SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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


FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996     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 March
     26, 1997                                                       $40,933,000

Number of shares of registrant's Common Stock                         6,754,761
outstanding as of March 26, 1997

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of registrant's proxy statement relating to the 1997 annual meeting of
stockholders have been incorporated by reference into Part III hereof.

<PAGE>
                                TABLE OF CONTENTS

                                   DESCRIPTION

ITEM                                                                       PAGE
----                                                                       ----

PART I   ...................................................................  1
         1.  BUSINESS.......................................................  1
         2.  PROPERTIES..................................................... 21
         3.  LEGAL PROCEEDINGS.............................................. 21
         4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 22

PART II  ................................................................... 22
         5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
                  RELATED STOCKHOLDER MATTERS............................... 22
         6.  SELECTED FINANCIAL DATA........................................ 24
         7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS....................... 25
         8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 27
         9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE....................... 27

PART III ................................................................... 27
         10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 27
         11.  EXECUTIVE COMPENSATION........................................ 28
         12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT................................................ 28
         13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 28

PART IV  ................................................................... 28
         14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                  ON FORM 8-K............................................... 28
         GLOSSARY .......................................................... 31

<PAGE>
                                     PART I

         THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "BUSINESS", "BUSINESS--RISK FACTORS", "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K.


ITEM 1.  BUSINESS

         CERTAIN TECHNICAL TERMS USED IN THIS ITEM ARE DESCRIBED OR DEFINED IN
THE GLOSSARY COMMENCING ON PAGE 33 OF THIS ANNUAL REPORT ON FORM 10-K.

GENERAL

         LifeCell Corporation ("LifeCell" or the "Company") develops and
commercializes universal tissue grafts and blood cell preservation products.

         The Company's universal tissue grafts are derived from a patented
platform technology for processing and preserving human (allograft) and animal
(xenograft) tissues to preclude rejection of transplanted foreign tissues by the
human body. LifeCell removes cells that cause tissue rejection while preserving
the extracellular tissue matrix and its essential biochemical and structural
composition. This matrix does not cause an immune rejection response and has
been clinically proven to function as a natural template or scaffold into which
a patient's own cells will migrate following transplantation for effective
tissue engraftment.

         The clinical use of a preserved tissue matrix as a natural template for
tissue regeneration has been established by others through the use of processed,
freeze-dried allograft bone for orthopedic and periodontal procedures.
LifeCell's expertise is the ability to preserve the more delicate and
sophisticated tissue matrix of soft tissues, which would otherwise be destroyed
by the allograft bone process.

         AlloDerm(R) processed universal dermal tissue graft ("AlloDerm") is
LifeCell's first commercial application of its technology. Additional universal
tissue products under development include composite skin graft, XenoDermTM
processed porcine dermis, heart valves for replacement surgeries and vascular
conduits for bypass procedures.

         Using its core preservation technology, LifeCell is also developing
products and patented formulations to facilitate storage, transportation and
delivery of transfusable blood cells. The Company is developing ThromboSolTM
platelet storage solution to permit refrigerated storage of transfusable blood
platelets and intends to develop other potential preservation technologies for
red blood cells and other mammalian cells.

         LifeCell was organized in 1986 to commercialize its core preservation
technology, a process developed by The University of Texas Health Science Center
in Houston and exclusively licensed from The Board of Regents of the University
of Texas System involving ultra-rapid cooling and ultra-low temperature
freeze-drying of biological cells and tissues.

PRODUCTS

         ALLODERM

         AlloDerm is human donor (allograft) dermis that has been processed
using LifeCell's patented technology. The AlloDerm process removes the cells
from donated human (allograft) skin and preserves the critical structural and
biochemical components of the dermal matrix which are key to the eventual
engraftment of the dermal matrix.

         The AlloDerm process preserves an immunologically inert human dermal
matrix which is freeze-dried and packaged for distribution to end-users.
AlloDerm grafts are rehydrated in the operating room in a ten-minute


                                       3
<PAGE>
procedure prior to grafting. The intact human dermal matrix functions as a graft
or implant, permanently integrating and guiding the reconstitution of dermal
tissue.

         AlloDerm grafts consist entirely of and are intended to perform the
same function as human dermis. As a result, the Company believes AlloDerm tissue
products are not subject to the lengthy United States Food and Drug
Administration ("FDA") approval or clearance process associated with medical
devices or drugs. See "--Government Regulation" and "--Risk Factors--FDA
Regulatory Status of AlloDerm". LifeCell procures human skin through sources
that screen donors to meet all FDA requirements for banked human tissue and
conduct blood testing recommended by the Centers for Disease Control and
Prevention. Additionally, the AlloDerm process includes de-cellularization
(extraction of living cells from human tissue matrix) and viral inactivation
(the treatment of the tissue with a documented anti-viral agent). The AlloDerm
process has been independently validated to inactivate concentrated suspensions
of HIV, the virus that causes AIDS.

         LifeCell procures allograft skin from unaffiliated tissue banks. To
date, the Company has not experienced any material difficulty in procuring
adequate supplies of cadaveric skin. Additionally, LifeCell believes it has
established what it believes to be adequate sources of cadaveric skin at
acceptable costs to satisfy the foreseeable demand for AlloDerm tissue products.

         AlloDerm products address multiple clinical markets including the
treatment of third-degree burns, periodontal surgery and plastic and
reconstructive surgery. Since its commercial introduction, AlloDerm has been
used as a dermal graft or transplant to treat over 5,000 patients.

         THIRD-DEGREE BURNS. AlloDerm grafts may be used in the treatment of any
and all burns that require skin grafts. The Company estimates that approximately
55,000 people are hospitalized each year in the United States due to burns and
that approximately 20,000 patients are admitted with major burns. LifeCell began
marketing AlloDerm for use in the treatment of third-degree burns in December
1993. To date, AlloDerm grafts have been used to treat third-degree burn
patients at approximately 60 of the 140 burn centers in the United States.

         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 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.

         Third-degree burns and other acute full-thickness skin wounds destroy
 both the epidermis and the dermis. Destruction of dermis is of particular
 concern because the body has lost the framework, I.E., the extracellular
matrix, to guide and support the regrowth of new cells and blood vessels. Like
most organs of the body, the skin can perform some repairs but it cannot
regenerate its basic structure. Instead, damaged or missing dermis is replaced
with scar tissue, which lacks the important elastic and tensile properties of
skin. Scar tissue also is disfiguring and can cause restricted mobility of limbs
and body areas near joints. For this reason, full-thickness burns are treated
with split-thickness skin grafts of the patient's own skin (autograft) taken
from an uninjured area of the body. This procedure is painful and causes an
additional wound at the autograft donor site. Autografts that include the dermal
layer generate relatively deep donor sites which can cause medical complications
including infection and hypertrophic scarring. Autografts that are too thin
(containing minimal dermis) typically result in poor wound healing quality, with
scarring and contracture at the wound site. AlloDerm grafts are used in
conjunction with thin autografts to supply an adequate dermal layer for optimum
healing of the wound. The use of AlloDerm reduces the thickness of
split-thickness grafts required from the patient in treating such wounds,
thereby minimizing the substantial donor site trauma associated with taking such
grafts.

         PERIODONTAL SURGERY. LifeCell began marketing AlloDerm to periodontists
in September 1995. LifeCell estimates that there are in excess of 4,000
periodontal surgeons in the United States. Periodontal surgeons use AlloDerm
tissue in free-gingival grafting, a procedure used to increase the amount of
attached gum tissue supporting tooth roots. This procedure previously required
the use of autograft tissue, which was excised from the roof of the patient's
mouth and then transplanted to the gum. In several clinical case studies,
AlloDerm grafts functioned as well or better than the patient's own (autologous)
graft, spared the patient the pain and discomfort associated with


                                       4
<PAGE>
the excision of the autograft, reduced surgical time and
eliminated the cost of the dressing that was needed for the autograft donor
site.

         AlloDerm tissue products are also used as barrier membranes in guided
tissue regeneration. In this function, the AlloDerm tissue serves as a barrier
membrane over allograft bone grafts, which are used to restore a degenerated jaw
bone and surrounding gingival tissue. The AlloDerm tissue barrier engrafts over
the bone, preventing the cells of the surrounding soft tissue from extruding the
bone graft during the normal healing process. Jaw bones restored by this
procedure were suitable for supporting artificial tooth implants.

         PLASTIC AND RECONSTRUCTIVE SURGERY. In November 1995, LifeCell began
marketing AlloDerm to plastic and reconstructive surgeons. The Company estimates
that there are approximately 8,000 physicians practicing plastic surgery in the
United States. Plastic surgeons use AlloDerm tissue as a graft to release
contractures and revise scarring resulting from previously grafted burn wounds,
and as an implant to correct soft tissue (dermal) defects and to revise scars
resulting from trauma or surgical excisions.

         TEMPORARY WOUND COVERAGE--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.

PRODUCT DEVELOPMENT

         In addition to AlloDerm tissue products, the Company is developing
composite skin grafts, XenoDerm porcine dermis, universal cardiovascular
products (heart valves and vascular conduits) and blood cell preservation
products.

         COMPOSITE SKIN GRAFTS. LifeCell intends to develop a composite,
full-thickness skin replacement tissue product containing an AlloDerm dermal
layer and an epidermis consisting of keratinocytes (epidermal cells) isolated
from the patient and expanded under cell culture conditions. Successfully
developed, a composite skin graft product would effectively eliminate the
requirement of taking an autologous skin graft from burn patients.

         In 1994, LifeCell received and completed a Phase I, Small Business
Innovative Research (SBIR) grant from the National Science Foundation ("NSF") to
assess the feasibility of a co-cultured composite skin product. In 1996,
LifeCell received a Phase II SBIR grant from the NSF to continue the development
of and initiate animal studies with this composite skin graft product. Also in
1996, LifeCell received a two-year Cooperation Agreement award from the U.S.
Army Medical Research and Material Command to support the development of a
composite skin graft product using AlloDerm and biopsy-sized microskin grafts
from the burn patient.

         XENODERM TISSUE PRODUCTS. LifeCell is developing XenoDermTM processed
porcine dermis, which is processed in a manner similar to the AlloDerm process
to remove the targets for immune rejection and preserve the dermal matrix.
Animal studies by LifeCell indicate that XenoDerm tissue does not cause a
significant immune response when transplanted cross-species. Animal studies
conducted by unaffiliated laboratories have shown that XenoDerm tissue is
potentially as effective as AlloDerm tissue in treating full-thickness skin
loss.
         LifeCell believes that, if successfully developed, the XenoDerm tissue
products would have the advantage of a potentially increased raw material supply
base and could facilitate distribution to certain international markets. See
"--Sources of Materials". The Company currently plans to begin clinical testing
of XenoDerm tissue products in 1997.

         HEART VALVES. LifeCell is applying its universal tissue processing and
preservation technology to porcine heart valves intended for replacement
procedures. In 1994, LifeCell and Medtronic, Inc. ("Medtronic") entered into a
license and development agreement for the potential development and
commercialization of heart valves processed with LifeCell's technology. Since
that time, pursuant to the agreement, LifeCell and Medtronic have been engaged
in a development program for heart valves that is funded fully by Medtronic. See
"--Corporate Alliance".


                                       5
<PAGE>
LifeCell's heart valves are based on its patented universal tissue processing
and preservation technology that the Company uses to process AlloDerm tissue
products. The Company processes heart valves harvested from pigs to remove the
cells that would be recognized by the body as foreign. By making the
transplanted heart valves non-immunogenic, LifeCell believes that the new valve
will last longer, become part of the body and perhaps last the patient's
lifetime.

         Tissue heart valves on the market today have limited life spans of 10
to 18 years after transplantation as a result of progressive calcification.
Mechanical heart valves last longer but lack the blood flow dynamics of tissue
valves and require the patient to remain on anticoagulants for life to prevent
strokes. Human donor (allogeneic) valves are used in a limited number of the
procedures, but there is limited donor availability and, therefore, a limited
market.

         Preliminary animal studies conducted by LifeCell have shown that the
LifeCell heart valves transplanted in the thoracic descending aorta become
populated with the recipient's own cells; I.E., they have not been rejected by
the recipient. Other animal studies conducted by LifeCell have shown that the
valves do not undergo significant calcification. Extensive FDA regulatory
involvement in both human and xenograft heart valves may significantly delay
product entry into this market. See "--Government Regulation".

         VASCULAR CONDUITS. LifeCell is developing vascular conduit products for
arterial bypass as a treatment for atherosclerosis, a progressive, degenerative
disease characterized by a build-up of fats, cholesterol and other material
within the lining of arterial blood vessels located throughout the body. This
build-up is called plaque, and leads to reduced blood flow through the arteries,
and eventually, may result in serious arterial blockage that can cause tissue
damage and death.

