumvented, or rendered unenforceable based
on, among other things, subsequently discovered prior art, lack of entitlement
to the priority of an earlier, related application or failure to comply with
the written description, best mode, enablement or other applicable
requirements. The invalidation, circumvention or unenforceability of key
patents or proprietary rights owned by or licensed to LifeCell could have a
material adverse effect on LifeCell and on its business, financial condition
and results of operations.
    

         LifeCell's success will depend in part on its ability to maintain and
obtain patent protection for its technology both in the United States and other
countries. Other companies and research and academic institutions may have
developed technologies, filed patent applications or received patents on
various technologies that may be related to LifeCell's business. Some of these
patent applications, patents or technologies may conflict with LifeCell's
patent applications, patents or technologies. Any such conflict could
invalidate or limit the scope of LifeCell's patents or could result in denial
of LifeCell's patent applications.

         In general, the patent position of biotechnology and medical product
firms is highly uncertain and involves complex legal, scientific and factual
questions. There can be no assurance that any other patents will be granted
with respect to the patent applications filed by the Company. Furthermore,
there can be no assurance that any patents issued or licensed to the Company
will provide commercial benefit to the Company or will not be infringed,
invalidated or circumvented by others. The United States Patent and Trademark
Office currently has a significant backlog of patent applications, and the
approval or rejection of patents may take several years. Prior to actual
issuance, the contents of United States patent applications are generally not
made public. Once issued, such a patent would constitute prior art from its
filing date, which might predate the date of a patent application on which the
Company relies. Conceivably, the issuance of such a patent, or the discovery of
"prior art" of which the Company is currently unaware, could invalidate a
patent of the Company or its licensor or prevent commercialization of a product
disclosed therein.



                                      27

<PAGE>   28
         The Company generally does not conduct an extensive review of issued
patents prior to engaging in research or development activities. Accordingly,
the Company may be required to obtain a license from others to commercialize
any of its products under development. There can be no assurance that any such
license that may be required could be obtained on favorable terms or at all.

         In addition, if patents that cover LifeCell's existing activities are
issued to other companies, there can be no assurance that LifeCell would be
able to obtain licenses to such patents at a reasonable cost, if at all, or be
able to develop or obtain alternative technology. Any of the foregoing matters
could have a material adverse effect on LifeCell and on its business prospects.
In addition, the Company may be required to obtain a license under one or more
patents prior to commercializing any heart valve or vascular product, if
developed. There can be no assurance that such a license will be available, or
if available, that a license will be granted on terms which are commercially
acceptable to the Company.

   
         During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). Under the terms of
the settlement agreement, Integra and MIT agreed not to assert the Integra
Patents against current or future products produced using LifeCell's current
technology. LifeCell also obtained the right to develop and commercialize future
products using Integra's technology through a license to certain of Integra's
patents. For a further discussion of the settlement terms, see "Legal
Proceedings." There can be no assurances that the Company's existing or
proposed products or processes will not be subject to infringement claims by
others. Any successful infringement claim relating to any patent could have a
material adverse effect on the Company.
    

         There can be no assurance that LifeCell will not be required to resort
to litigation to protect its patented technologies or other proprietary rights
or that the Company will not be the subject of additional patent litigation to
defend its existing or proposed products or processes against claims of patent
infringement or other intellectual property claims. Any of such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations.

         LifeCell also has applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts.

         LifeCell may decide for business reasons to retain certain knowledge
that it considers proprietary as confidential and elect to protect such
information as a trade secret, as business confidential information or as
know-how. In that event, LifeCell must rely upon trade secrets, know-how and
continuing technological innovation to maintain its competitive position. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to or disclose such
information. The independent development or disclosure of LifeCell's trade
secrets could have a material adverse effect on LifeCell and on its business
prospects. See "--Patents, Proprietary Information and Trademarks."

         PRODUCT LIABILITY AND INSURANCE

         The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing and marketing of medical
products. Although the Company has product liability insurance coverage with an
aggregate limit of $5.0 million and a per occurrence limit of $3.0 million,
there can be no assurance that such insurance will provide adequate coverage
against potential liabilities, that adequate product liability insurance will
continue to be available in the future or that it can be maintained on
acceptable terms. The obligation to pay any product liability claim in excess
of whatever insurance the Company is able to acquire could have a material
adverse effect on the business, financial condition and results of operations
of the Company. The Company uses donated human skin as the raw material for
AlloDerm. The non-profit organizations that supply such skin are required to
follow FDA regulations and guidelines published by the American Association of
Tissue Banks to screen donors for potential disease transmission. Such
procedures include donor testing for certain viruses, including HIV. The
Company's manufacturing process also has been demonstrated to inactivate
concentrated suspensions of HIV in 




                                      28

<PAGE>   29
tissue. While the Company believes such procedures are adequate to reduce the
threat of disease transmission, there can be no assurance that its AlloDerm
product will not be associated with transmission of disease or that a patient
otherwise infected with disease would not erroneously assert a claim that the
use of AlloDerm resulted in the disease transmission. Any such transmission or
alleged transmission could have a material adverse effect on the Company's
ability to manufacture or market its products or could otherwise have a
material adverse effect on the Company's business, financial condition or
results of operations. See "--Risk Factors--Dependence on Certain Sources of
Materials."

         LIMITATION ON THE USE OF NET OPERATING LOSSES AND RESEARCH AND 
         DEVELOPMENT TAX CREDITS

         As of December 31, 1997, LifeCell had accumulated net operating loss
("NOL") carryforwards for federal income tax purposes of approximately $32.1
million and research and development tax credits of approximately $395,000
since its inception, and may continue to incur NOL carryforwards. United States
tax laws provide for an annual limitation on the use of NOL carryforwards
following certain ownership changes and also limit the time during which NOL
and tax credit carryforwards may be applied against future taxable income and
tax liabilities. The sale of Common Stock in the public offering completed in
December 1997 resulted in an ownership change for federal income tax purposes.
The Company estimates that the amount of its NOL carryforwards and the credits
available to offset taxable income subsequent to the offering will be
approximately $2.6 million per year on a cumulative basis. Accordingly, if
LifeCell generates taxable income in any year in excess of the then cumulative
limitation, the Company may be required to pay federal income taxes even though
it has unexpired NOL carryforwards.

         DISPOSAL OF HAZARDOUS MATERIALS

         LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have a material adverse effect on
LifeCell's business, financial condition and results of operations. See
"--Government Regulation."

         POSSIBLE VOLATILITY OF STOCK PRICE

         The market price of the shares of Common Stock, like that of the
common stock of many other medical products and high technology companies, has
in the past been, and is likely in the future to continue to be, highly
volatile. Factors such as fluctuations in the Company's operating results,
announcements of technological innovations or new commercial products by the
Company or competitors, government regulation, developments in or disputes
regarding patent or other proprietary rights, economic and other external
factors and general market conditions may have a significant effect on the
market price of the Common Stock. Moreover, the stock market has from time to
time experienced extreme price and volume fluctuations which have particularly
affected the market prices for medical products and high technology companies
and which have often been unrelated to the operating performance of such
companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of
Common Stock.

         POSSIBLE ANTI-TAKEOVER EFFECTS

         Certain provisions of LifeCell's Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation") and
Amended and Restated By-laws (the "By-laws") and Section 203 of the Delaware
General Corporation Law may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over the current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may
deem to be in their best interests. For example, provisions contained in the
Restated Certificate of Incorporation and By-laws include authorized blank
check preferred stock, the denial of cumulative voting, limitation of the
persons who may call a special meeting of the stockholders and advance notice
requirement for election to the Board of Directors.




                                      29

<PAGE>   30
         RIGHTS OF HOLDERS OF SERIES B PREFERRED STOCK

         As of December 31, 1997, there were 125,441 shares of Series B
Preferred Stock outstanding. Such shares are convertible at any time at the
option of the holders thereof and automatically under certain circumstances
into approximately 4,046,483 shares of Common Stock. On all matters submitted
to a vote of the stockholders of the Company, each share of Series B Preferred
Stock entitles the holder thereof to one vote for each share of Common Stock
into which such share of Series B Preferred Stock is then convertible. The
holders of the shares of Series B Preferred Stock have the right to elect up to
three directors of the Company. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the holders of
shares of Series B Preferred Stock will be entitled to receive out of the
assets of the Company available for distribution to stockholders, before any
distribution of assets is made to holders of Common Stock, an amount equal to
$100.00 per share of Series B Preferred Stock. After payment of the full amount
of any liquidating distribution to which they are entitled, the holders of
shares of Series B Preferred Stock will be entitled to share ratably (treating
all then issued and outstanding shares of Series B Preferred Stock as if such
shares had been converted into Common Stock) in any further distribution of
assets by the Company to the holders of Common Stock. Holders of the Series B
Preferred Stock are entitled to receive dividends through September 30, 2001.
The Company may at its option pay such dividends in additional shares of Series
B Preferred Stock.

ITEM 2.    PROPERTIES

         LifeCell leases approximately 25,000 square feet of laboratory, office
and warehouse space at its facilities in The Woodlands, Texas, under lease
agreements that expire in January 2001. The Company's monthly rental obligation
for its facilities is approximately $24,000.

ITEM 3.    LEGAL PROCEEDINGS

   
         During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). During December
1997, the Company filed a separate lawsuit against Integra and MIT alleging
that they tortiously interfered with certain of LifeCell's business
relationships, including relationships with investors and potential investors in
LifeCell's recent public offering. The lawsuit also alleged anticompetitive
acts and business disparagement. Under the terms of the settlement agreement,
Integra and MIT agreed not to assert the Integra Patents against current or
future products produced using LifeCell's current technology. LifeCell also
obtained the right to develop and commercialize future products using Integra's
technology through a license to certain of Integra's patents. As an additional
condition of the settlement, Integra agreed to purchase from LifeCell $500,000
in shares of Common Stock following determination of the per-share purchase
price in accordance with the settlement agreement. LifeCell expects that the
settlement with Integra will have no material effect on the financial condition
or results of operations of the Company.
    

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

         None.




                                      30
<PAGE>   31

                                    PART II

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

   
         The Company's Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "LIFC." On April 17, 1998, the last reported sale price for the
Company's Common Stock on The Nasdaq SmallCap Market was $8.00 per share. The
following table sets forth the high and low sales information for the Company's
Common Stock for the periods indicated, as reported by The Nasdaq Stock Market.
    

<TABLE>
<CAPTION>
                                                           High     Low
<S>                                                       <C>      <C>  
              1996
               First Quarter.........................     $6.00    $2.25
                Second Quarter.......................      5.00     3.75
                Third Quarter........................      5.88     3.09
                Fourth Quarter.......................      4.25     2.88
             
              1997
               First Quarter........................      $8.88    $3.06
                Second Quarter.......................      7.13     4.63
                Third Quarter........................      8.38     4.81
                Fourth Quarter.......................      8.25     3.50
</TABLE>


         As of February 28, 1998, there were approximately 280 holders of
record of shares of Common Stock and 49 holders of record of shares of Series B
Preferred Stock. The Company estimates that there are in excess of 2,000
beneficial holders of its Common Stock.