         Minimally invasive surgical devices are currently available for opening
blocked or occluded arteries, including balloon angioplasty to dilate
mechanically and thereby open the vessel, and atherectomy devices and lasers
that physically remove plaque from the vessel wall. These procedures, however,
are not recommended when the patient displays extensive deposits of
atherosclerotic plaque throughout the length of one or more vessels, which makes
it impractical to attempt the opening of the occluded arteries due to the
procedural time involved. In these cases, a more extreme and invasive surgical
procedure called arterial bypass is indicated, in which one or more of the
patient's own veins (usually the saphenous veins from the legs) are transplanted
to an arterial position to divert blood flow around the blockage. Arterial
bypass is also used when the blockage is in a critical location or when the
surgeon is unable to access the blockage safely.

         Coronary bypass procedures, which involve replacement of vessels
supplying blood to the heart, typically use the patient's own veins or arteries.
The trauma endured from the vessel removal is often more extensive than that of
the bypass procedure itself. Even though immune response is not an issue with
these self-derived (autologous) vessels, long-term patency (greater than five
years) is limited due to eventual blockage from progressive wall thickening and
thrombosis.

         Repeat arterial bypass procedures may be difficult due to depletion of
the available supply of autologous vessels. The use of synthetic arterial
substitutes has been attempted, but these devices occlude even more rapidly in
the coronary and below-knee positions, which require a small diameter (6
millimeter) graft. The synthetic conduit has been used more successfully in
above-the-knee peripheral procedures, but is still associated with infections,
leaking and blockage.

         LifeCell currently is developing vascular conduit products using
allograft blood vessels and plans to extend the technology to xenografts. These
potential products utilize LifeCell's ability to process vascular tissue and
remove cells that would be recognized by the host as foreign and trigger an
immune response. Early preclinical studies conducted by LifeCell with its
vascular conduits show that they become re-populated with new host cells after
grafting and show no sign of rejection.

         As part of the Company's agreements 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 conduit products utilizing LifeCell's technology. In December 1996,
LifeCell received a two-year


                                       6
<PAGE>
Cooperative Agreement award from the U.S. Army Medical Research and
Material Command to support the development of vascular graft products.

         BLOOD CELL PRESERVATION PRODUCTS

         LifeCell is developing proprietary technology to extend the shelf life
of transfusable platelets, red blood cells and other mammalian cells. This
technology differs from the universal tissue graft applications in that cell
viability is crucial to successful processing.

         THROMBOSOL PLATELET STORAGE SOLUTION. LifeCell is developing a
proprietary biochemical formulation called ThromboSol platelet storage solution
to protect transfusable platelets from damage at low temperatures. Platelets are
blood cells that control clotting. Untreated platelets are sensitive to 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 three to five days. LifeCell has shown in laboratory
tests that the addition of ThromboSol solution preserves the functional aspects
of refrigerated platelets for up to ten days and frozen platelets for more than
six months. LifeCell initiated toxicity studies for ThromboSol platelet storage
solution in late 1994 and began preclinical animal studies in 1995. LifeCell
intends to license this product to major pharmaceutical and other appropriate
companies.

         The ThromboSol development program has been funded through a Phase I
and II SBIR contract with the United States Army. In April 1996, the Company
received additional contract funding of $613,000 for this program from the
United States Navy.

         FREEZE-DRIED RED BLOOD CELLS. LifeCell previously has been funded by
the United States Navy to develop directly transfusable freeze-dried red blood
cells. The need for immediately available, screened blood units is of particular
importance to the United States Armed Services because a substantial number of
combat deaths have resulted from hemorrhaging due to the lack of availability of
on-site transfusable blood. In addition, freeze-dried red blood cells
potentially will allow for widespread autologous transfusion, thereby preventing
transfusion related complications, including disease transmission.

         The fear of acquiring transmittable diseases such as AIDS and hepatitis
from donated blood units has created a growing market for blood recycling units,
preservation of autologous blood, blood cell growth stimulating factors, and
blood substitutes. Freeze-dried blood can eliminate the concern of disease
transmission by the patient donating his or her own blood to be freeze-dried
prior to the anticipated need for transfusable blood.

         The Company is seeking additional funds from various government
granting agencies and potential corporate partners to continue this program and
intends to license this technology to third-parties at a later stage of
development.

CORPORATE ALLIANCE

         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. The
agreement also provides that Medtronic will fund all costs of research and
development, including clinical trials, receive the exclusive right to market
any resulting commercial products and pay LifeCell royalties of up to $25
million on sales of products covered by the agreement. 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 circumstances, Medtronic has the option to
convert the $1.5 million license fee into shares of Common Stock, subject to
certain limitations, at the then current market price.

         In 1994, Medtronic also made a $500,000 equity investment in LifeCell
by purchasing approximately 64,000 shares of Common Stock at $7.77 per share in
exchange for rights of first refusal to negotiate licenses to LifeCell universal
vascular conduit products.


                                       7
<PAGE>
MARKETING

         LifeCell currently markets AlloDerm grafts and cryopreserved allograft
skin to United States burn treatment centers and other potential customers
through its direct sales force. LifeCell has a sales and marketing staff
consisting of a vice president of sales and marketing, a director of
international sales and marketing, a national manager, a product manager, nine
field technical representatives, a clinical specialist, a customer service
representative, two marketing coordinators, and an international customer
service assistant. The field technical representatives and clinical specialists
are responsible for interacting with treatment physicians, primarily burn
surgeons and plastic surgeons at burn treatment centers, and educating them
regarding the use and anticipated benefit of AlloDerm tissue grafts. LifeCell
also participates in national and international conferences and trade shows for
burns and wound healing.

         The Company has engaged specialty distributors to market and sell
AlloDerm tissue for plastic surgery indications. The Company has reached
agreement with 11 such companies and plans to add additional distributors to
cover the entire United States. The Company has nine field technical
representatives, who are responsible for promoting the use of AlloDerm tissue
products in plastic and reconstructive surgery and supporting regional
distributors of the product.

         In June 1996, LifeCell engaged DENTSPLY International, Inc. (DENTSPLY)
to distribute AlloDerm grafts for periodontal surgery on a worldwide basis. In
March 1997, however, DENTSPLY advised LifeCell that it intends to discontinue
operations of the division with responsibility for distributing AlloDerm.
Accordingly, LifeCell expects that it will terminate the agreement with DENTSPLY
and in the near future will resume marketing AlloDerm for periodontal
applications through its direct sales force.

PROCESSING

         LifeCell procures human skin and other tissues from unaffiliated tissue
banks. See "--Sources of Materials". LifeCell provides tissue banks and their
procurement agents with specific procurement protocols, which are required for
the optimum removal and transportation of tissues. Tissues are transported to
LifeCell in accordance with standard industry practices and are identified on
delivery to LifeCell with a unique identification number that allows tracing to
a specific donor. This unique identification number accompanies each processed
tissue to its destination. It then becomes the responsibility of the recipient
treatment center, hospital or surgeon to return a self-addressed patient
tracking card (included with all LifeCell tissues) to LifeCell for donor and
recipient tracking.

         LifeCell begins aseptic processing of donor tissue within 12 days
post-mortem. Processing includes any required sizing and trimming, treatment to
remove cells from the dermal matrix, which is then preserved by proprietary
cryoprotection, packaging and freeze-drying. Microbiological and other quality
assurance testing is conducted before AlloDerm tissue products are released for
shipment to customers. Customers typically order the AlloDerm product on a
just-in-time basis. The product is shipped at ambient temperature by overnight
delivery services.

         Cryopreserved allograft skin is processed by a standard industry
protocol and stored at LifeCell's premises until requisitioned by a customer.
Cryopreserved allograft skin is transported to the customer on dry ice by
overnight delivery.

SOURCES OF MATERIALS

         LifeCell procures allograft skin from unaffiliated tissue banks.
LifeCell is expanding its current procurement of skin and other tissues to
include any of approximately 100 major national tissue banks, including
approximately 35 skin banks. Procurement of certain human organs and tissue for
transplantation is subject to the restrictions of the National Organ Transplant
Act ("NOTA"), which prohibits purchase and sale of human organs and related
tissue for "valuable consideration". See "--Government Regulation". LifeCell
pays a procurement fee to the tissue bank, which covers the cost of recovering
the tissue, conducting donor testing for communicable diseases, including AIDS
and hepatitis tests recommended by the Centers for Disease Control and
Prevention.


                                       8
<PAGE>
Pursuant to contractual arrangements, LifeCell reimburses tissue banks for
recovering and delivering to LifeCell cadaveric skin suitable for
transplantation. In procuring such tissues, LifeCell competes with treatment
centers that use cadaveric skin for temporary wound dressings.

         LifeCell has entered into allograft skin procurement service agreements
with certain tissue banks that, prior to these agreements, did not recover skin
from consented tissue donors. Pursuant to these agreements, LifeCell accepts
from these tissue banks all skin tissue that meets LifeCell's allograft skin
procurement specifications, the requirements of the FDA and the procedural
guidelines outlined by the American Association of Tissue Banks. Allograft skin
tissue that is procured in excess of that required to meet the demand for
AlloDerm tissue products is processed by conventional cryopreservation and
distributed to burn treatment centers and hospitals for use as a temporary or
transitional wound dressing. See "--Products--Temporary Wound Coverage
--Cryopreserved Allograft Skin".

         The Company has established what it believes to be adequate sources of
cadaveric skin at acceptable costs to satisfy the foreseeable demand for
AlloDerm tissue products. Although to date the Company has not experienced any
material difficulty in procuring adequate supplies of cadaveric skin, there can
be no assurance that the future availability of 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. Different grades or thicknesses of material are required for different
surgical uses. There can be no assurances that imbalances in demand will not
result in shortages of desired materials and simultaneous increases in
inventoried materials.

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 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. Noncompliance 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 December 1993, the FDA published an interim rule regulating "banked
human tissue". The rule defines banked 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 kidney, liver, heart, lung, pancreas or any other
vascularized human organ. Banked human tissue is regulated by the FDA in a
manner the agency has deemed necessary to protect the public health from the
transmission of HIV infection 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 banked human tissue facilities and to detain, recall or destroy tissue for
which appropriate documentation is not available. Banked human tissue, however,
is not subject to premarket notification or approval by the FDA as are certain
drugs, biologicals and medical devices.

         In December 1991, the Company first contacted the FDA regarding the
regulatory status of AlloDerm and was advised in May 1992 that the FDA had not
made a final determination on the status of intact processed human cadaver skin,
that the agency currently was studying the issue and that these products may at
some future time be subject to FDA regulation. The FDA sent the Company a copy
of the December 1993 publication of the FDA's banked human tissue regulations
shortly after its release of such regulations and inspected the Company for
compliance with those regulations in July 1994. For these reasons, the Company
believed that AlloDerm was covered by the FDA's definition of banked human
tissue and that the product would not be regulated as a medical device.


                                       9
<PAGE>
         In November 1995, following LifeCell's commercial introduction of
AlloDerm for periodontal applications, the Company received a letter from the
FDA, stating that it considered AlloDerm to be a "device" as defined by the FDC
Act, and that a 510(k) premarket notification was required to be submitted and
cleared by the FDA in order to market the product. Following several months of
correspondence and discussions with the FDA, the Company received a letter from
the agency dated September 17, 1996, to the effect that, after considering the
information and views that the Company submitted at a May 1996 meeting with
agency officials and in subsequent correspondence, the FDA agrees with the
Company's position that AlloDerm intended for use for replacement or repair of
damaged or inadequate integumental tissue, including gingival dermis, is banked
human tissue within the meaning of the interim final rule. Consequently,
AlloDerm is not subject to premarket notification or approval by the FDA and the
Company may continue to 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 plastic and
reconstructive 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 17 letter, the FDA, by
letter dated September 23, 1996, informed the Company that indications 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 banked human tissue and thus not require premarket
clearance. The Company was asked to indicate what changes in advertisement and
promotion it would make for AlloDerm in response to the September 23, 1996
letter. 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 banked human tissue and between integumental
tissue and all other tissue in the September 17 opinion 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 augmentation and as a
void filler, still qualifies as banked 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 banked 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. The Company
also advised the FDA that it would present its arguments to the agency as to why
it believes that these uses fall within the definition of banked human tissue.
There can be no assurance that the FDA will not finally conclude that use of
AlloDerm for the Additional Indications should be regulated as a medical device
and require a 510(k) premarket notification or premarket approval ("PMA") 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 PMA for AlloDerm for the Additional Indications, 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 were 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 the Additional Indications, it is substantially
equivalent to a legally marketed predicate device or is safe and effective for
the Additional Indications and permit the product to be marketed for such uses.
Failure of the Company to receive any required FDA clearance or approval of
AlloDerm for the Additional Indications on a timely basis would preclude
promotion of AlloDerm for the Additional Indications and could have a material
adverse effect on the Company's business, financial condition and results of
operation. See "--Risk Factors--Regulatory Status of AlloDerm".