         During 1997, the Company issued a total of 74,786 shares of Common
Stock for an aggregate consideration of $308,866 to various stockholders of the
Company pursuant to the exercise of certain stock purchase warrants.
Additionally, during 1997, the Company issued 2,027 shares of Common Stock in
exchange for a warrant to purchase 15,000 shares of Common Stock. None of such
issuances involved underwriters. The Company considers these securities to have
been offered and sold in transactions not involving a public offering and,
therefore, to be exempted from registration under Section 4(2) of the
Securities Act of 1933, as amended.

DIVIDEND POLICY

         LifeCell has not paid a cash dividend to holders of shares of Common
Stock and does not anticipate paying cash dividends to the holders of its
Common Stock in the foreseeable future. Pursuant to the terms of the Company's
Series A Preferred Stock, on (i) December 6, 1996, the Company paid a per share
dividend of $1.60 in shares of Common Stock to the holders of the Series A
Preferred Stock; (ii) March 26, 1997, the Company paid a per share dividend of
$0.50 in shares of Common Stock to such security holders; and (iii) March 26,
1997, the Company paid a per share dividend of $0.25 in cash to such security
holders. Also on March 26, 1997, in accordance with the terms of the Series A
Preferred Stock, the Company redeemed all of the outstanding shares of the
Series A Preferred Stock through the conversion of such shares into shares of
Common Stock. Accordingly, no further dividends are payable in respect of the
Series A Preferred Stock.

         On February 15, 1997, May 15, 1997, August 15, 1997, and November 17,
1997, the Company paid a per share dividend in shares of its Series B Preferred
Stock equivalent to $1.17, $2.41, $1.50 and $1.51, respectively, to the holders
of shares of Series B Preferred Stock. On February 17, 1998, the Company paid a
$1.51 per share dividend in cash to the holders of shares of Series B Preferred
Stock. The Series B Preferred Stock bears dividends per share at the annual
rate of the greater of (i) $6.00 (subject to adjustment in certain events) and
(ii) the per annum rate of dividends per share paid, if applicable, by the
Company, on the Common Stock. The dividends may be paid, at the Company's
option, in cash or shares of Series B Preferred Stock or in a combination of
cash and shares of Series B Preferred Stock. Dividends on the Series B
Preferred Stock accrue and are paid quarterly. The Series B Preferred Stock
ceases bearing dividends on September 30, 2001.

         Under the General Corporation Law of the State of Delaware, a
corporation's board of directors may declare and pay dividends only out of
surplus, including additional paid in capital, or current net profits.


                                      31
<PAGE>   32



ITEM 6.    SELECTED FINANCIAL DATA

         The following table sets forth certain selected financial data of
LifeCell for each of the years in the five-year period ended December 31, 1997,
derived from the Company's audited financial statements. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>

                                                            Year Ended December 31,
                                       1993            1994            1995           1996             1997
                                   ------------    ------------    ------------   -------------    ------------
<S>                                <C>             <C>             <C>             <C>             <C>         
Operations Statement Data:
--------------------------
Revenues:
   Product sales ...............   $     20,737    $     93,940    $    742,238    $  2,012,205    $  4,904,971
   Research funded by others ...        377,057         722,675       1,064,337         933,365       1,074,954
                                   ------------    ------------    ------------    ------------    ------------
      Total revenues ...........        397,794         816,615       1,806,575       2,945,570       5,979,925
                                   ------------    ------------    ------------    ------------    ------------
Costs and expenses:
   Cost of goods sold ..........        207,398         515,500         925,174       1,281,353       2,540,644
   Research and development ....      2,095,856       2,085,851       2,169,764       1,588,186       2,007,062
   General and administrative ..      1,479,327       1,381,470       1,422,588       1,911,254       3,081,512
   Selling and marketing .......        268,618         727,615       1,475,296       2,389,573       4,955,597
                                   ------------    ------------    ------------    ------------    ------------
      Total costs and expenses .      4,051,199       4,710,436       5,992,822       7,170,366      12,584,815
                                   ------------    ------------    ------------    ------------    ------------
Loss from operations ...........     (3,653,405)     (3,893,821)     (4,186,247)     (4,224,796)     (6,604,890)
                                   ------------    ------------    ------------    ------------    ------------
   Interest income and other ...        223,973         167,300         280,843         135,082         466,255
                                   ------------    ------------    ------------    ------------    ------------
Net loss .......................   $ (3,429,432)   $ (3,726,521)   $ (3,905,404)   $ (4,089,714)   $ (6,138,635)

Loss per share(1)-basic and
   diluted .....................   $      (0.80)   $      (0.90)   $      (1.10)   $      (1.14)   $      (1.04)
                                   ============    ============    ============    ============    ============        
Shares used in computing loss
   per share-basic and diluted .      4,277,171       4,294,179       4,313,366       4,542,519       6,820,122
                                   ============    ============    ============    ============    ============        



                                                            Year Ended December 31,
                                       1993            1994            1995           1996             1997
                                   ------------    ------------    ------------   -------------    ------------
Balance Sheet Data:
-------------------
Cash and cash equivalents ......   $    426,104    $  1,877,295    $  3,015,332    $ 10,748,250    $ 20,781,026
Short-term investments .........      3,016,511       5,154,824            --              --              --
Working capital ................      3,433,008       6,613,304       2,888,048      10,884,779      20,515,559
Total assets ...................      4,260,079       7,997,404       4,376,039      12,890,015      24,155,598
Defferred credit ...............           --         1,500,000       1,500,000       1,500,000       1,500,000
Accumulated deficit ............    (16,618,635)    (20,678,402)    (24,774,753)    (29,310,934)    (36,411,480)
Total stockholders' equity .....      4,045,661       5,743,127       2,093,906      10,197,104      20,259,603

</TABLE>
(1) Includes effect of accounting treatment of preferred stock and warrants of
$0.03, $0.19, $0.24 and $0.14 in 1994, 1995, 1996 and 1997, respectively.


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

         The following discussion of operations and financial condition of
LifeCell should be read in conjunction with the Financial Statements and Notes
thereto included elsewhere in this Annual Report on Form 10-K.

         Special Note:  Certain  statements  set forth below  constitute  
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. See "Business--Special Note
Regarding Forward-Looking Statements."




                                      32
<PAGE>   33

GENERAL AND BACKGROUND

         LifeCell was organized in 1986 and, since its inception, has been
financed through the public and private sale of equity securities, through
product sales, through a corporate alliance with Medtronic and through the
receipt of government grants and contracts.

         LifeCell began the sale of AlloDerm grafts as a dermal replacement in
the grafting of third-degree burns in December 1993 and commenced commercial
activities in 1994. LifeCell commenced the sale of AlloDerm for periodontal
surgery in September 1995 and for reconstructive plastic surgery in November
1995. To date, proceeds from the sale of AlloDerm products have not been
sufficient to fund in full the Company's operating activities.

RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31, 1997 AND 1996

         The net loss for the year ended December 31, 1997, increased 50% to
approximately $6.1 million compared to approximately $4.1 million for the same
period of 1996. The increase was principally attributable to costs associated
with expanding the sales of AlloDerm, including the development of sales and
marketing programs, recruitment and retention of staff and the related
infrastructure necessary to support such activities.

         Total revenues for the year ended December 31, 1997, increased 103% to
approximately $6.0 million compared to approximately $2.9 million for the same
period of 1996. Approximately $2.9 million of such increase was attributable to
increases in sales of products, which were the result of expanded sales and
marketing activities and increased distribution activities during the 1997
period. The remaining $142,000 increase in revenues was the result of increased
research activities under funding arrangements; amounts recognized as revenues
under such cost-reimbursement arrangements are for the associated expenses
incurred during the periods.

         Cost of goods sold for the year ended December 31, 1997, was
approximately $2.5 million, resulting in a gross margin of approximately 48%.
The gross margin for the year ended December 31, 1996, was approximately 36%.
The increase in gross margin was principally attributable to the implementation
of certain production efficiencies, the allocation of fixed costs to higher
volumes of products, an increase in sales of certain higher-margin AlloDerm
products and an increase in the price of certain AlloDerm products in 1997.

         Research and development expenses for the year ended December 31,
1997, increased 26% to approximately $2.0 million compared to approximately
$1.6 million for 1996. Of such increase, approximately $142,000 was
attributable to increased activities related to research funded by others. Such
activities increased in 1997 as a result of the receipt during 1996 of three
contracts with government agencies to fund research and development activities.
The remaining $277,000 increase in research and development expense was
attributable to increased production of products for clinical and research
activities as well as higher allocations of resources to certain proprietary
research and development programs.

         General and administrative expenses for the year ended December 31,
1997, increased 61% to approximately $3.1 million compared to approximately
$1.9 million for 1996. Such increase was principally attributable to legal fees
accrued for the defense of the patent infringement lawsuit, increased staff
levels, recruiting fees and other professional fees related to the Company's
expansion of the infrastructure to support its increased sales activities.

         Selling and marketing expenses increased 107% to approximately $5.0
million for the year ended December 31, 1997, compared to approximately $2.4
million for 1996. The increase was primarily attributable to increased
promotional activities as well as the addition of sales personnel related to
AlloDerm marketing.

         Interest income and other, net increased 245% to approximately
$466,000 for the year ended December 31, 1997, compared to approximately
$135,000 for 1996. The increase was principally attributable to higher funds
available for investment during the current period as a result of the sale of
Series B Preferred Stock in November 1996 and the proceeds received from the
public offering of Common Stock in December 1997.

         YEARS ENDED DECEMBER 31, 1996 AND 1995

         Total revenues for 1996 increased 63% to approximately $2.9 million
compared to approximately $1.8 million for 1995. As a result of increased
marketing activities, expansion of distribution channels and expanded 


                                      33

<PAGE>   34
uses of the Company's AlloDerm product, product sales for the year increased
171% to $2.0 million from $742,000 for 1995. Revenue from research funded by
others decreased 12% to $933,000 from $1.1 million for 1995, principally as a
result of lower revenues under the Medtronic arrangement, offset by higher
revenues under government grants. The Company received two new grants in 1996
for its ThromboSol and composite skin programs.

         Total costs and expenses for 1996 increased 20% to $7.2 million,
compared to $6.0 million for the same period of the prior year principally as a
result of expanded sales and marketing activities for the Company's products
and costs related to such expanded activities.

         Cost of goods sold for 1996 increased 38% to $1.3 million compared to
$925,000 in the same period of 1995. This increase was due to an increase in
product sales and the shift from the development of AlloDerm to processing,
consistent with taking a product to market.

         Total research and development expenses decreased 27% to $1.6 million
in 1996 from $2.2 million in 1995 as a result of lower expenditures under its
research funded by others as well as the shift in the Company's focus from the
development of AlloDerm to processing.

         General and administrative expense increased 34% to $1.9 million in
1996, from $1.4 million in 1995 principally as a result of expanded
administrative activities as the Company increased its product sales and
marketing activities as well as certain administrative expenses recognized in
conjunction with its 1996 financing activities and non-cash charges related to
the reissuance of certain stock options.