         The FDA's banked 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. If at any
time the FDA determines that a banked human tissue product is not


                                       10
<PAGE>
procured, processed or distributed in accordance with these requirements (E.G.,
there is a question about the source of the tissue, the adequacy of the testing
or the adequacy of donor selection), the agency may order the
recall and destruction of the product. The failure of a tissue processing
establishment to adhere to the FDA's requirements could subject the
establishment and its principals to civil and criminal prosecution. LifeCell
believes that the Company's operations substantially comply with the
requirements of the FDA's interim rule.

         LifeCell requires that the tissue banks supplying the Company with
tissue comply with the FDA's banked 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 "AATB"). Since 1976,
the AATB has administered a voluntary accreditation system for skin and
orthopedic tissue banks. The AATB evaluates tissue banks for compliance with a
rigorous set of standards through site inspections and document review. The
AATB's standards apply to the procurement, processing, preservation, storage and
labeling of tissue and include requirements for disease screening through donor
testing and review of donor medical histories. Although the Company requires its
supplying tissue banks to comply with the FDA's requirements and the AATB's
standards, there can be no assurance that these tissue banks are in full
compliance with these requirements. The failure of a tissue bank to comply with
regulatory requirements with respect to tissue provided to the Company could
have a material adverse effect on the Company.

         In its interim rule on banked human tissue, the FDA stated that it
would propose additional requirements for such products. Additional requirements
may include registration of tissue banking establishments with the FDA,
donor-recipient tracking and clinical evaluation of tissues that are determined
to have undergone other than "minimal processing". To date, the FDA has not
proposed additional requirements; however, if significant additional regulatory
requirements were to be established, the Company could incur significant
additional costs in order to comply with such requirements.

         LifeCell's proposed human and xenograft heart valve products and its
proposed xenograft tissue transplantation products including XenoDerm tissue and
xenograft vascular conduits will be subject to regulation by the FDA as medical
devices, although the FDA has proposed classifying human heart valves as banked
human tissue. LifeCell's proposed blood cell additives, 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. Such testing must be 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 may also 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 PMA process. LifeCell will need to pursue one of these routes with respect
to each of its proposed medical device products. 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 demonstrate 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 medical use. Prior to
conducting the necessary clinical trials, an applicant may be required to submit
an investigational device ("IDE") protocol to the FDA for approval. An IDE
application typically contains data from laboratory and animal testing
demonstrating


                                       11
<PAGE>
that the product is sufficiently safe for study in humans as well as a
description of 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 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 may 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 Good Manufacturing Practice ("GMP") regulations. The 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 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 and 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 ("IND")
application to the FDA. Similar to the IDE for testing of devices, the IND
application must contain 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 are typically 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. The 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 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 device 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. The time required to obtain such foreign approval 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.


                                       12
<PAGE>
In addition, NOTA prohibits the acquisition, receipt or transfer of certain
human organs, including skin and heart valves and vascular conduits 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.

         LifeCell is also 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 environmental
laws or regulations in the future.

RESEARCH AND DEVELOPMENT

         LifeCell currently uses funds received primarily through external
sources, including corporate alliances and government grants and contracts, to
fund the development of additional universal tissue products and products for
blood cell preservation.

         LifeCell plans to continue to develop its non-AlloDerm technology
through an ongoing research and product development program. To date, its
research has been funded primarily through government SBIR grants, Department of
Defense (DOD) contracts and the proceeds from various offerings of its equity
securities. LifeCell's research and development costs in 1994, 1995 and 1996 for
all programs, including those programs funded through corporate and government
support, were approximately $2.1 million, $2.2 million and $1.6 million,
respectively. The development of LifeCell heart valves is currently being funded
by Medtronic. The 1996 funding of this program was approximately $546,000. See
"--Corporate Alliance".

         The SBIR grant program provides funding for two phases of awards. Phase
I is to evaluate the scientific and technical merit and feasibility of an idea.
Awards are up to $100,000 with a period of performance normally not to exceed
six months. Phase II is to expand on the results of and pursue the development
of Phase I. Awards are up to $750,000, with a period of performance normally not
to exceed two years. To date, LifeCell has been awarded approximately $4.6
million through 14 approved SBIR program awards and Department of Defense
contracts.

         In 1996, LifeCell received a two-year Phase II SBIR grant award from
the NSF in the amount of $300,000 to support the composite skin graft program, a
one-year U.S. Navy contract in the amount of approximately $613,000 to support
the ThromboSol program and a two-year Collaborative Agreement with the U.S. Army
in the amount of approximately $1,069,000 to support investigation of AlloDerm
grafts to repair dura mater, the membrane lining of the brain, the use of
AlloDerm grafts in conjunction with microskin grafting in burn wounds and the
development of vascular graft products.

         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.

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 and trade secrets to protect its technologies.
LifeCell currently has the exclusive right to eight patents through a license
agreement with the Board of Regents of the


                                       13
<PAGE>
University of Texas System. In addition, LifeCell has
been issued three patents and has five pending United States patent
applications.

         LifeCell has also 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 believes that it owns or has the right to use all knowledge
necessary to manufacture and market its current products and planned products
without infringing any existing patent or proprietary rights of others such that
it would be liable for damages or prevented from manufacturing or marketing its
products. No assurances may be given, however, that the Company's patents or
other proprietary rights may not be the subject of an infringement or other
claim that could invalidate to some extent its patents or other rights. Any
successful patent infringement claim relating to any patent could have a
material adverse effect on the Company. See "-- Risk Factors--Patents and
Proprietary Rights".

         LifeCell may decide for business reasons to retain certain knowledge
that it considers proprietary as trade secrets. In that event, or if patent
protection is unattainable, LifeCell must rely upon trade secrets, know-how and
continuing technological innovation to maintain its competitive position.
Employees and consultants of LifeCell who have access to proprietary information
have signed confidentiality agreements. It is LifeCell's policy to require any
new employee to sign similar confidentiality agreements.

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

COMPETITION

         UNIVERSAL TISSUE GRAFTS

         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 and
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.

         ALLODERM TISSUE PRODUCTS--BURNS. LifeCell believes that the AlloDerm
process is the only technology that consistently and effectively eliminates the
targets of rejection and permits permanent transplantation of human dermal
tissue. Competitive commercial products are currently in clinical trials that
claim to provide permanent full-thickness wound coverage. In most cases, these
products contain a "dermal equivalent", which is usually a processed animal
collagen gel or a bioabsorbable synthetic material in which human cells that
produce collagen (fibroblasts) are usually seeded. The fibroblasts secrete
dermal-like proteins and are intended to support a split-skin graft. In
comparison to these products, LifeCell has focused its product development on
the extracellular matrix, and not the cell population of dermis.

         Advanced Tissue Sciences, Inc. and Organogenesis, Inc. each has
developed or is developing such dermal equivalent products. In early 1997,
Advanced Tissue Sciences received a PMA from the FDA to market a temporary wound
covering. LifeCell does not believe that this product will directly compete with
AlloDerm, which is a permanent graft.

         LifeCell believes that these "dermal equivalent products" lack
important dermal components and will encounter difficulty in adequately
anchoring the vital surface epithelial cells. LifeCell's primary objectives in
processing AlloDerm tissue include the preservation of important dermal
components, including a basement membrane complex. The Company believes this
structure not only is essential for sufficient anchoring of epidermal


                                       14
<PAGE>
cells, but also determines the degree of differentiation of these cells, an
aspect that has direct bearing on the skin's vital water barrier function.
LifeCell has demonstrated by electron microscopy that its processing technology
has produced preserved dermis with an intact basement membrane complex. LifeCell
has further demonstrated that a human epidermal cell population (keratinocytes)
will attach and differentiate into the stratified layers typical of normal skin,
on both human and porcine processed dermis. The AlloDerm process also preserves
the basement membrane of the vascular channels and capillaries within the dermal
matrix. LifeCell has demonstrated in animal studies that these vascular channels
become repopulated with host cells that normally line blood vessels and
ultimately restore a normal blood supply to the tissue graft. LifeCell believes
this aspect of its technology is fundamental to the ability of the transplanted
tissue to engraft permanently (integrate) into host tissue and that it is its
principal competitive advantage.

         Integra LifeSciences Corporation received a PMA in 1996 from the FDA to
market two-layer wound dressings that include a biosynthetic dermal equivalent
and a silicone membrane. Integra's product is currently restricted to treatment
of life-threatening burns in cases where autologous tissue is not available.
This treatment requires that the patient's autograft be applied in a subsequent
surgery approximately two weeks later.

         LifeCell believes that AlloDerm grafts will effectively compete with
Integra's product in the treatment of burns based on superior product
performance and because AlloDerm grafts can be applied simultaneously with the
patient's autograft in a single procedure as opposed to an additional subsequent
procedure, thereby reducing surgical costs.

         COMPOSITE SKIN GRAFT. Genzyme Tissue Repair has developed technology
for culturing autologous keratinocytes (epidermal) cells for commercial
distribution. LifeCell believes that these cultured epidermal cell sheets alone
are not optimum as a permanent skin replacement for full-thickness skin injury.
This product does not contain a dermal layer, and in some clinical cases this
type of treatment for a full-thickness wound has resulted in fragility with
severe blistering and loss of grafts. The fragile nature of the product usually
requires that it be hand-carried to the hospital. In some cases, this product
has been used by burn surgeons in conjunction with AlloDerm grafts in an attempt
to improve the quality of healing with these cultured cell sheets.

         LifeCell believes that its composite skin product will compete
effectively with currently available cultured cell sheets because it will
contain a dermal layer, which should improve the take rate and reduce the
fragility currently associated with these products.

         ALLODERM TISSUE PRODUCTS--PERIODONTAL SURGERY. AlloDerm grafts used in
free-gingival graft procedures compete with procedures using the patient's own
tissue, removed from the roof of the mouth or from another area of the patient's
skin, such as the leg, and freeze-dried allograft skin, procured from tissue
banks. LifeCell believes it competes with procedures using the patient's own
tissue by eliminating the need for a donor site and the resulting trauma. The
Company believes it competes with freeze-dried allograft skin because of
AlloDerm's higher biocompatability and reduced immune response.

         AlloDerm grafts used as barrier membranes for guided tissue
regeneration compete with several commercial products, including "Gore-Tex",
manufactured by W.L. Gore & Associates, Inc. Gore-Tex is nonabsorbable and must
be removed by the periodontist several months following the initial surgery.
LifeCell believes that AlloDerm grafts compete with Gore-Tex by eliminating the
need for a second surgical procedure for removal of the membrane. The Company is
aware of other barrier membrane products that are absorbed by the body and,
therefore, do not have to be removed, including products manufactured by Guidor
and Integra LifeSciences Corporation. LifeCell believes that AlloDerm grafts
will compete with absorbable membrane products through more effective
performance and versatility of use.

         ALLODERM TISSUE PRODUCTS--PLASTIC AND RECONSTRUCTIVE SURGERY. When used
during reconstructive surgery as a graft to release burn wound contractures,
AlloDerm competes with the patient's own tissue and potentially with the
products described above intended for burn wound grafting. For the repair and
replacement of damaged or inadequate integumental tissue, AlloDerm competes with
injectable collagen products, such as those manufactured by Collagen
Corporation, and bovine synthetic products such as Gore-Tex. LifeCell believes
that AlloDerm will compete with these products because of AlloDerm's high
biocompatibility and reduced immune response.


                                       15
<PAGE>
CRYOPRESERVED ALLOGRAFT SKIN (TEMPORARY WOUND COVERAGE). LifeCell competes with
regional tissue banks for the distribution of cryopreserved allograft skin for
temporary wound coverage. The Company believes that it can compete successfully
with these tissue banks by offering customized products and services, such as
pre- meshing of the grafts, which save time in the operating room reducing
surgery costs.

         Advanced Tissue Sciences, Inc. has received a PMA from the FDA for a
biosynthetic wound dressing consisting of a commercially available wound
dressing in which human neonatal fibroblasts are cultured and then covered with
a thin synthetic covering to prevent fluid loss. LifeCell believes that its
cryopreserved allograft skin product will compete successfully with this product
primarily because the application of cryopreserved allograft skin is considered
the clinically preferred procedure for temporary wound coverage.

         HEART VALVES. Three current types of replacement heart valves are
commercially available, mechanical valves, chemically processed animal valves
and human allograft valves. Mechanical valves require the patient to be
maintained on lifelong anticoagulant therapy to prevent blood clotting and
subsequent complications of stroke. There also are published reports of sudden
catastrophic failure of these valves, resulting in patient death. Animal valves
calcify or harden over time and usually require replacement within ten to 18
years. Human allograft valves are in short supply. Major manufacturers and
suppliers of mechanical and animal heart valve products include Medtronic, St.
Jude Medical, Inc. and the Edwards Division of Baxter Healthcare Corporation.
Human tissue valves are procured and processed and distributed by Cryolife, Inc.
and non-profit tissue banks, including the American Red Cross.

         LifeCell's preclinical data has indicated that its processed porcine
valve tissue undergoes reduced calcification compared to chemically processed
porcine valves and reduced immune response compared to fresh or cryopreserved
heart valve tissue. LifeCell believes that its processed heart valve, currently
under development with Medtronic, will minimize complications associated with
commercially available valves.

         VASCULAR CONDUITS. Medical treatment for cardiovascular disease,
including atherosclerosis, is a highly competitive industry. Significant
technological progress has been made with respect to the development of
minimally invasive devices for dilation of blocked vessels and devices for
physically removing the plaque from the vessel wall. Additionally, drugs are
being developed to prevent or reverse atherosclerosis. Bypass surgery, however,
is generally performed when the patient displays extensive deposits of plaque
throughout the length of one or more vessels, when the blockage is in a critical
position or when the blockage site cannot be safely accessed.

         The two current clinically preferred methods for coronary arterial
bypass procedure are transposing available arteries and using an autologous vein
from another area in the patient's body. The second procedure induces trauma to
the area of vein harvest and has shown evidence of failure or occlusion after
five to ten years. There are commercially available synthetic vascular conduit
substitutes, but these products also show evidence of occlusion and the
increased potential for leaking and infection. LifeCell believes that its
processing technology will reduce the causes and, accordingly, the potential for
vessel occlusion, leakage and infection.

         BLOOD CELL PRESERVATION PRODUCTS

         LifeCell currently is not aware of any product or developing product
that it anticipates will compete with the products it is developing for blood
cell preservation; however, technological competition in the blood banking field
is intense. Several companies with significantly greater financial resources
than LifeCell are developing blood substitute products. Additionally, several
commercially available blood recycling units are currently used in some surgical
procedures, and growth factors are being developed that are intended to increase
the body's capacity for producing blood cells. LifeCell believes that its
planned freeze-dried blood products and mammalian cells will successfully
compete with these technologies on the basis of cost and convenience.

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,


                                       16
<PAGE>
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 March 26, 1997, the Company had 73 full-time and two part-time
employees of which 23 were employed in processing and support, 18 in sales and
marketing, 17 in research and development and 17 in administration and
accounting. As of March 26, 1997, the Company employed, full time, two persons
with M.D.
degrees and six persons with Ph.D. degrees.

RISK FACTORS

         THE COMPANY'S EXPECTATIONS WITH RESPECT TO FUTURE RESULTS OF OPERATIONS
THAT MAY BE EMBODIED IN ORAL AND WRITTEN FORWARD-LOOKING STATEMENTS, INCLUDING
ANY FORWARD-LOOKING STATEMENTS THAT MAY BE CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MUST BE CONSIDERED WHEN
EVALUATING THE LIKELIHOOD OF THE COMPANY'S REALIZATION OF SUCH EXPECTATIONS. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW.

         NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL

         LifeCell expects to incur substantial expenses for AlloDerm marketing
and the Company's product development programs (including costs of clinical
studies), production, sales and marketing, product introduction, technical
seminars, support of ongoing administrative activities and research and
development activities, such as regulatory and quality assurance programs and
continuing applications for patent protection for the proprietary aspects of its
technology. The Company currently intends to fund these activities from its
existing cash resources, sales of products, and research and development funding
received from others. There can be no assurance that such sources of funds will
be sufficient to meet these future expenses. 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 1997 and 1998 as well as the
extent to which the Company may decide or may be required to use its own
resources, in addition to external funding, 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.

         HISTORY OF OPERATING LOSSES

         The Company has incurred substantial losses since inception in January
1986, including losses of approximately $3.7 million, $3.9 million and $ 4.1
million for the years ended December 31, 1994, 1995, and 1996, respectively, and
had an accumulated deficit of approximately $29.3 million at December 31, 1996.
There can be no assurance that the Company will ever become profitable.

         FDA REGULATORY STATUS OF ALLODERM

         In December 1993, the FDA published an interim rule regulating "banked
human tissue". The rule defines banked 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 kidney, liver, heart, lung, pancreas or any other
vascularized human organ. Banked human tissue is regulated by the FDA in a
manner the agency has deemed necessary to protect the public health from the
transmission of HIV infection 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 banked human tissue facilities and to detain, recall or destroy tissue for
which appropriate documentation is not available. Banked human


                                       17
<PAGE>
tissue, however, is not subject to premarket notification or approval by the FDA
as are certain drugs, biologicals and medical devices.

         In December 1991, the Company first contacted the FDA regarding the
regulatory status of AlloDerm and was advised in May 1992 that the FDA had not
made a final determination on the status of intact processed human cadaver skin,
that the agency currently was studying the issue and that these products may at
some future time be subject to FDA regulation. The FDA sent the Company a copy
of the December 1993 publication of the FDA's banked human tissue regulations
shortly after its release of such regulations and inspected the Company for
compliance with those regulations in July 1994. For these reasons, the Company
believed that AlloDerm was covered by the FDA's definition of banked human
tissue and that the product would not be regulated as a medical device.

         In November 1995, following LifeCell's commercial introduction of
AlloDerm for periodontal applications, the Company received a letter from the
FDA, stating that it considered AlloDerm to be a "device" as defined by the FDC
Act, and that a 510(k) premarket notification was required to be submitted and
cleared by the FDA in order to market the product. Following several months of
correspondence and discussions with the FDA, the Company received a letter from
the agency dated September 17, 1996, to the effect that, after considering the
information and views that the Company submitted at a May 1996 meeting with
agency officials and in subsequent correspondence, the FDA agrees with the
Company's position that AlloDerm intended for use for replacement or repair of
damaged or inadequate integumental tissue, including gingival dermis, is banked
human tissue within the meaning of the interim final rule. Consequently,
AlloDerm is not subject to premarket notification or approval by the FDA and the
Company may continue to 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 plastic and
reconstructive 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 the Additional
Indications, would need to be determined by the FDA on a case by case basis. To
date, a minimal amount of LifeCell's aggregate product sales are attributable to
the Additional Indications.

         While the Company's marketing efforts had not previously focused on the
Additional Indications, as a follow-up to its September 17 letter, the FDA, by
letter dated September 23, 1996, informed the Company that indications 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 banked human tissue and thus not require premarket
clearance. The Company was asked to indicate what changes in advertisement and
promotion it would make for AlloDerm in response to the September 23, 1996
letter. 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 banked human tissue and between integumental
tissue and all other tissue in the September 17 opinion 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 augmentation and as a
void filler, still qualifies as banked 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 banked 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. The Company
also advised the FDA that it would present its arguments to the agency as to why
it believes that these uses fall within the definition of banked human tissue.
There can be no assurance that the FDA will not finally conclude that use of
AlloDerm for the Additional Indications should be regulated as a medical device
and require a 510(k) premarket notification or PMA 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
PMA for AlloDerm for the Additional Indications, 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 were 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 the


                                       18
<PAGE>
Additional Indications, it is substantially equivalent to a legally marketed
predicate device or is safe and effective for the Additional Indications and
permit the product to be marketed for such uses. Failure of the Company to
receive any required FDA clearance or approval of AlloDerm for the Additional
Indications on a timely basis would preclude promotion of AlloDerm for the
Additional Indications and could have a material adverse effect on the Company's
business, financial condition and results of operation. See "--Government
Regulation--Proposed Products".

         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 the FDA or foreign approvals will be obtained for any of
the Company's proposed products.

         LifeCell's proposed human and xenograft heart valve products and its
proposed xenograft tissue transplantation products will be subject to regulation
as medical devices. The Company's proposed blood cell additives will be subject
to regulation as biologics. Such products require FDA premarket clearance 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 GMP regulations. Manufacturing facilities and
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 and foreign countries in which LifeCell's
products are sold will not impose additional regulatory requirements or
marketing impediments.

         NOTA prohibits the acquisition, receipt or transfer of certain human
organs, including skin, heart valves and vascular conduits, 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 and prospects.

         DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL

         The success of LifeCell will be dependent largely on the efforts of
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 Scientific Officer and a director of the Company. The loss of either
person's services would have a material adverse effect on LifeCell's business
and prospects. Dr. Livesey, a citizen of Australia, has received an extension of
an "H-1B" visa to work in the United States that currently expires in June 1997,
and he is in the process of applying for permanent residence status in the
United States. There can be no assurance that he will be able to


                                       19
<PAGE>
obtain such status. Further, the success of LifeCell is also dependent upon its
ability to hire and retain suitable 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 necessary personnel.

         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
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 than LifeCell and have established
reputations for success in the development, sale and service of products. 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.

         AVAILABILITY OF MATERIALS

         The Company's business will be dependent on the availability of human
cadaveric skin and cardiovascular tissue to the extent that LifeCell is unable
successfully to develop products using animal tissue. A limited supply of
donated skin is available. Although the Company has established what it believes
to be an adequate source of cadaveric skin to satisfy the expected demand for
AlloDerm, there can be no assurance that the availability of human skin and
cardiovascular tissue will be sufficient to meet LifeCell's demand for such
materials.

         UNCERTAINTY OF MARKET ACCEPTANCE

         Achieving broad market acceptance for AlloDerm and LifeCell's proposed
products will require substantial additional marketing efforts. There can be no
assurance that AlloDerm or any of LifeCell's proposed products ultimately will
achieve widespread commercial acceptance.

         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 has the exclusive right to eight patents through a license
agreement with the Board of Regents of the University of Texas System. In
addition, LifeCell has been issued three patents and has five pending United
States patent applications. There can be no assurance that LifeCell will obtain
any additional key patents or other protection, that the patents currently
applied for will be granted, that existing patents or proprietary rights owned
by or licensed to LifeCell will not be invalidated or that patents will provide
significant commercial benefits. The invalidation of key patents or proprietary
rights owned by or licensed to LifeCell could have a material adverse effect on
LifeCell and on its business prospects.

         LifeCell believes that it owns or has the right to use all knowledge
necessary to manufacture and market its current products and planned products
without infringing any existing patent or proprietary rights of others such that
it would be liable for damages or prevented from manufacturing or marketing its
products. No assurances may be given, however, that the Company's patents or
other proprietary rights may not be the subject of an infringement or other
claim that could invalidate to some extent its patents or other rights. Any
successful patent 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 patents or other proprietary rights or that the
Company may be the subject of patent litigation to defend its patents or other
rights against claims of infringement or other intellectual property claims.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's financial condition and
results of operations.


                                       20
<PAGE>
         LifeCell has also 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.

         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. These and future changes in
third-party payor reimbursement practices regarding the procedures performed
with LifeCell's products may adversely affect LifeCell's business.

         PRODUCT LIABILITY AND INSURANCE

         The Company's business will expose 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 million, there can be no assurance that such insurance
will provide adequate coverage against potential liabilities or that adequate
product liability insurance will continue to be available in the future or that
it can be maintained on acceptable terms.

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

         As of December 31, 1996, LifeCell had accumulated net operating loss
("NOL") carryforwards for federal income tax purposes of approximately $26
million and research and development tax credits of approximately $385,000 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. Accordingly, LifeCell may not be able to take full advantage of its
NOL carryforwards and tax credits for federal income tax purposes.

         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 an adverse effect on LifeCell's
business.


ITEM 2.  PROPERTIES

         LifeCell leases approximately 20,000 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 $18,000.


ITEM 3.  LEGAL PROCEEDINGS

         None.


                                       21
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.
                                     PART II

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

         MARKET FOR THE COMMON STOCK

         The Company's Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "LIFC". The table below sets forth the high and low sales
prices of the Common Stock for each quarter of 1995 and 1996, as reported by The
Nasdaq Stock Market. The quotations reflect inter-dealer prices, without retail
mark-down or commission, and may not represent actual transactions.


                                  1995                         1996
                               Price Range                  Price Range
                            -----------------           ------------------

                              High      Low                High       Low
                            -----------------           ------------------

First Quarter                $4        $1 5/8            $6        $2 1/4

Second Quarter                5 1/2     2 1/8             5         3 3/4

Third Quarter                 4 3/4     3 3/8             5 7/8     3 5/8

Fourth Quarter                4         2                 4 1/4     2 7/8


         As of March 26, 1997, the last sales price per share of LifeCell's
Common Stock, as reported by The Nasdaq Stock Market, was $7.00.

         At March 26, 1997, the Company's 6,754,761 shares of Common Stock
outstanding were held by approximately 250 stockholders of record and the
Company estimates that there are in excess of 1,500 beneficial owners. At March
26, 1977, the Company's 125,583 shares of Series B Preferred Stock outstanding
were held by 52 stockholders of record.

         DIVIDEND POLICY

         LifeCell has not paid a cash dividend to its holders 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
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, on March 26, 1997,
the Company paid a per share dividend of $.50 in shares of its Common Stock to
such security holders, and on March 26, 1997, the Company paid a per share
dividend of $.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, the Company paid a per share dividend of $1.17 in
shares of Series B Preferred Stock to the holders of Series B Preferred Stock.
The Series B Preferred Stock bears dividends at the annual rate 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.