         Selling and marketing expenses increased 62% to $2.4 million for 1996
from $1.5 million in 1995 primarily due to the addition of sales personnel and
promotional activities related to AlloDerm marketing and expanded distribution
activities.

         Interest income and other, net decreased 52% to $135,000 for 1996
compared to $281,000 for 1995 as a result of the decrease in funds available
for investment prior to the receipt of funds from an equity financing in late
1996, as well as lower interest rates in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception, LifeCell's principal sources of funds have been
equity offerings, product sales, external funding of research activities and
interest on investments. LifeCell has historically funded research and
development activities for products other than AlloDerm primarily with external
funds from its corporate alliance with Medtronic and government grants. In
April 1996, LifeCell was awarded a $613,000 contract from the United States
Navy related to the development of ThromboSol. In August 1996, LifeCell was
awarded a two-year $300,000 National Science Foundation grant related to its
keratinocytes program. In December 1996, LifeCell was awarded a two-year
contract of approximately $1.1 million from the United States Army to support
the development of vascular graft and other products.

         In 1994, LifeCell entered into an agreement with Medtronic pursuant to
which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject
to certain rights to terminate at Medtronic's discretion, to fund certain costs
of the research and development of LifeCell's proprietary tissue processing
technology in the field of heart valves. Through December 31, 1997, LifeCell
has recognized approximately $1.9 million in revenues for development funding,
excluding the initial license fee, for this program.

         In November 1996, LifeCell received net proceeds of approximately
$10.9 million pursuant to the private sale of Series B Preferred Stock and
warrants exercisable for the purchase of Common Stock. In December 1997,
LifeCell received net proceeds of approximately $16.0 million pursuant to a
public offering of 4.0 million shares of Common Stock.

   
         During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and the Massachusetts Institute of Technology ("MIT"). During
November 1997, Integra and MIT had alleged that the Company infringed two
patents licensed by MIT to Integra (the "Integra Patents"). During December
1997, the Company filed a separate lawsuit against Integra and MIT alleging that
they tortiously interfered with certain of LifeCell's business relationships,
including relationships with investors and potential investors in LifeCell's
recent public offering. The lawsuit also alleged anitcompetitive acts and
business disparagement. Under the terms of the settlement agreement, Integra and
MIT agreed not to assert the Integra Patents against current or future products
produced using LifeCell's current technology. LifeCell also obtained the right
to develop and commercialize future products using Integra's technology through
a license to certain of Integra's patents. As an additional condition of the
settlement, Integra agreed to purchase from LifeCell $500,000 in shares of
Common Stock following determination of the per-share purchase price in
accordance with the settlement agreement. LifeCell expects that the settlement
with Integra will have no material effect on the financial condition or results
of operations of the Company. 
    



                                      34

<PAGE>   35
   
    

   
         LifeCell expects to incur substantial expenses in connection with its
efforts to expand sales and marketing of AlloDerm, develop expanded uses for
AlloDerm, conduct the Company's product development programs (including costs of
clinical studies), prepare and make any required regulatory filings, introduce
products, participate in technical seminars and support ongoing administrative
and research and development activities. The Company currently intends to fund
these activities from its existing cash resources, sales of products and
research and development funding received from others. While the Company
believes that its existing available funds will be sufficient to meet its
present operating and capital requirements through at least 1999, there can be
no assurance that such sources of funds will be sufficient to meet these future
expenses. If adequate funds are not available, the Company expects it will be
required to delay, scale back or eliminate one or more of its product
development programs. The Company's need for additional financing will be
principally dependent on the degree of market acceptance achieved by the
Company's products and the extent to which the Company can achieve substantial
growth in product sales during 1998 and 1999, as well as the extent to which the
Company may decide to expand its product development efforts. There can be no
assurance that the Company will be able to obtain any such additional financing
on acceptable terms, if at all. See "Business--Risk Factors--No Assurance of
Additional Necessary Capital."
    

         LifeCell has had losses since its inception and therefore has not been
subject to federal income taxes. As of December 31, 1997, LifeCell had net
operating loss ("NOL") and research and development tax credit carryforwards
for income tax purposes of approximately $32.1 million and $395,000,
respectively, available to reduce future income tax and tax liabilities.
Federal tax laws provide for a limitation on the use of NOL and tax credit
carryforwards following certain ownership changes that could limit LifeCell's
ability to use its NOL and tax credit carryforwards. The sale of Common Stock
in the recent public offering resulted in an ownership change for federal
income tax purposes. The Company estimates that the amount of NOL carryforwards
and the credits available to offset taxable income subsequent to the offering
will be approximately $2.6 million per year on a cumulative basis. Accordingly,
if LifeCell generates taxable income in any year in excess of its then
cumulative limitation, the Company may be required to pay federal income taxes
even though it has unexpired NOL carryforwards.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         None.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements and supplementary financial information
required to be filed under this Item are presented commencing on page F-1 of
this Annual Report on Form 10-K, and are incorporated herein by reference.

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

         None.


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held May 27, 1998, under the captions "Election of
Directors" and "Executive Compensation," and such information is incorporated
herein by reference.





                                      35


<PAGE>   36
ITEM 11.   EXECUTIVE COMPENSATION

         The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held May 27, 1998, under the caption "Executive
Compensation," and such information is incorporated herein by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held May 27, 1998, under the caption "Security
Ownership of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item will be set forth in the
Registrant's Proxy Statement relating to the annual meeting of the Registrant's
stockholders scheduled to be held May 27, 1998, under the caption "Certain
Relationships and Related Transactions," and such information is incorporated
herein by reference.


                                    PART IV

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

(a)  DOCUMENTS INCLUDED IN THIS REPORT:

<TABLE>
<CAPTION>
     1.  FINANCIAL STATEMENTS                                                                                  PAGE

<S>                                                                                                            <C>
              Report of Independent Public Accountants.......................................................   F-1

              Balance Sheets as of December 31, 1996 and 1997................................................   F-2

              Statements of Operations for the years ended December 31, 1995, 1996 and 1997..................   F-3

              Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997........   F-4

              Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..................   F-6

              Notes to Financial Statements..................................................................   F-7

</TABLE>

(b)  REPORTS ON FORM 8-K:

         None

(c)  EXHIBITS:

   
         Exhibits designated by the symbol * are filed with this Form 10-K/A,
Amendment No. 1 to Annual Report on Form 10-K. All exhibits not so designated 
are incorporated by reference to a prior filing as indicated.
    

         Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with this
report pursuant to this Item 14.

         LifeCell undertakes to furnish to any stockholder so requesting a copy
of any of the following exhibits upon payment to the Company of the reasonable
costs incurred by Company in furnishing any such exhibit.



   
     3.1      Restated Certificate of Incorporation, as amended (incorporated
              by reference to Exhibit 3.1 to the Company's Annual Report on
              Form 10-K for the year ended December 31, 1997).
    

     3.2      Amended and Restated By-laws (incorporated by reference to Exhibit
              3.2 to the Company's Quarterly Report on Form 10-Q for the period
              ended June 30, 1996)


                                      36

<PAGE>   37
    10.1+     LifeCell Corporation Amended and Restated 1992 Stock Option Plan,
              as amended (incorporated by reference to Exhibit 10.1 to the
              Company's Quarterly Report on Form 10-Q for the period ended June
              30, 1997, filed with the Commission on August 12, 1997).

    10.2+     LifeCell Corporation Second Amended and Restated 1993
              Non-Employee Director Stock Option Plan, as amended (incorporated
              by reference to Exhibit 10.4 to the Company's Annual Report on
              Form 10-K for the fiscal year ended December 31, 1996, filed with
              the Commission on March 31, 1997).

     10.3     Form of Confidentiality/Non-Compete Agreement (incorporated by
              reference to Exhibit 10.28 to the Company's Registration
              Statement on Form S-1, Registration No. 33-44969, filed with the
              Commission on January 9, 1992).

     10.4     Exclusive License Agreement dated June 6, 1986, between the
              Registrant and The Board of Regents of The University of Texas
              System (incorporated by reference to Exhibit 10.29 to the
              Company's Registration Statement on Form S-1, Registration No.
              33-44969, filed with the Commission on January 9, 1992).

    10.5+     Amended and Restated Registration Rights Agreement dated February
              26, 1992, by and between the Registration and the stockholders
              named therein (incorporated by reference to Exhibit 10.40 to
              Amendment No. 3 to the Company's Registration Statement on Form
              S-1, Registration No. 33-44969, filed with the Commission on
              February 27, 1992).

     10.6     Underwriter's Warrant Agreement dated March 6, 1992, between the
              Registrant and Robert Todd Financial Corporation, and First
              Amendment to Underwriter's Warrant Agreement dated January 26,
              1993, between the Registrant and Robert Todd Financial
              Corporation (incorporated by reference to Exhibit 10.18 to the
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1992).

     10.7     Lease Agreement dated December 10, 1986, between the Registrant
              and The Woodlands Corporation, Modification and Ratification of
              Lease Agreement dated April 11, 1988, between the Registration
              and The Woodlands Corporation Modification and Ratification of
              Lease dated August 1, 1992, between the Company and The Woodlands
              Corporation and Modification, Extension and Ratification of Lease
              dated March 5, 1993, between the Registrant and The Woodlands
              Corporation, and Modification and Ratification of Lease Agreement
              dated December 21, 1995, between the Company and The Woodlands
              Office Equities -- '95 Limited (incorporated by reference to
              Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
              the period ended March 31, 1996).

     10.8     Lease Agreement dated September 1, 1988, between the Registrant
              and The Woodlands Corporation, and Modification of Lease
              Agreement dated March 5, 1993, between the Registrant and The
              Woodlands Corporation (incorporated by reference to Exhibit 10.22
              to the Company's Annual Report on Form 10-K for the fiscal year
              ended December 31, 1992).

     10.9     Stock Purchase Warrant dated January 26, 1993, issued to
              Strategem of Alabama, Inc. (incorporated by reference to Exhibit
              10.25 to the Company's Annual Report on Form 10-K for the fiscal
              year ended December 31, 1992).

    10.10     License and Development Agreement dated March 3, 1994, between
              the Registrant and Medtronic, Inc. (incorporated by reference to
              Exhibit 10.1 to the Company's Current Report on Form 8-K dated
              March 3, 1994).

    10.11     Investment Agreement dated March 3, 1994, between the Registrant
              and Medtronic, Inc. (incorporated by reference to Exhibit 10.2 to
              Company's Current Report on Form 8-K dated March 3, 1994).

    10.12     Lease Agreement between LifeCell Corporation and Unichem, dated
              August 1, 1994 (incorporated by reference to Exhibit 10.3 to the
              Company's Quarterly Report on Form 10-Q for the period ended
              September 30, 1994).

    10.13     Securities Purchase Agreement dated November 18, 1996, between
              LifeCell Corporation and the Investors named therein
              (incorporated by reference to Exhibit 10.15 to the Company's
              Annual Report on Form 10-K for the fiscal year ended December 31,
              1996).





                                      37


<PAGE>   38

    10.14     Voting Agreement dated November 18, 1996, among LifeCell
              Corporation and certain stockholders named therein (incorporated
              by reference to Exhibit 10.16 to the Company's Annual Report on
              Form 10-K for the fiscal year ended December 31, 1996).