                                       22
<PAGE>
The dividends will accrue and be paid quarterly. 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 or current net profits.

         RECENT SALES OF UNREGISTERED SECURITIES

         During November 1996, the Company completed a private placement of
124,157 shares of its Series B Preferred Stock and stock purchase warrants to
purchase an aggregate of 2,803,530 shares of Common Stock for a total purchase
price of $12,415,700. The Series B Preferred Stock and warrants were sold to
accredited investors. Each share of Series B Preferred Stock is convertible at
any time into approximately 32.26 shares of Common Stock, subject to adjustment
in certain events. The placement agent for the private placement received a
stock purchase warrant to purchase an aggregate of 354,734 shares of Common
Stock.

         From January 1, 1996 through September 13, 1996, the Company issued a
total of 5,000 shares of Common Stock for an aggregate consideration of $14,375
to a director of the Company pursuant to the exercise of options granted under
the Company's non-employee director stock option plan. Also in 1996, the Company
issued a total of 247,000 shares of Common Stock for an aggregate consideration
of $765,700 to certain holders of the Company's Series A Preferred Stock
pursuant to the exercise of certain stock purchase warrants.

         The Company considers the above-described 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) or Regulation D of the
Securities Act of 1933, as amended.


                                       23
<PAGE>
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, 1996,
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,

                                                         1992             1993             1994             1995             1996
                                                      ---------        ---------         --------        ---------       -----------
OPERATIONS STATEMENT DATA:

Revenues:
<S>                                                     <C>             <C>             <C>             <C>              <C>
   Product sales .............................               --           20,737           93,940          742,238        2,012,205

   Corporate alliance ........................          $    --          $    --        $ 358,331       $  825,221       $  546,461

   Grants and contracts ......................          239,102          377,057          364,334          239,116          386,904
                                                      ---------        ---------         --------        ---------       -----------
      Total revenues .........................          239,102          397,794          816,615        1,806,575        2,945,570
                                                      ---------        ---------         --------        ---------       -----------
Costs and expenses:

   Cost of goods sold ........................             --            207,398          515,500          925,174        1,281,353

   Funded research and
   development ...............................          239,102          377,057          722,675        1,064,337          933,365

   Proprietary research and
   development ...............................        1,354,941        1,718,799        1,363,176        1,105,427          654,821

   General and administrative ................        1,165,662        1,479,327        1,381,470        1,422,588        1,911,254

   Selling and marketing .....................          205,108          268,618          727,615        1,475,296        2,389,573
                                                      ---------        ---------       ---------        ---------       -----------

      Total costs and expenses ...............        2,964,813        4,051,199        4,710,436        5,992,822        7,170,366
                                                      ---------        ---------       ---------        ---------       -----------

Loss from operations .........................       (2,725,711)      (3,653,405)      (3,893,821)      (4,186,247)      (4,224,796)
                                                      ---------        ---------        ---------        ---------       -----------

   Interest income and other .................          161,443          223,973          167,300          280,843          135,082
                                                      ---------        ---------        ---------        ---------       -----------

Net loss .....................................      $(2,564,268)      (3,429,472)      (3,726,521)      (3,905,404)      (4,089,714)
                                                      ---------        ---------        ---------        ---------       -----------
Loss per share(1) ............................            (0.70)           (0.80)           (0.90)           (1.10)           (1.14)
                                                      ---------        ---------        ---------        ---------       -----------
Shares used in computing loss per
share ........................................        3,643,333        4,277,171        4,294,179        4,313,366        4,542,519
                                                      ---------        ---------        ---------        ---------       -----------
</TABLE>

<TABLE>
<CAPTION>
                                                                              At December 31,


                                                         1992             1993             1994             1995             1996
                                                      ---------        ---------         --------        ---------       -----------

BALANCE SHEET DATA:
<S>                                        <C>                <C>                <C>                <C>                <C>
Cash and cash equivalents ...........      $  3,938,598       $    426,104       $  1,877,295       $  3,015,332       $ 10,748,250

Short-term investments ..............         2,589,493          3,016,511          5,154,824               --                 --

Working capital (deficit) ...........         6,770,195          3,433,008          6,613,304          2,888,048         10,884,779

Total assets ........................         7,413,401          4,260,079          7,997,404          4,376,039         12,890,015

Long-term obligations ...............              --                 --            1,500,000          1,500,000          1,500,000

Accumulated deficit .................       (13,189,203)       (16,618,635)       (20,678,402)       (24,774,753)       (29,310,934)

Total stockholders' equity ..........         7,152,253          4,045,661          5,743,127          2,093,906         10,197,104
</TABLE>

(1) Includes effect of accounting treatment of preferred stock of $0.03, $0.19
and $0.24 in 1994, 1995 and 1996, respectively.


                                       24
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K.

GENERAL AND BACKGROUND

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

         In December 1993, LifeCell began commercial distribution of AlloDerm
human dermal grafts. The initial AlloDerm product was used as a dermal
replacement in the grafting of third-degree burns. LifeCell commenced commercial
sales of AlloDerm for periodontal surgery in September 1995 and for plastic and
reconstructive surgery uses in June 1995. The Company reported total product
sales of approximately $94,000, $742,000 and $2,012,000 in 1994, 1995 and 1996,
respectively.

         In 1994, LifeCell entered into an agreement with Medtronic pursuant to
which Medtronic agreed (subject to certain rights to terminate at Medtronic's
discretion) to fund the development of LifeCell's proprietary tissue processing
technology in the field of heart valves. Additionally, LifeCell's research and
development of blood cell products has been substantially funded through
government grants and contracts.

RESULTS OF OPERATIONS

         YEARS ENDED DECEMBER 31, 1996 AND 1995

         Total revenues for 1996 were 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 uses of the
 Company's
AlloDerm product, product sales for the year increased $1.3 million from 1995.
Corporate alliance revenue decreased from $825,000 in 1995 to $546,000 in 1996
as a result of certain non-recurring revenue received by LifeCell in the first
quarter of 1995 under the Medtronic agreement and the timing of planned
activities performed by LifeCell related to the progress of the project. The
corporate alliance revenue is recorded based on the costs of the work performed
under the agreement. During 1996, the Company recognized $387,000 in revenue
from its government grants and contracts, or an increase of $148,000 over 1995,
as a result of additional governmental awards received during 1996 for the
Company's ThromboSol and keratinocyte development programs.

         Total costs and expenses for 1996 were $7.2 million, an increase of
$1.2 million compared to 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 were $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. The cost of funded
research and development declined from $1.1 million in 1995 to $933,000 in 1996
as a result of the timing of planned activities as well as the funding
available, as such costs are reimbursed by others. Proprietary research and
development expense decreased to $655,000 for the 1996 from $1.1 million in 1995
primarily due to the shift in the Company's focus from the development of
AlloDerm to processing. General and administrative expense increased to $1.9
million for the year ended December 31, 1996 from $1.4 million in the same
period of 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 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 decreased by $146,000 from 1995 to 1996 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.


                                       25
<PAGE>
         YEARS ENDED DECEMBER 31, 1995 AND 1994

         Total revenues for 1995 were $1.8 million compared to approximately
$817,000 for 1994. This increase was primarily due to increased product sales
and increased activities in the corporate alliance with Medtronic. Product sales
increased to $742,000 in 1995 from $94,000 in 1994, due to greater market
acceptance and additional sales efforts. The corporate alliance revenues
increased to $825,000 in 1995 from $358,000 in 1994 due to a full year of
activity in 1995 and increased heart valve development activities. In 1995,
revenues included amounts recorded from one Small Business Innovative Research
("SBIR") contract of approximately $239,000, compared to $364,000 from two SBIR
contracts in 1994. During 1995, research and development contracts and grants
revenue consisted of $239,000 pursuant to the second year of a 1993 award of a
Phase II $740,000 SBIR contract from the United States Army for the prolonged
storage of platelets. Interest income increased to $281,000 in 1995 from
$167,000 in 1994 due to an increase in average funds available for investment in
1995 as compared to 1994.

         Cost of goods sold for product sales increased $409,000 while revenues
increased $648,000 during 1995 as compared to 1994. During 1994, the "start up"
phase of manufacturing was still underway and the Company had excess capacity.
This resulted in higher amounts of unabsorbed overhead costs in 1994 than in
1995.

         Proprietary research and development expense decreased to $1.1 million
in 1995 from $1.4 million in 1994 primarily as a result of the transfer of
AlloDerm related activities from proprietary research and development to
processing (cost of goods sold). These costs previously were recorded in
research and development expense.

         General and administrative expenses remained relatively consistent with
the prior year. Selling and marketing expenses increased to $1.5 million in 1995
from $728,000 in 1994 primarily due to the addition of sales personnel,
increased promotional activities related to AlloDerm marketing activities and
commercial introduction of the AlloDerm graft in the periodontal surgery market.

LIQUIDITY AND CAPITAL RESOURCES

         Since its inception, LifeCell's principal sources of funds have been
equity offerings, product sales, the Medtronic corporate alliance, government
grants and contracts and interest on investments.

         LifeCell primarily funds research and development activities for
products other than AlloDerm with external funds from its corporate alliance and
government grants. In April 1996, LifeCell was awarded a one-year $613,000
contract from the U.S. Navy related to the development of ThromboSol. In August
1996, LifeCell was awarded a two-year $300,000 National Science Foundation Phase
II grant related to its keratinocytes program. In December 1996, LifeCell was
awarded a two-year contract from the U.S. Army to support the development of
vascular graft products.

         In 1994, LifeCell entered into agreements 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 the
development of LifeCell's proprietary tissue processing technology in the field
of heart valves. Through December 31, 1996, LifeCell has recognized
approximately $1.7 million in revenues for development funding, excluding the
initial license fee, for this program.

         In January 1996, LifeCell borrowed $120,000 from a bank for working
capital purposes. The loan was secured by cash, required monthly payments of
$2,000, plus interest, matured December 31, 1996, and bore interest at a rate
equal to 6.05% per annum. In August 1996, LifeCell borrowed $250,000 from the
same bank for working capital purposes. This loan was secured by accounts and
other receivables, matured in December 1996, and bore interest at a rate equal
to prime plus .25% per annum. The notes were paid in full November 1996.

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

         In June 1996, LifeCell engaged DENTSPLY to distribute AlloDerm grafts
for periodontal surgery on a worldwide basis. In March 1997, however, DENTSPLY
advised LifeCell that it intends to discontinue operations of the division with
responsibility for distributing AlloDerm. Accordingly, LifeCell expects that it
will terminate the

                                       26
<PAGE>
agreement with DENTSPLY and in the near future will resume marketing AlloDerm
for periodontal applications through its direct sales force. While the Company
anticipates that the termination of the DENTSPLY agreement may have some impact
on revenues attributable to sales of AlloDerm for periodontal applications
during this transition, LifeCell believes that it will not materially affect the
Company's overall revenues attributable to AlloDerm sales.

         LifeCell expects to incur substantial expenses for AlloDerm marketing
and the Company's product development programs (including costs of clinical
studies), production, sales and marketing, product introduction, technical
seminars, support of ongoing administrative activities and research and
development activities, such as regulatory and quality assurance programs and
continuing applications for patent protection for the proprietary aspects of its
technology. The Company currently intends to fund these activities from its
existing cash resources, sales of products, and research and development funding
received from others. There can be no assurance that such sources of funds will
be sufficient to meet these future expenses. 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 1997 and 1998 as well as the
extent to which the Company may decide or may be required to use its own
resources, in addition to external funding, 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.

         LifeCell has had losses since inception and therefore has not been
subject to federal income taxes. As of December 31, 1996, LifeCell had NOL and
research and development tax credit carryforwards for income tax purposes of
approximately $26 million and $385,000, 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. A
recapitalization effected by LifeCell in 1992, the issuance of additional
capital stock pursuant to its initial public offering in 1992 and its sales of
equity securities in 1994 and 1996 may cause a "more than 50 percent change in
ownership" as defined in the applicable tax laws. Accordingly, LifeCell's
ability to use its NOL and tax credit carryforwards to reduce future taxable
income may be restricted.


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 June 19, 1997, under the captions "Election of
Directors" and "Executive Compensation", and such information is incorporated
herein by reference.