    10.15     Registration Rights Agreement dated November 18, 1996, between
              LifeCell Corporation and certain stockholders named therein
              (incorporated by reference to Exhibit 10.17 to the Company's
              Annual Report on Form 10-K for the fiscal year ended December 31,
              1996).

    10.16     Form of Stock Purchase Warrant dated November 18, 1996, issued to
              each of the warrant holders named on Schedule 10.18 attached
              thereto (incorporated by reference to Exhibit 10.18 to the
              Company's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1996).

    10.17     Stock Purchase Warrant dated November 18, 1996, issued to Gruntal
              & Co., Incorporated (incorporated by reference to Exhibit 10.19
              to Amendment No. 1 to the Company's Annual Report on Form 10-K
              for the fiscal year ended December 31, 1996 on Form 10-K/A).

   10.18+     Agreement dated July 1, 1997, between LifeCell Corporation and
              Paul M. Frison.(incorporated by reference to Exhibit 10.20 to the
              Company's Registration Statement No. 333-37123 on Form S-2 filed
              with the Commission on October 3, 1997).

   10.19+     Agreement dated July 1, 1997, between LifeCell Corporation and 
              Stephen A. Livesey. (incorporated by reference to Exhibit 10.20 to
              the Company's Registration Statement No. 333-37123 on Form S-2 
              filed with the Commission on October 3, 1997).

    23.1*     Consent of Arthur Andersen LLP.

   
    27.1      Financial data schedule (Previously filed).
    




                                      38
<PAGE>   39



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                      LIFECELL CORPORATION
                      (Registrant)


                      By: /s/ PAUL M. FRISON
                          ----------------------------------------------------
                          Paul M. Frison, President and Chief Executive Officer
                              and Chairman of the Board of Directors
                            
Dated: May 1, 1998.

<PAGE>   40



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To LifeCell Corporation:



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

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

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



                                                   ARTHUR ANDERSEN LLP



Houston, Texas
February 18, 1998 (except with respect to the matter discussed in Note 10, as
to which the date is April 9, 1998)




                                      F-1
<PAGE>   41



                              LIFECELL CORPORATION

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 ----------------------------
                                                                                     1996            1997
                                                                                 ------------    ------------
                                     Assets


<S>                                                                              <C>             <C>         
Current Assets
  Cash and cash equivalents ..................................................   $ 10,748,250    $ 20,781,026
  Accounts and other receivables, net ........................................        436,839       1,095,904
  Inventories ................................................................        839,821         936,398
  Prepayments and other ......................................................         52,780          98,226
                                                                                 ------------    ------------
         Total current assets ................................................     12,077,690      22,911,554
Furniture and Equipment, net .................................................        478,098         864,058
Intangible Assets, net .......................................................        334,227         379,986
                                                                                 ------------    ------------
         Total assets ........................................................   $ 12,890,015    $ 24,155,598
                                                                                 ============    ============

                      Liabilities and Stockholders' Equity
                                        

Current Liabilities
  Accounts payable ...........................................................   $    514,848    $    780,393
  Accrued liabilities ........................................................        539,271       1,556,083
  Deferred revenues ..........................................................        138,792          59,519
                                                                                 ------------    ------------
         Total current liabilities ...........................................      1,192,911       2,395,995
Deferred Credit ..............................................................      1,500,000       1,500,000

Commitments and Contingencies

Stockholders' Equity
Series A preferred stock, $.001 par value, 300,000 and none shares authorized,
  260,000 and none issued and outstanding,
  including accrued dividends of $86,667 and none, respectively ..............      5,291,473            --
Series B preferred stock, $.001 par value, 182,205 shares
  authorized, 124,157 and 125,441 issued and outstanding and
  accrued dividends of 1,426 shares and none, respectively ...................            126             125
Undesignated preferred stock, $.001 par value, 1,517,795 and
  1,817,795 shares authorized, none issued and outstanding, respectively .....           --              --
Common stock, $.001 par value, 25,000,000 shares authorized,
  4,899,944 and 11,012,906 shares issued and outstanding,
  respectively ...............................................................          4,900          11,013
Warrants outstanding to purchase 3,378,264 and 3,163,478
  shares of common stock, respectively .......................................        423,218         299,480
Additional paid-in capital ...................................................     33,788,321      56,360,465
Accumulated deficit ..........................................................    (29,310,934)    (36,411,480)
                                                                                 ------------    ------------
         Total stockholders' equity ..........................................     10,197,104      20,259,603
                                                                                 ------------    ------------
         Total liabilities and stockholders' equity ..........................   $ 12,890,015    $ 24,155,598
                                                                                 ============    ============

</TABLE>







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

                                      F-2

<PAGE>   42



                              LIFECELL CORPORATION

                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                  FOR THE YEAR ENDED DECEMBER 31,
                                           --------------------------------------------
                                               1995            1996            1997
                                           ------------    ------------    ------------

<S>                                        <C>             <C>             <C>         
Revenues

  Product sales ........................   $    742,238    $  2,012,205    $  4,904,971
  Research funded by others ............      1,064,337         933,365       1,074,954
                                           ------------    ------------    ------------

         Total revenues ................      1,806,575       2,945,570       5,979,925
                                           ------------    ------------    ------------

Costs and Expenses

  Cost of goods sold ...................        925,174       1,281,353       2,540,644
  Research and development .............      2,169,764       1,588,186       2,007,062
  General and administrative ...........      1,422,588       1,911,254       3,081,512
  Selling and marketing ................      1,475,296       2,389,573       4,955,597
                                           ------------    ------------    ------------

         Total costs and expenses ......      5,992,822       7,170,366      12,584,815
                                           ------------    ------------    ------------

Loss From Operations ...................     (4,186,247)     (4,224,796)     (6,604,890)
                                           ------------    ------------    ------------

  Interest income ......................        280,843         135,082         466,255
                                           ------------    ------------    ------------

Net Loss ...............................   $ (3,905,404)   $ (4,089,714)   $ (6,138,635)
                                           ============    ============    ============

Loss Per Common Share--Basic and Diluted   $      (1.10)   $      (1.14)   $      (1.04)
                                           ============    ============    ============

Shares Used in Computing Loss Per
  Common Share--Basic and Diluted ......      4,313,366       4,542,519       6,820,122
                                           ============    ============    ============
</TABLE>



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

                                      F-3

<PAGE>   43



                             LIFECELL CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                       SERIES A                     SERIES B
                                                   PREFERRED STOCK               PREFERRED STOCK              COMMON STOCK
                                                 --------------------           -----------------          -----------------------
                                                 SHARES        AMOUNT           SHARES        AMOUNT        SHARES          AMOUNT
                                                 ------        ------           ------        ------        ------          ------
<S>                                          <C>            <C>            <C>            <C>            <C>           <C>        
Balance at December 31, 1994 .............       264,500    $ 5,279,909           --      $      --        4,297,592   $     4,298
  Warrant issued to purchase
     common stock ........................          --             --             --             --             --            --
  Stock options exercised ................          --             --             --             --            1,000             1
  Warrants exercised .....................          --             --             --             --            1,250             1
  Common stock issued as dividends
     on Series A preferred stock .........          --         (317,400)          --             --          103,816           104
  Earned portion of restricted stock .....          --             --             --             --             --            --
  Earned portion of warrants .............          --             --             --             --             --            --
  Dividends accrued on preferred stock ...          --          190,947           --             --             --            --
  Accretion of preferred stock ...........          --          343,337           --             --             --            --
  Net Loss ...............................          --             --             --             --             --            --
                                             -----------    -----------    -----------    -----------    -----------   -----------
Balance at December 31, 1995 .............       264,500      5,496,793           --             --        4,403,658         4,404
  Stock options exercised ................          --             --             --             --            6,062             6
  Warrants exercised .....................          --             --             --             --          339,066           339
  Expiration of warrants .................          --             --             --             --             --            --
  Conversion of preferred stock ..........        (4,500)       (90,000)          --             --           30,104            30
  Common stock issued as dividends
     on Series A preferred stock .........          --         (415,920)          --             --          121,054           121
  Earned portion of restricted stock .....          --             --             --             --             --            --
  Stock options issued for services ......          --             --             --             --             --            --
  Series B preferred stock and common
     stock warrants issued for cash ......          --             --          124,157            124           --            --
  Dividends accrued on preferred stock ...          --          300,600           --                2           --            --
  Net Loss ...............................          --             --             --             --             --            --
                                             -----------    -----------    -----------    -----------    -----------   -----------
Balance at December 31, 1996 .............       260,000      5,291,473        124,157            126      4,899,944         4,900
  Stock options exercised ................          --             --             --             --           47,987            48
  Warrants exercised .....................          --             --             --             --           76,813            77
  Expiration of warrants .................          --             --             --             --             --            --
  Redemption of Series A preferred stock .      (260,000)    (5,200,000)          --             --        1,739,128         1,739
  Conversion of Series B preferred stock .          --             --           (6,688)            (7)       215,729           216
  Common stock and cash issued as
     dividends on Series A preferred
     stock ...............................          --         (195,000)          --             --           33,305            33
  Common stock sold in public offering ...          --             --             --             --        4,000,000         4,000
  Stock options issued for services ......          --             --             --             --             --            --
  Series B preferred stock issued as
     dividends on Series B preferred stock          --             --            7,972              6           --            --
  Dividends accrued on preferred stock ...          --          103,527           --             --             --            --
  Net Loss ...............................          --             --             --             --             --            --
                                             -----------    -----------    -----------    -----------    -----------   -----------
Balance at December 31, 1997 .............          --      $      --          125,441    $       125     11,012,906   $    11,013
                                             ===========    ===========    ===========    ===========    ===========   ===========
</TABLE>

                                  (continued)
  The accompanying notes are an integral part of these financial statements.





                                      F-4
<PAGE>   44



                              LIFECELL CORPORATION

                STATEMENTS OF STOCKHOLDERS' EQUITY--(CONTINUED)

<TABLE>
<CAPTION>

                                                                           UNEARNED
                                                                          PORTION OF
                                                 WARRANTS TO PURCHASE  RESTRICTED STOCK  ADDITIONAL                    TOTAL
                                                     COMMON STOCK        COMPENSATION     PAID-IN     ACCUMULATED   STOCKHOLDERS'
                                                 SHARES       AMOUNT     AND WARRANTS     CAPITAL       DEFICIT       EQUITY
                                              ------------  ------------ -------------  ------------  ------------  ------------
<S>                                           <C>           <C>          <C>            <C>           <C>           <C>         
Balance at December 31, 1994 ................      515,316  $    227,060  $   (269,112) $ 21,179,374  $(20,678,402) $  5,743,127
Warrant issued to purchase
     common stock ...........................       60,000          --            --            --            --            --
  Stock options exercised ...................         --            --            --           2,999          --           3,000
  Warrants exercised ........................       (1,250)         (500)         --           4,574          --           4,075
  Common stock issued as dividends
     on Series A preferred stock ............         --            --            --         317,198          --             (98)
  Earned portion of restricted stock ........         --            --         238,872          --            --         238,872
  Earned portion of warrants ................         --            --          10,334          --            --          10,334
  Dividends accrued on preferred stock ......         --            --            --            --        (190,947)         --
  Accretion of preferred stock ..............         --            --            --        (343,337)         --            --
  Net Loss ..................................         --            --            --            --      (3,905,404)   (3,905,404)
                                              ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1995 ................      574,066       226,560       (19,906)   21,160,808   (24,774,753)    2,093,906
  Stock options exercised ...................         --            --            --          17,274          --          17,280
  Warrants exercised ........................     (339,066)     (104,300)         --       1,155,617          --       1,051,656
  Expiration of warrants ....................      (15,000)       (6,000)         --           6,000          --            --
  Conversion of preferred stock .............         --            --            --          89,970          --            --
  Common stock issued as dividends
     on Series A preferred stock ............         --            --            --         409,700          --          (6,099)
  Earned portion of restricted stock ........         --            --          19,906          --            --          19,906
  Stock options issued for services .........         --            --            --         150,000          --         150,000
  Series B preferred stock and common
     stock warrants issued for cash .........    3,158,264       306,958          --      10,653,087          --      10,960,169
  Dividends accrued on preferred stock ......         --            --            --         145,865      (446,467)         --
  Net Loss ..................................         --            --            --            --      (4,089,714)   (4,089,714)
                                              ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1996 ................    3,378,264       423,218          --      33,788,321   (29,310,934)   10,197,104
  Stock options exercised ...................         --            --            --         128,719          --         128,767
  Warrants exercised ........................      (89,786)     (123,738)         --         432,527          --         308,866
  Expiration of warrants ....................     (125,000)         --            --            --            --            --
  Redemption of  Series A preferred stock ...         --            --            --       5,198,261          --            --
  Conversion of Series B preferred stock ....         --            --            --            (209)         --            --
  Common stock and cash issued as
     dividends on Series A preferred
     stock ..................................         --            --            --         129,919          --         (65,048)
  Common stock sold in public offering ......         --            --            --      16,018,766          --      16,022,766
  Stock options issued for services .........         --            --            --          12,834          --          12,834
  Series B preferred stock issued as
     dividends on Series B preferred stock            --            --            --         651,327      (669,749)      (18,416)
  Dividends accrued on preferred stock ......         --            --            --            --        (292,162)     (188,635)
  Net Loss ..................................         --            --            --            --      (6,138,635)   (6,138,635)
                                              ------------  ------------  ------------  ------------  ------------  ------------
Balance at December 31, 1997 ................    3,163,478  $    299,480  $       --    $ 56,360,465  $(36,411,480) $ 20,259,603
                                              ============  ============  ============  ============  ============  ============
</TABLE>


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




                                      F-5

<PAGE>   45






                              LIFECELL CORPORATION
<TABLE>
<CAPTION>

                            STATEMENTS OF CASH FLOWS


                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                          ----------------------------------------
                                                              1995          1996          1997
                                                          ------------  ------------  ------------
<S>                                                       <C>           <C>           <C>          
Cash Flows from Operating Activities
  Net Loss .............................................. $ (3,905,404) $ (4,089,714) $ (6,138,635)
  Adjustments to reconcile net loss to net cash used in
      operating activities --
      Depreciation and amortization .....................      138,518       229,237       225,092
      Stock and warrant compensation expense ............      249,206       169,906        12,834
  Change in assets and liabilities --
      (Increase) in accounts and other receivables ......      (87,014)     (185,330)     (659,065)
      (Increase) in inventories .........................     (243,720)     (488,319)      (96,576)
      (Increase) decrease in prepayments and other ......       11,347          (942)      (45,446)
      Increase in accounts payable and accrued
         liabilities ....................................      118,494       450,988     1,282,357
      (Decrease) in deferred revenues and deferred
         credit .........................................      (90,638)      (40,210)      (79,273)
                                                          ------------  ------------  ------------
Total adjustments .......................................       96,193       135,330       639,923
                                                          ------------  ------------  ------------
         Net cash used in operating activities ..........   (3,809,211)   (3,954,384)   (5,498,712)
                                                          ------------  ------------  ------------
Cash Flows from Investing Activities
  Capital expenditures ..................................     (190,199)     (278,673)     (597,685)
  Intangible assets .....................................      (24,354)      (57,032)      (59,129)
  Short-term investments ................................    5,154,824          --            --
                                                          ------------  ------------  ------------
         Net cash provided by (used in) investing
            activities ..................................    4,940,271      (335,705)     (656,814)
                                                          ------------  ------------  ------------
Cash Flows from Financing Activities
  Proceeds from issuance of stock and warrants ..........        6,977    12,029,105    16,460,399
  Proceeds from issuance of notes payable ...............         --         370,000          --
  Cash dividends paid ...................................         --          (6,098)     (272,097)
  Payments of notes payable .............................         --        (370,000)         --
                                                          ------------  ------------  ------------
         Net cash provided by financing
            activities ..................................        6,977    12,023,007    16,188,302
                                                          ------------  ------------  ------------
Net Increase in Cash and Cash Equivalents ...............    1,138,037     7,732,918    10,032,776
Cash and Cash Equivalents at Beginning of Year ..........    1,877,295     3,015,332    10,748,250
                                                          ------------  ------------  ------------
Cash and Cash Equivalents at End of Year ................ $  3,015,332  $ 10,748,250  $ 20,781,026
                                                          ============  ============  ============  


Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for interest ................ $       --    $     13,766  $      4,583
                                                          ============  ============  ============  

Supplemental Schedule of Noncash Financing Activities:
  Common Stock issued as payment of dividends ........... $    317,400  $    415,920  $    195,000
                                                          ============  ============  ============  
  Series B Preferred stock issued as payment of dividends $       --    $       --    $    797,200
                                                          ============  ============  ============  


</TABLE>
   The accompanying notes are an integral part of these financial statements.



                                      F-6

<PAGE>   46



                              LIFECELL CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

                               DECEMBER 31, 1997


1.   ORGANIZATION:

         LifeCell Corporation, a Delaware corporation ("LifeCell" or "the
Company"), is a bioengineering company engaged in the development and
commercialization of tissue regeneration and cell preservation products. The
Company was incorporated on January 6, 1992 for the purpose of merging with its
predecessor entity, which was formed in 1986. LifeCell began commercial sales
of its first product, AlloDerm(R) acellular dermal graft, during 1994. The
future operating results of the Company will be principally dependent on the
market acceptance of its current product, development of and market acceptance
of future products, competition from other products or technologies, protection
of the Company's proprietary technology, and access to funding as required.
Accordingly, there can be no assurance of the Company's future success. See
"Business--Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" elsewhere herein.

2.   ACCOUNTING POLICIES:

     Cash and Cash Equivalents and Short-term Investments

         The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments
with longer maturities that the Company intends to hold to maturity are
classified as either current or non-current assets based on the maturity date
of the security. As of December 31, 1996 and 1997, the Company held $10,638,981
and $20,427,627, respectively, of interest-bearing money market accounts and
A1/P1 commercial paper which were classified as "held to maturity" securities.
The carrying basis of these investments approximated fair value and amortized
cost. The securities held at December 31, 1997, matured prior to January 30,
1998.

     Inventories

         Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.

     Furniture and Equipment

         Furniture and equipment are stated at cost. Maintenance and repairs
that do not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and improvements are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations. Depreciation of
furniture and equipment is provided on the straight-line method based on the
estimated useful lives of the assets of five years. Leasehold improvements are
depreciated over the life of the lease.

     Intangible Assets

         Intangible assets primarily consist of the costs of obtaining patents
for the proprietary technology owned by or licensed to the Company. These costs
are being amortized over the lesser of the legal (generally 17 years) or the
estimated economic life of the patent. Accumulated amortization at December 31,
1996 and 1997, amounted to $53,033 and $66,673, respectively.

     Allowance for Doubtful Accounts

         The Company provides an allowance for specific accounts receivable
that it believes may not be fully collectible. An allowance of $83,690 was
established during 1997.

     Revenue Recognition

         Product sales are recognized as revenue when the product is shipped to
fill customer orders. Revenues from research funded by others are recognized as
the work is performed unless the Company has continuing 




                                      F-7
<PAGE>   47
performance obligations, in which case revenue is recognized upon the
satisfaction of such obligations. Revenue received, but not yet earned, is
classified as deferred revenue.

     Research and Development Expense

         Research and development costs are expensed when incurred. The Company
performs research funded by others, including research funded through the
corporate alliance with Medtronic (see Note 9), as well as its own independent
proprietary research, development and clinical testing of its products.

     Sales and Marketing Expense

         Sales and marketing costs include salaries, commissions, advertising
and promotional costs related to the sale of the Company's products.
Advertising costs are expensed as incurred. The cost of promotional activities,
including free goods, product samples and promotional allowances, are expensed
as incurred.

     Loss Per Common Share

         Loss per Common share has been computed by dividing net loss, which
has been increased for periodic accretion and imputed and stated dividends on
outstanding Preferred Stock and the discount offered on warrant exercises
induced during 1996, by the weighted average number of shares of Common Stock
outstanding during each period. In all applicable years, all Common Stock
equivalents, including the Series A Preferred Stock and the Series B Preferred
Stock, were antidilutive and, accordingly, were not included in the
computation.

         During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," and all prior periods have been
retroactively adjusted to conform to this statement. The implementation of
Statement 128 had no effect on the Company's presentation of earnings per share
due to the antidilutive nature of all of the Company's Common Stock
equivalents.

         Basic loss per Common share was calculated as follows:

<TABLE>
<CAPTION>
                                                                  1995           1996           1997
                                                               -----------    -----------    -----------
<S>                                                            <C>            <C>            <C>         
     Net Loss ..............................................   $(3,905,404)   $(4,089,714)   $(6,138,635)
     Less: Preferred dividends, accretion of preferred stock
         and warrant exercises .............................      (851,684)    (1,071,035)      (961,911)
                                                               -----------    -----------    -----------
     Net Loss available to common shareholders--basic ......   $(4,757,088)   $(5,160,749)   $(7,100,546)
                                                               ===========    ===========    ===========
     Weighted average shares outstanding--basic ............     4,313,366      4,542,519      6,820,122
                                                               ===========    ===========    ===========
     Loss per Common Share--basic ..........................   $     (1.10)   $     (1.14)   $     (1.04)
                                                               ===========    ===========    ===========
</TABLE>

         Diluted loss per Common share is the same as basic loss per share due
to the antidilutive nature of all of the Company's Common Stock equivalents.

     Stock-Based Compensation

         The Company accounts for employee stock-based compensation pursuant to
the provisions of Accounting Principles Board Opinion No. 25. Compensation
expense for stock options issued to employees and directors is generally
recorded at the intrinsic value of the option at the date of grant (the
discount, if any, of the option price from the market price of the Common Stock
under option). Subsequent changes in the market price of the underlying stock
do not affect the accounting treatment of the option. Subsequent to 1995,
options granted to others are accounted for under the provisions of Statement
of Financial Accounting Standards No. 123, which requires that the estimated
fair value of the option be estimated using option-pricing formulas used in the
financial markets and amortized over the period of expected service to the
Company.