                                       27
<PAGE>
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 June 19, 1997, 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 June 19, 1997, 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 June 19, 1997, under the caption "Executive
Compensation", 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:

   1.   FINANCIAL STATEMENTS                                             PAGE
                                                                         ----
     Report of Independent Public Accountants...........................  F-2
     Balance Sheets as of December 31, 1995 and 1996....................  F-3
     Statements of Operations for the years ended
     December 31, 1994, 1995 and 1996...................................  F-4
     Statements of Stockholders' Equity for the
     years ended December 31, 1995 and 1996.............................  F-5
     Statements of Cash Flows for the years ended
     December 31, 1994, 1995 and 1996...................................  F-6
     Notes to Financial Statements......................................  F-7

(B)      REPORTS ON FORM 8-K:

     During the quarter ended December 31, 1996, the Company filed (i) on
     November 27, 1996, a Current Report on Form 8-K dated as of November 18,
     1996, to report the private placement of equity securities of the Company;
     and (ii) on December 31, 1996, a Current Report on Form 8-K dated as of
     December 27, 1996, at the request of The Nasdaq Stock Market. The latter
     report included the Company's balance sheet as of November 30, 1996, and
     was filed to evidence the Company's compliance with The Nasdaq Stock
     Market's continuing listing requirements for SmallCap issuers

(C)      EXHIBITS:

         Exhibits designated by the symbol * are filed with this 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.


                                       28
<PAGE>
EXHIBIT NO.                                      DESCRIPTION
----------                                       -----------
         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 4.1 to the Registrant's Current Report on
              Form 8-K dated November 18, 1996).

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

     4.1*     Form of Series B Preferred Stock Certificate.

     4.2*     See Exhibit 10.21 -- Voting Agreement dated November 18, 1996,
              among LifeCell Corporation and certain stockholders named therein.

     10.1+    Employment Agreement and accompanying Confidentiality, Inventions
              and Discoveries and Non- Competition Agreement dated January 28,
              1992, by and between the Registrant and Paul M. Frison
              (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to
              the Registrant's Registration Statement on Form S-1, Registration
              No. 33-44969, filed with the Commission on February 10, 1992).

     10.2+    Employment Agreement and accompanying Confidentiality, Inventions
              and Discoveries and Non- Competition Agreement dated January 28,
              1992, by and between the Registrant and Stephen A. Livesey
              (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to
              the Registrant's Registration Statement on Form S-1, Registration
              No. 33-44969, filed with the Commission on February 10, 1992).

     10.3*+   LifeCell Corporation Second Amended and Restated 1992 Stock Option
              Plan, as amended.

     10.4*+   LifeCell Corporation Second Amended and Restated 1993 Non-Employee
              Director Stock Option Plan, as amended.

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

     10.6     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
              Registrant's Registration Statement on Form S-1, Registration No.
              33-44969, filed with the Commission on January 9, 1992).

     10.7+    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 Registrant's Registration Statement on Form
              S-1, Registration No. 33- 44969, filed with the Commission on
              February 27, 1992).

     10.8     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).


                                       29
<PAGE>
EXHIBIT NO.                                      DESCRIPTION
----------                                       -----------

     10.9     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 Registrant's Quarterly Report on Form 10-Q for the
              period ended March 31, 1996).

     10.10    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
              Registrant's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1992).

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

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

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

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

     10.15*   Securities Purchase Agreement dated November 18, 1996, between
              LifeCell Corporation and the Investors named therein.

     10.16*   Voting Agreement dated November 18, 1996, among LifeCell
              Corporation and certain stockholders named therein.

     10.17*   Registration Rights Agreement dated November 18, 1996, between
              LifeCell Corporation and certain stockholders named therein.

     10.18*   Form of Stock Purchase Warrant dated November 18, 1996, issued to
              each of the warrant holders named on Schedule 10.19 attached
              thereto.

     10.19*   Stock Purchase Warrant dated November 18, 1996, issued to Gruntal
              & Co., Incorporated.

     11.1*    Statement Regarding Computation of Per Share Earnings.

     23.1*    Consent of Arthur Andersen LLP.

     27.1*    Financial Data Schedule.


                                       30
<PAGE>
                                    GLOSSARY

         THE FOLLOWING GLOSSARY IS INTENDED TO PROVIDE THE READER WITH AN
EXPLANATION OF CERTAIN TECHNICAL TERMS USED IN CERTAIN SECTIONS OF THIS ANNUAL
REPORT ON FORM 10-K:

ALLOGRAFT.........................   Graft derived from one individual and
                                     transplanted to another of the same species
                                     (E.G., human to human).

ANCHORING FIBRIL..................   A specialized collagen thread that attaches
                                     to both epidermal cells of skin and to the
                                     dermal basement membrane complex, bonding
                                     them together.

ASEPTIC PROCESSING................   Processing in a sterile work environment
                                     using special procedures to keep the tissue
                                     free from exposure to infectious material.

AUTOGRAFT.........................   Graft derived from one part of an
                                     individual's body and transplanted to
                                     another location in the same individual.

BASEMENT MEMBRANE
COMPLEX..........................    A highly specialized surface structure of
                                     dermis that separates and anchors a layer
                                     of epithelial cells to the underlying
                                     dermis.

CALCIFICATION.....................   Abnormal deposition of calcium salts within
                                     a tissue, leading to hardening.

CELL CULTURE......................    The maintenance and growth of living cells
                                     outside of the body, typically in glass or
                                     plastic containers containing nutrients and
                                     other supportive substances.

CHEILOPLASTY......................  Surgical lip augmentation.

CLINICAL TRIAL....................    An evaluation or experiment to test safety
                                     and therapeutic value of a device or
                                     substance in humans.

COLLAGEN..........................   A specialized group of proteins which form
                                     fibers and comprise the structural support
                                     for numerous tissues of the body (including
                                     dermis, blood vessels, heart valves,
                                     ligaments, and tendons).

CONTRACTURE RELEASE...............    A surgical procedure to remove scar tissue
                                     that is preventing free movement of
                                     muscles, tendons or joints.

CORONARY BYPASS...................    A surgically established shunt of blood
                                     flow from the aorta (main artery) to the
                                     blood vessels of the heart (coronary
                                     arteries), bypassing an obstruction in the
                                     coronary artery.

CRYOPRESERVATION..................   The preservation of a biological cell or
                                     tissue by the use of freezing and low
                                     temperature storage.

CRYOPROTECTION....................   The use of chemical substances that reduce
                                     ice crystal damage associated with
                                     freezing.

DERMIS............................   The inner layer of skin, composed of
                                     extracellular protein matrix, collagen and
                                     fibroblasts, which provides strength and
                                     durability.

DIFFERENTIATION...................   The developmental process whereby an
                                     immature primary cell divides and acquires
                                     properties required for its specialized
                                     function.

ELA...............................   Establishment License Application; filed
                                     with the FDA Center for Biologic Evaluation
                                     and Research to obtain approval to
                                     manufacture a biological product at a
                                     facility.

ENDOTHELIAL CELLS.................   Thin flattened cells that line body
                                     cavities, including the inside surface of
                                     blood vessels.


                                       31
<PAGE>
EPIDERMIS.........................   The outermost superficial layer of skin
                                     composed of epithelial cells
                                     (keratinocytes) and pigment cells, which
                                     overlies the dermis and is responsible for
                                     water barrier function and pigmentation.

EPITHELIAL CELLS..................   Sheets of cells that cover exposed surfaces
                                     of the body (including skin) and serve
                                     especially to close and protect other parts
                                     of the body.

EXTRACELLULAR MATRIX..............   A proteinaceous substance of lattice,
                                     secreted by cells, which forms connective
                                     tissue and serves as structural support for
                                     certain tissues or organs of the body. (See
                                     Dermis).

FIBROBLAST........................   A cell that secretes collagen and other
                                     proteins involved in the formation of
                                     connective tissue.

FREEZE-DRY........................   To dry a sample in a frozen state under
                                     high vacuum especially for preservation.

FULL-THICKNESS WOUND..............   A skin injury that results in the loss of
                                     all skin components, including epidermis
                                     and dermis (E.G., third-degree burn).

GLABELLAR CONTOURING..............   A surgical procedure to restore the smooth
                                     appearance of the forehead between the
                                     eyebrows by filling in the depression
                                     created by frown lines.

GRAFT.............................   To surgically bond tissues that are
                                     normally separate, or the tissue used in a
                                     grafting procedure.

HEMORRHAGE........................   To undergo heavy or uncontrolled bleeding.

HOMOLOGOUS CELLS..................   Cells from another person which, when
                                     transplanted, can be recognized by the body
                                     as foreign and thus provoke an immune
                                     response.

IDE APPLICATION...................   Investigational Device Exemption allows a
                                     company to conduct clinical studies with an
                                     investigational medical device.

IMMUNE RESPONSE...................   An inflammatory reaction of the body's
                                     immune cells to a transplanted tissue or
                                     organ, leading to its destruction.

IMMUNOSUPPRESSIVE.................   That which suppresses the body's natural
                                     immune response, preventing the destruction
                                     or rejection of a transplanted tissue or
                                     organ.

IND...............................   An Investigational New Drug application
                                     (IND) is usually the first step in the
                                     process of obtaining FDA approval to
                                     commercially distribute a new drug. Under
                                     an IND, a sponsor can use the drug with
                                     human subjects during and in connection
                                     with clinical investigations.

                                             The clinical trials generally
                                             consist of three Phases.

                                             Phase I, involves the study of a
                                             drug's safety in a small number of
                                             normal healthy volunteers.

                                             Phase II, involves the assessment
                                             of a drug's effectiveness
                                             (efficacy) in a larger group of
                                             volunteer patients with the
                                             condition for which the drug is
                                             directed.

                                             Phase III, involves close
                                             monitoring of a larger number of
                                             patients with the condition for
                                             which the drug is directed in order
                                             to ascertain the drug's
                                             effectiveness and to identify any
                                             adverse reactions.

IN-VITRO..........................  A biological process conducted outside of
                                    the body, as in a laboratory flask.

KERATINOCYTE......................  Primary epithelial cells of the skin which
                                    have the ability to differentiate to
                                    full-thickness when associated with a dermal
                                    basement membrane complex.


                                       32
<PAGE>
MOLECULAR DISTILLATION DRY......... To dry a sample containing unstable
                                    frozen water under conditions of vacuum
                                    and temperature such that ice
                                    crystallization and subsequent damage to
                                    the sample does not occur.

NASAL SEPTAL DEFECT...............  An imperfection of the membrane inside the
                                    nose that separates the nostrils.

NDA...............................  A New Drug Approval application is an
                                    application to the FDA for approval to
                                    market a drug.

ORTHOPEDIC........................  Pertaining to the restoration of function
                                    following injury to, and the correction of
                                    deformities of, the skeletal system, its
                                    joints and associated structures.

PERIPHERAL BYPASS.................  An arterial bypass procedure in an area away
                                    from the heart, usually in a limb.

PLA...............................  A Product License Application (PLA) is an
                                    application to the FDA for approval to
                                    market a biological product.

PMA...............................  A Pre-market Approval Application (PMA) is
                                    an application to the FDA for approval to
                                    market a medical device for human
                                    therapeutic use.

PORCINE...........................  Derived from pigs.

PRECLINICAL TRIALS................  Trials related to experimentation to test
                                    safety and therapeutic value of a device or
                                    product in living animals, prior to testing
                                    in humans.

PREMARKET APPROVAL................  An approved premarket approval application
                                    (PMA) is required for new types of Class III
                                    medical devices prior to commercialization.

REJECTION.........................  Destruction of a transplanted tissue or
                                    organ by the host's immune cells.

RHINOPLASTY.......................  Plastic surgical operation on the nose.

RHYTIDECTOMY......................  Removal of skin to eliminate wrinkles.

SAPHENOUS VEIN....................  Either of the two chief superficial veins of
                                    the legs, commonly used for coronary bypass
                                    procedures.

SPLIT-SKIN GRAFT..................  Skin containing both epidermis and dermis
                                    which is excised from healthy sites and
                                    transplanted to a full-thickness wound on
                                    some other area of the body.

TAKE RATE.........................  The percentage of the total graft area in
                                    which the graft has adhered and
                                    vascularized.

THIRD-DEGREE BURN.................  Full-thickness injury of the skin, with loss
                                    of both the epidermal and dermal components.

VASCULAR CONDUIT..................  A tubular structure through which blood
                                    flows (i.e., blood vessel, artery or vein).

VENOUS STASIS ULCERS..............  Skin ulcers resulting from the slowing or
                                    stoppage of normal blood flow because of
                                    deteriorating valves in the veins.

XENOGRAFT.........................  A tissue graft derived from one species and
                                    transplanted to a different species (e.g.,
                                    animal to human).