     Use of Estimates

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




                                      F-8

<PAGE>   48
3.   INVENTORIES:

         Inventories consist of products in various stages produced for sale
and includes the costs of raw materials, labor, and overhead. A summary of
inventories is as follows:
<TABLE>
<CAPTION>

                                                       1996       1997
                                                     --------   --------

<S>                                                  <C>        <C>     
     Raw materials used in production ............   $189,376   $428,406
     Work-in-process .............................    300,583    228,071
     Finished goods ..............................    349,862    279,921
                                                     --------   --------
       Total inventories .........................   $839,821   $936,398
                                                     ========   ========
</TABLE>

4.   FURNITURE AND EQUIPMENT:

         A summary of furniture and equipment is as follows:
<TABLE>
<CAPTION>

                                                    1996           1997
                                                 -----------    -----------
<S>                                              <C>            <C>        
     Office furniture and fixtures ...........   $    61,130    $   120,548
     Machinery and equipment .................     1,342,243      1,748,956
     Leasehold improvements ..................       220,293        334,282
                                                 -----------    -----------
                                                   1,623,666      2,203,786
     Accumulated depreciation and amortization    (1,145,568)    (1,339,728)
                                                 -----------    -----------
       Net furniture and equipment ...........   $   478,098    $   864,058
                                                 ===========    ===========
</TABLE>

5.   ACCRUED LIABILITIES:

         Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                        1996         1997
                                                     ----------   ----------
<S>                                                  <C>          <C>       
     Employee compensation and benefits ..........   $  301,305   $  399,498
     Operating expenses and other ................      237,966      468,670
     Litigation costs ............................           --      374,635
     Public offering costs .......................           --      313,280
                                                     ----------   ----------
       Total accrued liabilities .................   $  539,271   $1,556,083
                                                     ==========   ==========
</TABLE>

6.   CAPITAL STOCK:

     Authorized Capital Stock

         As of December 31, 1997, the authorized capital of the Company
consisted of 25,000,000 shares of Common Stock, $.001 par value, and 2,000,000
shares of Preferred Stock, $.001 par value, of which 182,205 shares were
designated as Series B Preferred Stock. As of December 31, 1997, there were
11,012,906 shares of Common Stock and 125,441 shares of Series B Preferred
Stock outstanding.

     Series A Preferred Stock

         During November 1994, the Company issued 264,500 shares of Series A
Convertible Preferred Stock (Series A Preferred Stock) and warrants to acquire
264,500 shares of Common Stock for gross proceeds of approximately $5.3 million
in a private placement. Each share of Series A Preferred Stock was convertible
at any time at the option of the holder into 6.69 shares of Common Stock.
During 1996, 4,500 shares of Series A Preferred Stock were converted into
30,104 shares of Common Stock.

         The Series A Preferred Stock bore dividends at annual rates of $1.20,
$1.60, and $2.00 per share for each of the first, second and third years,
respectively, after the date of original issuance. Dividends were payable in
cash, Common Stock, or any combination of cash and Common Stock at the
Company's discretion. The Series A Preferred Stock had no ordinary voting
rights. During 1995 and 1996, respectively, the Company paid $317,400 and
$415,920 in accrued dividends on the Series A Preferred Stock by issuing
103,816 and 121,054 shares of Common Stock, respectively. During 1997, the
Company paid $195,000 in accrued dividends by issuing 33,305 shares of Common
Stock and paying a cash dividend of $65,000.





                                      F-9
<PAGE>   49
         The preferred stock was automatically convertible into Common Stock on
November 9, 1997, and could be redeemed sooner by the Company if, after
November 9, 1995, the closing bid price of the Company's Common Stock averaged
or exceeded $5.17 per share for 20 consecutive days. Pursuant to such
provisions, during February 1997, the Company called for redemption of all
outstanding shares of Series A Preferred Stock. During March 1997 the Company
issued 1,739,128 shares of Common Stock to redeem the Series A Preferred Stock.

     Series B Preferred Stock

         During November 1996, the Company issued 124,157 shares of Series B
Preferred Stock ("Series B Preferred Stock") and warrants to acquire 2,803,530
shares of Common Stock for gross proceeds of approximately $12.4 million in a
private placement. Each share of Series B Preferred Stock is initially
convertible at any time at the option of the holder into approximately 32.26
shares of Common Stock (or 4,046,483 shares of Common Stock at December 31,
1997), subject to adjustment for dilutive issuances of securities. The Series B
Preferred Stock has a liquidation preference of $100 per share, or $12,544,100
as of December 31, 1997, and shares ratably in any residual assets after
payment of such liquidation preference.

         The Series B Preferred Stock bears cumulative dividends, payable
quarterly, for five years at the greater of the annual rate of $6.00 per share
or the rate of any dividends paid on other series of stock (effectively $10 per
share until the Series A Preferred Stock was redeemed in March 1997). Dividends
may be paid in cash, in additional shares of Series B Preferred Stock based on
the stated value of $100 per share, or any combination of cash and Series B
Preferred Stock at the Company's option. On all matters for which the Company's
stockholders are entitled to vote, each share of Series B Preferred Stock will
entitle the holder to one vote for each share of Common Stock into which the
share of Series B Preferred Stock is then convertible. Additionally, the
holders of Series B Preferred Stock have the right to elect up to three
directors to the Board of Directors of the Company. While the preferred shares
are outstanding or any dividends are owned thereon, the Company may not declare
or pay cash dividends on its Common Stock. During 1997, the Company paid
accrued dividends on the Series B Preferred Stock of $815,616 through the
issuance of 7,972 additional shares of Series B Preferred Stock and $18,416
cash. The Company has accrued a dividend at December 31, 1997, of $188,635
which was paid in cash on February 17,1998.

         The preferred stock will be automatically converted into Common Stock
if (i) the closing price of the Company's Common Stock averages or exceeds
$9.30 per share for 30 consecutive trading days and (ii) the Company conducts
an underwritten public offering of newly issued Common Stock with proceeds, net
of underwriting discounts and commissions, exceeding $20 million. Additionally,
the preferred stock will be automatically converted into Common Stock if the
Company conducts an underwritten public offering of newly issued Common Stock
with proceeds, net of underwriting discounts and commissions, exceeding $20
million and the price per share in such offering equals or exceeds $9.30.

     Common Stock

         In December 1997, the Company issued 4,000,000 shares of Common Stock
in a public offering at a price of $4.50 per share. The proceeds of the
offering were approximately $16.7 million before deducting offering costs of
approximately $717,000.

         During 1995, 1996 and 1997, respectively, the Company issued 103,816
shares, 121,054 shares and 33,305 shares of Common Stock as payment of accrued
dividends on Series A Preferred Stock. Additionally, during 1996, the Company
induced the exercise of warrants by temporarily lowering exercise prices and
issued 339,066 shares of Common Stock at a weighted average price of $3.10 upon
exercise of certain warrants.

         During 1997, the Company issued 74,786 shares of Common Stock upon
exercise of certain warrants and 2,027 shares of Common Stock upon the net
exercise of warrants to acquire 15,000 shares of Common Stock.

         In 1992, the Company adopted a Restricted Stock Plan and issued
241,372 shares of Common Stock to employees, a director and a consultant of the
Company for $.001 per share. The restricted stock vested over a four year
period. Deferred compensation expense totaling $965,000 was expensed over the
vesting period of the grants. The non-cash charge related to these stock grants
was $239,000 for 1995 and $20,000 for 1996.





                                     F-10

<PAGE>   50
     Options

         The Company's Amended and Restated 1992 Stock Option Plan, as amended
in 1997 (the "1992 Plan"), provides for the grant of options to purchase up to
1,500,000 shares of Common Stock. Granted options generally become exercisable
over a four year period, 25 percent per year beginning on the first anniversary
of the date of grant. To the extent not exercised, options generally expire on
the tenth anniversary of the date of grant, except for employees who own more
than 10 percent of all the voting shares of the Company, in which event the
expiration date is the fifth anniversary of the date of grant. All options
granted under the plan have exercise prices equal to the fair market value at
the dates of grant.

         The Second Amended and Restated 1993 Non-Employee Director Stock
Option Plan, as amended ("Director Plan") was adopted in 1993. A total of
750,000 shares of Common Stock are available for grant under the Director Plan.
Upon amendment of the Director Plan in 1996, options to purchase 50,000 shares
of Common Stock were granted to each then-current non-employee director of the
Company at an exercise price equal to the fair market value of a share of
Common Stock on the date of the Director Plan. Options to purchase 25,000
shares of Common Stock will be granted to newly elected directors at an
exercise price equal to the fair market value of a share of Common Stock on
such election date. The provisions of the Director Plan provide for an annual
grant of an option to purchase 10,000 shares of Common Stock to each
non-employee director. Options under the Director Plan generally vest one year
after date of grant and expire after 10 years.

         A summary of stock option activity is as follows:
<TABLE>
<CAPTION>

                                               1992 Stock Option Plan          Director Plan
                                               ----------------------         ---------------
                                                            Weighted-            Weighted-
                                                          Avg. Exercise        Avg. Exercise
                                                Options      Price($)  Options    Price($)
                                               ----------    --------  ------- --------------
<S>                                            <C>           <C>     <C>          <C> 
            Balance at December 31, 1994          414,762       6.19    50,000       9.40
               Granted .....................      266,350       2.46    10,000       2.75
               Exercised ...................       (1,000)      3.00        --         --
               Forfeited ...................     (225,917)      8.97        --         --
                                               ----------            ---------                 
            Balance at December 31, 1995 ...      454,195       2.63    60,000       8.29
                                               ----------            ---------
               Granted .....................      558,000       3.80   240,000       3.07
               Exercised ...................       (1,062)      2.74    (5,000)      2.88
               Forfeited ...................      (42,313)      3.18        --         --
               Reissue .....................           --      --     (220,000)      4.14
                                               ----------            ---------    
            Balance at December 31, 1996 ...      968,820       3.28    75,000       4.11
                                               ----------            ---------
               Granted .....................      131,050       5.21    70,000       5.10
               Exercised ...................      (47,987)      2.68        --         --
               Forfeited ...................      (14,563)      3.75        --         --
                                               ----------            ---------         
            Balance at December 31, 1997 ...    1,037,320       3.54   145,000       4.59
                                               ----------            ---------    
            Exercisable at December 31, 1995      158,330       2.61    50,000       9.40
            Exercisable at December 31, 1996      255,429       2.61    15,000       8.29
            Exercisable at December 31, 1997      484,427       3.02   100,000       4.05
</TABLE>

         At December 31, 1997, 412,231 and 600,000 options were available for
future grant under the 1992 Plan and the Director Plan, respectively. The
exercise prices of options outstanding under the 1992 Plan and the Director
Plan at December 31, 1997, range from $0.07 to $5.875 and $2.75 to $11.00,
respectively. The weighted average contractual life of options outstanding at
December 31, 1997, was 8.1 years for the 1992 Plan and 8.41 years for the
Director Plan.