510(K) (REVIEW)...................  A process which enables a manufacturer to
                                    demonstrate to the FDA that a proposed
                                    product is "substantially equivalent" to
                                    another product that was in commercial
                                    distribution in the United States before May
                                    28, 1976, or has subsequently been cleared

                                       33
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants .................................   F-2
Balance Sheets as of December 31, 1995 and 1996 ..........................   F-3
Statements of Operations for the years ended
      December 31, 1994, 1995 and 1996 ...................................   F-4
Statements of Stockholders' Equity for the years
      ended December 31, 1994, 1995 and 1996 .............................   F-5
Statements of Cash Flows for the years ended
      December 31, 1994, 1995 and 1996 ...................................   F-6
Notes to Financial Statements ............................................   F-7

                                      F-1
<PAGE>
                    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, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

                               ARTHUR ANDERSEN LLP

Houston, Texas
March 26, 1997

                                      F-2
<PAGE>
                              LIFECELL CORPORATION

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                              ------------------------------------
                                                                                  1995                    1996
                                                                              ------------            ------------
<S>                                                                           <C>                     <C>
                                  A S S E T S
CURRENT ASSETS
     Cash and cash equivalents ..........................................     $  3,015,332            $ 10,748,250
     Accounts and other receivables .....................................          251,509                 436,839
     Inventories ........................................................          351,502                 839,821
     Prepayments and other ..............................................           51,838                  52,780
                                                                              ------------            ------------
          Total current assets ..........................................        3,670,181              12,077,690
 FURNITURE AND EQUIPMENT, net ...........................................          415,563                 478,098
 INTANGIBLE ASSETS, net .................................................          290,295                 334,227
                                                                              ------------            ------------
          Total assets ..................................................     $  4,376,039            $ 12,890,015
                                                                              ============            ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
     Accounts payable ...................................................     $    384,780            $    514,848
     Accrued liabilities ................................................          218,351                 539,271
     Deferred revenues ..................................................          179,002                 138,792
                                                                              ------------            ------------
          Total current liabilities .....................................          782,133               1,192,911

DEFERRED CREDIT .........................................................        1,500,000               1,500,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
 Series A preferred stock, $.001 par value, 300,000 shares
  authorized, 264,500 and 260,000 issued and outstanding
  including accrued dividends of $70,533 and $86,667 ....................        5,496,793               5,291,473
Series B preferred stock, $.001 par value, 182,205 shares
  authorized, none and 124,157 issued and outstanding
  and accrued dividends of none and 1,426 shares.........................             --                       126
Undesignated preferred stock, $.001 par value, 1,517,795
shares authorized, none issued and outstanding ..........................             --                      --
Common stock, $.001 par value, 12,500,000 and 25,000,000
  shares authorized, respectively, 4,403,658 and
  4,899,944 shares issued and outstanding, respectively .................            4,404                   4,900
Warrants outstanding to purchase 574,066 and 3,378,264
  shares of Common Stock, respectively ..................................          226,560                 423,218
Additional paid in capital ..............................................       21,160,808              33,788,321
Unearned portion of restricted stock compensation & warrants ............          (19,906)                   --
Accumulated deficit .....................................................      (24,774,753)            (29,310,934)
                                                                              ------------            ------------
     Total stockholders' equity .........................................        2,093,906              10,197,104
                                                                              ------------            ------------
     Total liabilities and stockholders' equity .........................     $  4,376,039            $ 12,890,015
                                                                              ============            ============
</TABLE>

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

                                      F-3
<PAGE>
                              LIFECELL CORPORATION

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 For the Year Ended December 31,
                                                    -------------------------------------------------------
                                                       1994                  1995                  1996
                                                    -----------           -----------           -----------
<S>                                                 <C>                   <C>                   <C>
REVENUES
     Product sales ...............................  $    93,940           $   742,238           $ 2,012,205
     Corporate alliance ..........................      358,331               825,221               546,461
     Grants and contracts ........................      364,344               239,116               386,904
                                                    -----------           -----------           -----------
          Total revenues .........................      816,615             1,806,575             2,945,570
                                                    -----------           -----------           -----------

COSTS AND EXPENSES

     Cost of goods sold ..........................      515,500               925,174             1,281,353
     Funded research and development .............      722,675             1,064,337               933,365
     Proprietary research and development ........    1,363,176             1,105,427               654,821
     General and administrative ..................    1,381,470             1,422,588             1,911,254
     Selling and marketing .......................      727,615             1,475,296             2,389,573
                                                    -----------           -----------           -----------
          Total costs and expenses ...............    4,710,436             5,992,822             7,170,366
                                                    -----------           -----------           -----------

LOSS FROM OPERATIONS .............................   (3,893,821)           (4,186,247)           (4,224,796)
                                                    -----------           -----------           -----------
     Interest income .............................      167,300               280,843               135,082
                                                    -----------           -----------           -----------
NET LOSS .........................................  $(3,726,521)          $(3,905,404)          $(4,089,714)
                                                    ===========           ===========           ===========
Loss per share before effect of preferred
     dividends, accretion of preferred stock
     and warrant exercises .......................  $     (0.87)          $     (0.91)          $     (0.90)
 Effect of preferred dividends, accretion of
     preferred stock and warrant exercises .......  $     (0.03)          $     (0.19)          $     (0.24)
                                                    -----------           -----------           -----------
LOSS PER SHARE ...................................  $     (0.90)          $     (1.10)          $     (1.14)
                                                    ===========           ===========           ===========
SHARES USED IN COMPUTING LOSS PER SHARE ..........    4,294,179             4,313,366             4,542,519
                                                    ===========           ===========           ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                      F-4
<PAGE>
                              LIFECELL CORPORATION

                       STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                       Series A            Series B                                 Class I
                                                     Preferred Stock     Preferred Stock     Common Stock          Common Stock
                                                -----------------------  --------------   ------------------   --------------------
                                                 Shares        Amount     Shares  Amount   Shares     Amount     Shares      Amount
                                                --------    -----------   -------  ----   ---------   ------   ----------   -------
<S>                                              <C>        <C>           <C>      <C>    <C>         <C>                   <C>
Balance at December 31, 1993 ..................     --      $      --        --    $--    1,473,359   $1,473    2,803,812   $ 2,804
Class I common converted to common ............     --             --        --     --    2,803,812    2,804   (2,803,812)   (2,804)
Purchase of common stock ......................     --             --        --     --         --       --           --        --
Issuance for cash ($7.77 per share) ...........     --             --        --     --       20,421       21         --        --
Issuance of Series A preferred stock and
     warrants for cash ........................  264,500      4,877,995      --     --         --       --           --        --
Warrant issued to purchase common stock .......     --             --        --     --         --       --           --        --
Earned portion of restricted stock compensation     --             --        --     --         --       --           --        --
Earned portion of warrants ....................     --             --        --     --         --       --           --        --
Dividends accrued on preferred stock ..........     --          333,246      --     --         --       --           --        --
Accretion of preferred stock ..................     --           68,668      --     --         --       --           --        --
Expiration of warrants ........................     --             --        --     --         --       --           --        --
Net Loss ......................................     --             --        --     --         --       --           --        --
                                                --------    -----------   -------  ----   ---------   ------   ----------   -------
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         --        --
Issuance of common stock as dividends on
     Series A Preferred stock .................     --         (317,400)     --     --      103,816      104         --        --
Earned portion of restricted stock compensation     --             --        --     --         --       --           --        --
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         --        --
Issuance of common stock as dividends on
     Series A Preferred stock .................     --         (415,920)     --     --      121,054      121         --        --
Earned portion of restricted stock compensation     --             --        --     --         --       --           --        --
Issuance of stock options for services ........     --             --        --     --         --       --           --        --
Issuance of Series B preferred stock and
  common stock warrants 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         --     $  --
                                                ========    ===========   =======  ====   =========   ======   ==========   =======
</TABLE>
<TABLE>
<CAPTION>
                                                         Warrants             Unearned
                                                        to Purchase           Portion of
                                                        Common Stock       Restricted Stock  Additional
                                                  -------------------------  Compensation      Paid In
                                                    Shares         Amount    and Warrants     Capital
                                                  ----------    -----------    ---------    ------------
<S>                                                  <C>        <C>            <C>          <C>
Balance at December 31, 1993 ..................      165,933    $   116,260    $(529,942)   $ 21,073,701
Class I common converted to common ............         --             --           --              --
Purchase of common stock ......................         --             --           --              --
Issuance for cash ($7.77 per share) ...........         --             --           --           174,341
Issuance of Series A preferred stock and
     warrants for cash ........................      264,500        105,800         --              --
Warrant issued to purchase common stock .......       90,816          5,000         --              --
Earned portion of restricted stock compensation         --             --        238,872            --
Earned portion of warrants ....................         --             --         21,958            --
Dividends accrued on preferred stock ..........         --             --           --              --
Accretion of preferred stock ..................         --             --           --           (68,668)
Expiration of warrants ........................       (5,933)          --           --              --
Net Loss ......................................         --             --           --              --
                                                  ----------    -----------    ---------    ------------
Balance at December 31, 1994 ..................      515,316    $   227,060    $(269,112)   $ 21,179,374
Warrant issued to purchase common stock .......       60,000           --           --              --
Stock options exercised .......................         --             --           --             2,999
Warrants exercised ............................       (1,250)          (500)        --             4,574
Issuance of common stock as dividends on
     Series A Preferred stock .................         --             --           --           317,198
Earned portion of restricted stock compensation         --             --        238,872            --
Earned portion of warrants ....................         --             --         10,334            --
Dividends accrued on preferred stock ..........         --             --           --              --
Accretion of preferred stock ..................         --             --           --          (343,337)
Net Loss ......................................         --             --           --              --
                                                  ----------    -----------    ---------    ------------
Balance at December 31, 1995 ..................      574,066    $   226,560    $ (19,906)   $ 21,160,808
Stock options exercised .......................         --             --           --            17,274
Warrants exercised ............................     (339,066)      (104,300)        --         1,155,617
Expiration of warrants ........................      (15,000)        (6,000)        --             6,000
Conversion of preferred stock .................         --             --           --            89,970
Issuance of common stock as dividends on
     Series A Preferred stock .................         --             --           --           409,700
Earned portion of restricted stock compensation         --             --         19,906            --
Issuance of stock options for services.........         --             --           --           150,000
Issuance of Series B preferred stock and
  common stock warrants for cash ..............    3,158,264        306,958         --        10,653,087
Dividends accrued on preferred stock ..........         --             --           --           145,865
Net Loss ......................................         --             --           --              --
                                                  ----------    -----------    ---------    ------------
Balance at December 31, 1996 ..................    3,378,264    $   423,218    $    --      $ 33,788,321
                                                  ==========    ===========    =========    ============
</TABLE>
<TABLE>
<CAPTION>
                                                                                    Total
                                                     Treasury     Accumulated    Stockholders'
                                                      Stock         Deficit         Equity
                                                    ---------    ------------    ------------
<S>                 <C> <C>                         <C>          <C>             <C>
Balance at December 31, 1993 ..................     $    --      $(16,618,635)   $  4,045,661
Class I common converted to common ............          --              --              --
Purchase of common stock ......................      (307,755)           --          (307,755)
Issuance for cash ($7.77 per share) ...........       307,755            --           482,117
Issuance of Series A preferred stock and
     warrants for cash ........................          --              --         4,983,795
Warrant issued to purchase common stock .......          --              --             5,000
Earned portion of restricted stock compensation          --              --           238,872
Earned portion of warrants ....................          --              --            21,958
Dividends accrued on preferred stock ..........          --          (333,246)           --
Accretion of preferred stock ..................          --              --              --
Expiration of warrants ........................          --              --              --
Net Loss ......................................          --        (3,726,521)     (3,726,521)
                                                    ---------    ------------    ------------
Balance at December 31, 1994 ..................     $    --      $(20,678,402)   $  5,743,127
Warrant issued to purchase common stock .......          --              --              --
Stock options exercised .......................          --              --             3,000
Warrants exercised ............................          --              --             4,075
Issuance of common stock as dividends on
     Series A Preferred stock .................          --              --               (98)
Earned portion of restricted stock compensation          --              --           238,872
Earned portion of warrants ....................          --              --            10,334
Dividends accrued on preferred stock ..........          --          (190,947)           --
Accretion of preferred stock ..................          --              --              --
Net Loss ......................................          --        (3,905,404)     (3,905,404)
                                                    ---------    ------------    ------------
Balance at December 31, 1995 ..................     $    --      $(24,774,753)   $  2,093,906
Stock options exercised .......................          --              --            17,280
Warrants exercised ............................          --              --         1,051,656
Expiration of warrants ........................          --              --              --
Conversion of preferred stock .................          --              --              --
Issuance of common stock as dividends on
     Series A Preferred stock .................          --              --            (6,099)
Earned portion of restricted stock compensation          --              --            19,906
Issuance of stock options for services.........          --              --           150,000
Issuance of Series B preferred stock and
  common stock warrants for cash ..............          --              --        10,960,169
Dividends accrued on preferred stock ..........          --          (446,467)           --
Net Loss ......................................          --        (4,089,714)     (4,089,714)
                                                    ---------    ------------    ------------
Balance at December 31, 1996 ..................     $    --      $(29,310,934)   $ 10,197,104
                                                    =========    ============    ============
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                      F-5
<PAGE>
                              LIFECELL CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                For the Year Ended December 31,
                                                                           1994             1995               1996
                                                                       ------------      ------------      ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                    <C>               <C>               <C>
     Net Loss .......................................................  $ (3,726,521)     $ (3,905,404)     $ (4,089,714)
     Adjustments to reconcile net loss to net cash
       used in operating activities--
          Depreciation and amortization .............................       107,351           138,518           229,237
          Stock and warrant compensation expense ....................       260,830           249,206           169,906
     Change in assets and liabilities --
       (Increase) in accounts and other receivables .................       (67,237)          (87,014)         (185,330)
       Increase in inventories ......................................       (54,834)         (243,720)         (488,319)
       (Increase) decrease in prepayment and other ..................        (8,580)           11,347              (942)
       Increase in accounts payable and accrued liabilities .........       270,219           118,494           450,988
       Increase (decrease) in deferred revenues and credit ..........     1,769,640           (90,638)          (40,210)
                                                                       ------------      ------------      ------------
     Total adjustments ..............................................     2,277,389            96,193           135,330
                                                                       ------------      ------------      ------------
               Net cash used in operating activities ................    (1,449,132)       (3,809,211)       (3,954,384)
                                                                       ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES
     Capital expenditures ...........................................       (90,509)         (190,199)         (278,673)
     Intangible assets ..............................................       (34,012)          (24,354)          (57,032)
     Short-term investments .........................................    (2,138,313)        5,154,824              --
                                                                       ------------      ------------      ------------
               Net cash provided by (used in) investing activities ..    (2,262,834)        4,940,271          (335,705)
                                                                       ------------      ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from issuance of stock and warrants ...................     5,163,157             6,977        12,029,105
     Proceeds from issuance of notes payable ........................          --                --             370,000
     Dividends paid .................................................          --                --              (6,098)
     Payments of notes payable ......................................          --                --            (370,000)
                                                                       ------------      ------------      ------------
               Net cash provided by (used in) financing activities ..     5,163,157             6,977        12,023,007
                                                                       ------------      ------------      ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...........................     1,451,191         1,138,037         7,732,918
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR ...........................................................       426,104         1,877,295         3,015,332
                                                                       ------------      ------------      ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................  $  1,877,295      $  3,015,332      $ 10,748,250
                                                                       ============      ============      ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
     Cash paid during the year for interest .........................  $         -       $          -      $     13,766
SUPPLEMENTAL SCHEDULE OF NONCASH
  FINANCING ACTIVITIES:
     During 1995 and 1996 , the Company issued common
       stock as payment for dividends in the amount of
       $317,400 and $415,920, respectively
</TABLE>