         In addition to the amounts set forth in the table above, during 1996
the Company granted options to purchase 220,000 shares of Common Stock to
directors who resigned upon the closing of the sale of the Series B Preferred
Stock in exchange for options previously granted under the Director Plan. These
options have provisions identical to the options previously granted under the
Director Plan, including exercise prices and vesting periods. The weighted
average exercise price of the options granted was $4.14. The weighted average
remaining contractual life of the grants was 7.8 years as of December 31, 1997.
The Company expensed $150,000, which was the 


                                     F-11


<PAGE>   51
difference between the market price and the option price on the date of the
grant, during 1996 related to this reissuance.

         During 1995, options to purchase 225,917 shares of Common Stock at
exercise prices of $9.00 and $14.50 were canceled and reissued at substantially
the same terms, but with an exercise price equal to the then current market
price of $2.50.

         In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation" which, if fully adopted,
requires the Company to record stock-based compensation at fair value. The
Company has adopted the disclosure requirements of SFAS No. 123 and has elected
to record employee compensation expense in accordance with Accounting
Principles Board Opinion (APB) No. 25.

         The Company accounts for its employee stock-based compensation plans
under APB No. 25 and its related interpretations. Accordingly, deferred
compensation expense is recorded for stock options based on the excess of the
market value of the common stock on the date the options were granted over the
aggregate exercise price of the options. This deferred compensation is
amortized over the vesting period of each option. As the exercise price of
options granted under the 1992 Plan and the Director Plan has been equal to or
greater than the market price of the Company's stock on the date of grant, no
compensation expense related to these plans has been recorded. Had compensation
expense for its 1992 Plan and Director Plan been determined consistent with
SFAS No. 123, the Company's net loss and loss per share would have been
increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                       1995             1996             1997
                                                  -------------    -------------   ---------------
<S>                                               <C>              <C>              <C>           
            Net Loss:
            As reported .......................   $  (3,905,404)   $  (4,089,714)   $  (6,138,635)
            Pro forma .........................   $  (3,940,041)   $  (5,372,049)   $  (7,058,879)
            Loss Per Share (Basic and Diluted):
            As reported .......................   $       (1.10)   $       (1.14)   $       (1.04)
            Pro forma .........................   $       (1.10)   $       (1.42)   $       (1.18)
</TABLE>

         Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

         Under the provisions of SFAS No. 123, the weighted average fair value
of options granted in 1995, 1996 and 1997 was $1.88, $3.21 and $4.24 per share,
respectively, under the 1992 Plan. The weighted average fair value of options
granted in 1995, 1996 and 1997 was $2.21, $2.40 and $4.08 per share,
respectively, under the Director Plan. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1995, 1996
and 1997, respectively: a weighted average risk-free interest rate of
approximately 6 percent for all years; no expected dividend yield during the
expected life of the option; expected lives of 5 years for each grant and
expected volatility between 97 and 113 percent.

         The stock options issued to retiring directors in 1996 had a weighted
average fair value of $2.57. The fair values of such options are estimated on
the date of grant using Black-Scholes option price model with the following
assumptions used: a weighted average risk-free interest rate of 6 percent,
expected lives of 3 to 5 years, expected volatility of 99 percent and no
expected dividends.

     Warrants

         As of December 31, 1997,  warrants to acquire a total of 3,163,478  
shares of Common Stock were outstanding as set forth below.

         During 1996, the Company issued warrants to acquire 2,803,530 shares
of Common Stock in conjunction with the sale of the Series B Preferred Stock
(the "1996 Warrants"). The 1996 Warrants are exercisable at an exercise price
of $4.13 per share. The warrants expire on the fifth anniversary of the date of
grant, are callable if the average closing price of the Company's Common Stock
for 30 trading days equals or exceeds three times the then-exercise price, and
allow cashless exercise. The warrants also have provisions for adjustment of
the exercise price and number of shares for below-exercise price issuance of
securities. During 1997, warrants to acquire 74,786 Shares of Common Stock were
exercised. As of December 31, 1997, warrants to acquire 2,728,744 Shares of
Common Stock were outstanding.






                                     F-12


<PAGE>   52

         Additionally, the Company issued a warrant to acquire 354,734 shares
of Common Stock to the placement agent for the Series B Preferred Stock ("Agent
Warrant"). The Agent Warrant is exercisable at an exercise price of $4.50 per
share. The warrant expires on the fifth anniversary of the date of grant and
allows cashless exercise. The warrant also has provisions for adjustment of the
exercise price and number of shares for below-exercise price issuance of
securities.

         In connection with the sale of the Series A Preferred Stock, the
Company issued warrants to acquire 264,500 shares of Common Stock at exercise
prices of $3.26 per share during the first year and $3.54 per share during the
second year. Additionally, the placement agent was issued a warrant to purchase
90,816 shares of Common Stock at $6.00 per share. A total of 339,066 warrants
were exercised during 1996 through inducement of exercise by lowering the
exercise price to $3.10 per share. The difference between the market price on
the date of inducement and the induced exercise price has been deducted from
net income to determine loss per Common share. A total of 15,000 warrants
expired unexercised.

         As of December 31, 1997, additional warrants to acquire 80,000 shares
of Common Stock were outstanding with exercise prices ranging from $2.50 to
$11.05. Such warrants expire during periods ranging from February 26, 1998, to
December 13, 2000. During 1997, 15,000 warrants were exercised on a net basis
in exchange for 2,027 shares of Common Stock. In addition, 125,000 warrants
expired unexercised.

7.   EMPLOYEE BENEFIT PLANS:

         The Company maintains a retirement savings plan as described in
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company
may, at its discretion, contribute amounts not to exceed each employee's
contribution. During January 1996, January 1997 and February 1998, the Company
made total contributions of $5,292, $8,187 and $13,088 to the plan for a
partial matching of employee contributions during 1995, 1996 and 1997,
respectively.

         During 1996, the Company established an Employee Stock Purchase Plan
to allow for the purchase of the Company's Common Stock on the open market
using employee and any employer matching contributions. During 1996 and 1997,
the Company contributed $1,328 and $7,631 to this plan, respectively.

8.   FEDERAL INCOME TAXES:

         The Company has not made any income tax payments since inception. As
of December 31, 1997, the Company has a net operating loss (NOL) carryforward
for federal income tax purposes of approximately $32.1 million, subject to the
limitations described below, expiring as follows:
<TABLE>
<CAPTION>

<S>                                                                                    <C>          
                  YEAR EXPIRES
                  ------------  
                      2001........................................................     $     500,000
                      2002........................................................         1,500,000
                      2003........................................................         2,800,000
                      2004........................................................         2,200,000
                      2005........................................................         1,700,000
                      2006........................................................         1,400,000
                      2007........................................................         2,400,000
                      2008........................................................         3,000,000
                      2009........................................................         2,500,000
                      2010........................................................         4,000,000
                      2011........................................................         4,000,000
                      2012........................................................         6,100,000
                                                                                       -------------
                                                                                       $  32,100,000
                                                                                       =============
</TABLE>


         Additionally, the Company has approximately $395,000 of research and
development tax credit carryforwards which will expire in varying amounts
commencing in 2001. Federal tax laws provide for a limitation on the use of NOL
and tax credit carryforwards following certain ownership changes that could
limit LifeCell's ability to use its NOL and tax credit carryforwards. The sale
of Common Stock in the public offering in December 1997 resulted in an
ownership change for federal income tax purposes. The Company estimates that
the amount of NOL carryforwards and the credits available to offset taxable
income at December 31, 1997, is approximately $2.6 


                                     F-13
<PAGE>   53
million per year on a cumulative basis. Accordingly, if LifeCell generates
taxable income in any year in excess of its then cumulative limitation, the
Company may be required to pay federal income taxes even though it has
unexpired NOL carryforwards.

         For financial reporting purposes, a valuation allowance of $11,826,000
has been recorded as of December 31, 1997, to fully offset the deferred tax
asset related to these carryforwards. The principal components of the deferred
tax asset as of December 31, 1996 and 1997, assuming a 34% federal tax rate,
are as follows:

<TABLE>
<CAPTION>
                                                                               1996               1997
                                                                          -------------       ------------
<S>                                                                        <C>                <C>         
Temporary differences:
   Deferred revenue.................................................       $    510,000       $    530,000
   Restricted stock compensation....................................            154,000                 --
   Uniform capitalization of inventory costs........................             37,000             45,000
   Other items......................................................            (29,000)           (58,000)
                                                                           ------------       ------------
   Total temporary differences......................................            672,000            517,000
   Federal tax losses and credits not currently utilizable..........          9,225,000         11,309,000
                                                                           ------------       ------------
Total deferred tax assets...........................................          9,897,000         11,826,000
   Less valuation allowance.........................................         (9,897,000)        11,826,000)
                                                                           ------------       ------------
Net deferred tax asset..............................................       $         --       $         --
                                                                           ============       ============
</TABLE>

         The net increase in the deferred tax valuation allowance for 1996 and
1997 was $1,440,000, and $1,929,000, respectively. Other than the net operating
loss and tax credit carryforwards, there is no significant difference between
the statutory federal income tax rate and the Company's effective tax rate
during 1995, 1996 and 1997.

9.   COLLABORATIONS AND CORPORATE ALLIANCES:

     Medtronic Collaboration

         During March 1994, the Company entered into a license and development
agreement with Medtronic, Inc. ("Medtronic") to develop jointly the Company's
heart valve products. Pursuant to the agreement, Medtronic paid the Company an
initial $1.5 million license fee. Medtronic funds in part the cost of research
and development under a mutually agreed upon budget, has the exclusive right to
market any resulting commercial products and must pay the Company royalties on
sales of products covered by the agreement. LifeCell's research and development
funding by Medtronic in 1995, 1996 and 1997 were $825,221, $546,460 and
$217,854. Royalties payable to the Company under the agreement are limited to
an aggregate maximum of $25.0 million. Medtronic may terminate the agreement at
any time if in its sole business judgment it deems the development and
commercialization of products thereunder not to be in its best interests or
otherwise to be imprudent. In such an event, and if the agreement is terminated
under certain other circumstances, the $1.5 million license fee paid by
Medtronic will be converted into shares of Common Stock, subject to certain
limitations, at the market price at the time of conversion, and any unconverted
portion of the fee will be refunded to Medtronic. Accordingly, such $1.5
million license fee has been recorded as a deferred credit in the accompanying
financial statement.

     Other Product Sales Arrangements

         The Company has negotiated other distribution or sales collaboration
arrangements with various parties with exclusive regional or international
territories under each agreement. The agreements generally provide that the
distributor must meet certain performance measures or the agreement may be
terminated by the Company.

10.  COMMITMENTS AND CONTINGENCIES:

     Litigation

         The Company is subject to numerous risks and uncertainties and from
time to time may be subject to various claims in the ordinary course of its
operations. The Company maintains insurance coverage for events and in amounts
that it deems appropriate. There can be no assurance that the level of
insurance maintained will be sufficient to cover any claims incurred by the
Company or that the type of claims will be covered by the terms of insurance
coverage.





                                     F-14



<PAGE>   54
   
          During April 1998, the Company entered into an agreement settling its
pending litigation with Integra LifeSciences Corporation and its affiliate
("Integra") and Massachusetts Institute of Technology ("MIT"). During November
1997, Integra and MIT had alleged that the Company infringed two patents
licensed by MIT to Integra (the "Integra Patents"). During December 1997, the
Company filed a separate lawsuit against Integra and MIT alleging that they
tortiously interfered with certain of LifeCell's business relationships,
including relationships with investors and potential investors in LifeCell's
recent public offering. The lawsuit also alleged anticompetitive acts and
business disparagement. Under the terms of the settlement agreement, Integra and
MIT agreed not to assert the Integra Patents against current or future products
produced using LifeCell's current technology. LifeCell also obtained the right
to develop and commercialize future products using Integra's technology through
a license to certain of Integra's patents. As an additional condition of the
settlement, Integra agreed to purchase from LifeCell $500,000 in shares of
Common Stock following determination of the per-share purchase price in
accordance with the settlement agreement. LifeCell expects that the settlement
with Integra will have no material effect on the financial condition or results
of operations of the Company. During 1997, the Company recorded an expense of
$340,000 for the estimated litigation costs expected to be incurred in
connection with this matter during 1998.
    

     External Funding for Research

         Certain of the Company's research programs have been funded by Small
Business Innovation Research (SBIR) grants and other direct federal government
funding contracts. The grants and contracts generally obligate the Company to
perform specified research activities in return for such funding, and the
utilization of funds under the grants is subject to audit by the appropriate
governmental agencies. At December 31, 1997, the Company had received $59,519
of deferred revenue, which is an advance payment from a corporate alliance, for
research to be conducted during 1998.

     License Agreements

         The Company has entered into several license agreements, both
exclusive and nonexclusive in conjunction with its business. The Company is
required to pay royalties on net sales of products encompassing the licensed
technologies. For the years ended December 31, 1996 and 1997, $18,630 and
$141,539 of expenses were incurred under these agreements.

     Leases

         The Company leases approximately 25,000 square feet for office and
laboratory space and has various other operating leases. The future minimum
lease payments under noncancelable lease terms in excess of one year as of
December 31, 1997, were as follows:
<TABLE>
<CAPTION>

<S>                                                                                  <C>         
            1998.................................................................    $    298,992
            1999.................................................................         250,722
            2000.................................................................         241,068
            2001.................................................................          27,641
            2002.................................................................              --
                                                                                     ------------
                 Total...........................................................    $    818,423
                                                                                     ============
</TABLE>





                                     F-15


<PAGE>   55
11.  TRANSACTIONS WITH RELATED PARTIES:

         The Company leases office space from an entity which was an affiliate
of a stockholder of the Company prior to 1998. The Company paid rent expense of
approximately, $129,000, $142,000 and $223,000 during 1995, 1996, and 1997,
respectively, related to this lease.

         The Company paid consulting fees and expenses to an affiliate of a
person who was a director of the Company until November 1996. Such amounts
totaled approximately $91,000 and $80,000 during the years ended December 31,
1995 and 1996, respectively, pursuant to a consultant agreement.

         As of December 31, 1997, the Company had notes receivable totaling
$95,060 from participants, two of whom are directors and officers of the
Company, in a previous deferred compensation plan. Such notes represent loans
of federal income tax amounts payable by the individuals as a result of grants
under the plan.

12.  QUARTERLY FINANCIAL DATA (UNAUDITED):

         The following table presents summary unaudited financial data for the
years ended December 31, 1996 and 1997. The Company believes that this
information reflects all adjustments, consisting of only normal recurring
items, considered necessary for a fair presentation of the quarterly financial
information presented. The operating results for any quarterly period are not
necessarily indicative of the results that may be expected for future periods.
<TABLE>
<CAPTION>

                                                    First    Second       Third     Fourth
                                                   Quarter   Quarter     Quarter    Quarter
                                                   -------   -------     -------    -------
                                                    (In thousands except per share amounts)
<S>                                                <C>        <C>        <C>        <C>    
1996                                               
       Product Sales ............................  $   421    $   429    $   561    $   602
       Total Revenues ...........................  $   576    $   678    $   816    $   876
       Gross Margin on Product Sales ............  $   149    $   157    $   205    $   220
       Net Loss .................................  $  (949)   $  (909)   $(1,023)   $(1,209)
       Loss Per Common Share--Basic and Diluted..  $ (0.25)   $ (0.24)   $ (0.33)   $ (0.32)
1997
       Product Sales ............................  $   821    $ 1,007    $ 1,410    $ 1,667
       Total Revenues ...........................  $ 1,111    $ 1,273    $ 1,634    $ 1,962
       Gross Margin on Product Sales ............  $   331    $   487    $   715    $   831
       Net Loss .................................  $(1,650)   $(1,573)   $(1,393)   $(1,523)
       Loss Per Common Share--Basic and Diluted..  $ (0.41)   $ (0.25)   $ (0.23)   $ (0.20)
                                                   

</TABLE>

                                     F-16
                                                   
<PAGE>   56
   
<TABLE>
<CAPTION>                               INDEX TO EXHIBITS


   EXHIBIT
   NUMBER     DESCRIPTION
   ------     -----------
   <S>        <C>
     3.1      Restated Certificate of Incorporation, as amended (incorporated
              by reference to Exhibit 3.1 to the Company's Annual Report on
              Form 10-K for the year ended December 31, 1997).
     
     3.2      Amended and Restated By-laws (incorporated by reference to Exhibit
              3.2 to the Company's Quarterly Report on Form 10-Q for the period
              ended June 30, 1996)

    10.1+     LifeCell Corporation Amended and Restated 1992 Stock Option Plan,
              as amended (incorporated by reference to Exhibit 10.1 to the
              Company's Quarterly Report on Form 10-Q for the period ended June
              30, 1997, filed with the Commission on August 12, 1997).

    10.2+     LifeCell Corporation Second Amended and Restated 1993
              Non-Employee Director Stock Option Plan, as amended (incorporated
              by reference to Exhibit 10.4 to the Company's Annual Report on
              Form 10-K for the fiscal year ended December 31, 1996, filed with
              the Commission on March 31, 1997).

     10.3     Form of Confidentiality/Non-Compete Agreement (incorporated by
              reference to Exhibit 10.28 to the Company's Registration
              Statement on Form S-1, Registration No. 33-44969, filed with the
              Commission on January 9, 1992).

     10.4     Exclusive License Agreement dated June 6, 1986, between the
              Registrant and The Board of Regents of The University of Texas
              System (incorporated by reference to Exhibit 10.29 to the
              Company's Registration Statement on Form S-1, Registration No.
              33-44969, filed with the Commission on January 9, 1992).

    10.5+     Amended and Restated Registration Rights Agreement dated February
              26, 1992, by and between the Registration and the stockholders
              named therein (incorporated by reference to Exhibit 10.40 to
              Amendment No. 3 to the Company's Registration Statement on Form
              S-1, Registration No. 33-44969, filed with the Commission on
              February 27, 1992).

     10.6     Underwriter's Warrant Agreement dated March 6, 1992, between the
              Registrant and Robert Todd Financial Corporation, and First
              Amendment to Underwriter's Warrant Agreement dated January 26,
              1993, between the Registrant and Robert Todd Financial
              Corporation (incorporated by reference to Exhibit 10.18 to the
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1992).

     10.7     Lease Agreement dated December 10, 1986, between the Registrant
              and The Woodlands Corporation, Modification and Ratification of
              Lease Agreement dated April 11, 1988, between the Registration
              and The Woodlands Corporation Modification and Ratification of
              Lease dated August 1, 1992, between the Company and The Woodlands
              Corporation and Modification, Extension and Ratification of Lease
              dated March 5, 1993, between the Registrant and The Woodlands
              Corporation, and Modification and Ratification of Lease Agreement
              dated December 21, 1995, between the Company and The Woodlands
              Office Equities -- '95 Limited (incorporated by reference to
              Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
              the period ended March 31, 1996).

     10.8     Lease Agreement dated September 1, 1988, between the Registrant
              and The Woodlands Corporation, and Modification of Lease
              Agreement dated March 5, 1993, between the Registrant and The
              Woodlands Corporation (incorporated by reference to Exhibit 10.22
              to the Company's Annual Report on Form 10-K for the fiscal year
              ended December 31, 1992).

     10.9     Stock Purchase Warrant dated January 26, 1993, issued to
              Strategem of Alabama, Inc. (incorporated by reference to Exhibit
              10.25 to the Company's Annual Report on Form 10-K for the fiscal
              year ended December 31, 1992).

    10.10     License and Development Agreement dated March 3, 1994, between
              the Registrant and Medtronic, Inc. (incorporated by reference to
              Exhibit 10.1 to the Company's Current Report on Form 8-K dated
              March 3, 1994).

    10.11     Investment Agreement dated March 3, 1994, between the Registrant
              and Medtronic, Inc. (incorporated by reference to Exhibit 10.2 to
              Company's Current Report on Form 8-K dated March 3, 1994).

    10.12     Lease Agreement between LifeCell Corporation and Unichem, dated
              August 1, 1994 (incorporated by reference to Exhibit 10.3 to the
              Company's Quarterly Report on Form 10-Q for the period ended
              September 30, 1994).

    10.13     Securities Purchase Agreement dated November 18, 1996, between
              LifeCell Corporation and the Investors named therein
              (incorporated by reference to Exhibit 10.15 to the Company's
              Annual Report on Form 10-K for the fiscal year ended December 31,
              1996).

    10.14     Voting Agreement dated November 18, 1996, among LifeCell
              Corporation and certain stockholders named therein (incorporated
              by reference to Exhibit 10.16 to the Company's Annual Report on
              Form 10-K for the fiscal year ended December 31, 1996).

    10.15     Registration Rights Agreement dated November 18, 1996, between
              LifeCell Corporation and certain stockholders named therein
              (incorporated by reference to Exhibit 10.17 to the Company's
              Annual Report on Form 10-K for the fiscal year ended December 31,
              1996).

    10.16     Form of Stock Purchase Warrant dated November 18, 1996, issued to
              each of the warrant holders named on Schedule 10.18 attached
              thereto (incorporated by reference to Exhibit 10.18 to the
              Company's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1996).

    10.17     Stock Purchase Warrant dated November 18, 1996, issued to Gruntal
              & Co., Incorporated (incorporated by reference to Exhibit 10.19
              to Amendment No. 1 to the Company's Annual Report on Form 10-K
              for the fiscal year ended December 31, 1996 on Form 10-K/A).

   10.18+     Agreement dated July 1, 1997, between LifeCell Corporation and
              Paul M. Frison.(incorporated by reference to Exhibit 10.20 to the
              Company's Registration Statement No. 333-37123 on Form S-2 filed
              with the Commission on October 3, 1997).

   10.19+     Agreement dated July 1, 1997, between LifeCell Corporation and 
              Stephen A. Livesey. (incorporated by reference to Exhibit 10.20 to
              the Company's Registration Statement No. 333-37123 on Form S-2 
              filed with the Commission on October 3, 1997).

    23.1*     Consent of Arthur Andersen LLP.

    27.1      Financial data schedule (previously filed).



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