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

                                      F-6
<PAGE>
                              LIFECELL CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1996


1.  ORGANIZATION:

        LifeCell Corporation, a Delaware corporation (LifeCell or the Company),
is engaged in the research, development and commercialization of transplantable
tissue and transfusable blood products. The Company was incorporated on January
6, 1992 for the purpose of merging with its predecessor entity, which was formed
in 1986. LifeCell commercially introduced its first transplantable tissue
product, AlloDerm(R), during December 1993. Sales of AlloDerm to date have not
been sufficient to fund the Company's operations, and the Company expects
continued operating losses during 1997. The future operating results of the
Company will be principally dependent on the market acceptance of its current
and 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
"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
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, 1995 and 1996, the Company held $3,009,376 and $10,638,981, 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, 1996 matured prior to March 31, 1997.

        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 betterments 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
economic life of the patent. Accumulated amortization at December 31, 1995 and
1996, amounted to $39,933 and $53,033, respectively.

                                      F-7
<PAGE>
        REVENUE RECOGNITION

        Product sales are recognized as revenue when the product is shipped to
fill customer orders. Revenues from corporate alliances and from government
grants and contracts are recognized as the work is performed unless the Company
has continuing 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 COSTS

        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 8), as well as its own independent
proprietary research, development and clinical testing of its products.
Externally funded research consists of direct costs associated with specific
projects as well as an allocation of overhead associated with administering
these activities.

        LOSS PER SHARE

        Loss per 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 the periods. 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.

        In March 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Statement 128
establishes standards for computing and presenting earnings per share (EPS).
This statement simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, EARNINGS PER SHARE, and makes them
comparable to international EPS standards. The statement also retroactively
revises the presentation of earnings per share in the financial statements. The
Company will adopt this Standard for the year ended December 31, 1997, and has
not currently quantified the effect of applying the new Standard.

        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 (the discount, if any, of the option price from
the market price of the Common Stock under option) of the option at the date of
grant. Subsequent changes in the market price of the underlying stock do not
affect the accounting treatment of the option. Options granted to others are
accounted for under the provisions of Statement of Financial Accounting
Standards No. 123, which requires that the option be recorded at its estimated
fair value using option-pricing formulas used in the financial markets.

        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>
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:

                                                 1995       1996
                                               --------   --------
              Raw Materials ................   $ 29,171   $ 52,738
              Work-In-Process ..............    107,988    437,221
              Finished Goods ...............    214,343    349,862
                                               --------   --------
                                               $351,502   $839,821
                                               ========   ========

4.  FURNITURE AND EQUIPMENT:
  A summary of furniture and equipment is as follows:

                                                          1995         1996
                                                    ----------   ----------
     Office furniture and fixtures ..............   $   57,636   $   61,130
     Machinery and equipment ....................    1,097,480    1,342,243
     Leasehold improvements .....................      189,877      220,293
                                                    ----------   ----------
                                                     1,344,993    1,623,666
     Less -
        Accumulated depreciation and amortization      929,430    1,145,568
                                                    ----------   ----------
           Net furniture and equipment ..........   $  415,563   $  478,098
                                                    ==========   ==========

5.  CAPITAL STOCK:

        AUTHORIZED CAPITAL STOCK

        As of December 31, 1996, 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 300,000 shares were designated as
Series A Convertible Preferred Stock and 182,205 shares were designated as
Series B Preferred Stock. As of December 31, 1996, there were 4,899,944 shares
of Common Stock, 260,000 shares of Series A Convertible Preferred Stock and
124,157 shares of Series B Preferred Stock outstanding. During March 1997, all
outstanding shares of Series A Convertible Preferred Stock and a portion of the
accrued dividends were converted into 1,772,433 shares of Common Stock.

        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 had a liquidation preference of
$20 per share, or $5,200,000 as of December 31, 1996.

        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. While
the preferred shares were outstanding or any dividends were owed thereon, the
Company could not declare or pay cash dividends on its Common Stock. 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 shares and 121,054
shares of Common Stock.

                                      F-9
<PAGE>

        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 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 and paid a cash
dividend of $65,000 and issued an additional 33,305 shares of Common Stock for
dividends accrued through the date of redemption.

        The carrying amount of the Series A Preferred Stock was increased for
accrued and unpaid stated dividends plus periodic accretion, using the effective
interest method, such that the carrying amount equaled the redemption amount on
November 9, 1995. In November 1994, the Series A Preferred Stock was also
increased by imputed dividends resulting from the increasing dividend rates.

        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 4,005,064 shares of Common Stock at December 31,
1996), subject to adjustment for dilutive issuances of securities. The Series B
Preferred Stock has a liquidation preference of $100 per share, or $12,415,700
as of December 31, 1996, and shares ratable 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 the Series A Preferred 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 1996 the Company declared
accrued dividends on the Series B Preferred Stock of $145,867 payable through
the issuance of 1,426 additional shares of Series B Preferred Stock on February
15, 1997.

        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 gross 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 gross 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

        During February 1994, all previously outstanding shares of Class I
Common Stock were automatically converted into 2,803,812 shares of Common Stock
and the Class I Common Stock was eliminated during June 1995.

        During 1995 and 1996, respectively, the Company issued 103,816 shares
and 121,054 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.

                                      F-10
<PAGE>
        During March 1997, the Company issued 1,739,128 shares of Common Stock
to redeem all outstanding shares of the Series A Preferred Stock and paid a cash
dividend of $65,000 and issued an additional 33,305 shares of Common Stock for
dividends accrued through the date of redemption.

        During 1994, the Company purchased 43,965 shares of Common Stock from
several employees, including officers and directors, for the purpose of
satisfying their income tax liabilities for shares and options previously
granted under a deferred compensation arrangement. These treasury shares were
subsequently reissued during 1994.

        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 1994 and 1995 and $20,000 for 1996.

        OPTIONS

        The Company's 1992 Stock Option Plan, as amended (1992 Plan), provides
for the grant of options to purchase up to 1,000,000 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 1993 Non-Employee Director Stock Option Plan (Director Plan) was
adopted in 1993 and amended during 1996. 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.

                                      F-11
<PAGE>

        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, 1993 ............      224,593       9.06       40,000      11.00
     Granted ............................      192,819       2.87       10,000       3.00
     Exercised ..........................         --         --           --         --
     Forfeited ..........................       (2,650)      7.68         --         --
                                            ----------              ----------
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
                                            ==========              ==========
Exercisable at December 31, 1994 ........       57,606       9.11       40,000      11.00
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
</TABLE>

        At December 31, 1996, 28,718 and 670,000 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, 1996 range from $0.07 to $4.375 and $2.75 to $11.00,
respectively. The weighted average contractual life of options outstanding at
December 31, 1996 was 9.1 years for the 1992 Plan and 7.8 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 8.8 years as of December 31, 1996.
The Company expensed $150,000, which was the difference between the market price
and the option price on the date of the grant, during 1996 related to this
reissuance.

        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:

                                      F-12
<PAGE>
                                                  1995          1996
                                                  ----          ----
                Net Loss:       As reported    $3,905,404    $4,089,714
                                Pro forma      $3,940,041    $5,372,049
             Loss Per Share:    As reported       $1.10         $1.14
                                Pro forma         $1.10         $1.42

        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 and 1996 was $1.88 and $3.21, respectively, under the
1992 Plan. The weighted average fair value of options granted in 1995 and 1996
was $2.21 and $2.40, 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 and 1996, respectively: a weighted average risk-free interest
rate of 6 percent for both years; no expected dividend yields for both years;
expected lives of 3 years for both years and expected volatility between 96 and
100 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.

        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.

        WARRANTS

        As of December 31, 1996, warrants to acquire a total of 3,378,264 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.

        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, 1996, additional warrants to acquire 100,000 shares
of Common Stock were outstanding with exercise prices ranging from $2.50 to
$11.05. Such warrants expire during periods ranging from December 31,

                                      F-13
<PAGE>
1997 to December 13, 2000. Additionally, as of December 31, 1996, warrants to
acquire 120,000 shares of Common Stock were outstanding but expired unexercised
on February 27, 1997.

6.  EMPLOYEE BENEFIT PLANS:

        The Company maintains a retirement savings plan as described in Section
401(k) of the Internal Revenue Code of 1986. The Company may, at its discretion,
contribute amounts not to exceed each employee's contribution. During January
1996 and January 1997, the Company made total contributions of $5,292 and $8,187
to the plan for a partial matching of employee contributions during 1995 and
1996, 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, the Company
contributed $1,328 to this plan.

7.  FEDERAL INCOME TAXES:

        The Company has not made any income tax payments since inception. As of
December 31, 1996, the Company has a net operating loss (NOL) carryforward for
federal income tax purposes of approximately $26 million, subject to the
limitations described below, expiring as follows:

                  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
                                                          -----------
                                                          $26,000,000
                                                          ===========

        Additionally, the Company has approximately $385,000 of research and
development tax credit carryforwards which will expire in varying amounts
commencing in 2001. The Company's ability to utilize its tax loss and credit
carryforwards to reduce future taxable income may be limited by either the prior
expiration of such loss or credit or by the occurrence of a "change in
ownership," as such term is defined by federal income tax laws and regulations.
A change in ownership may occur upon the sale of additional equity securities by
the Company, conversion of existing shares of Series B Preferred Stock or by
sales of stock by existing stockholders. In the event of a change in ownership,
the amount of the tax loss and credit carryforwards that may be utilized to
offset taxable income in any year may be limited and result in the payment of
federal income taxes that otherwise would be offset by such tax losses or
credits.

        For financial reporting purposes, a valuation allowance of $9,897,000
has been recorded as of December 31, 1996 to fully offset the deferred tax asset
related to these carryforwards. The principal components of the deferred tax
asset as of December 31, 1995 and 1996, assuming a 34% federal tax rate, are as
follows:

                                      F-14
<PAGE>

                                                      1995          1996
                                                   ----------    ----------
   Temporary differences:
       Deferred revenue ........................      582,000       510,000
       Restricted stock compensation............     (196,000)      154,000
       Uniform capitalization of
          inventory costs ......................      160,000        37,000
       Other items .............................       66,000       (29,000)
                                                   ----------    ----------
       Total temporary differences .............      612,000       672,000
       Federal tax losses and credits
          not currently utilizable .............    7,845,000     9,225,000
                                                   ----------    ----------
   Total deferred tax assets ...................    8,457,000     9,897,000
       Less valuation allowance ................   (8,457,000)   (9,897,000)
                                                   ----------    ----------
   Net deferred tax asset ......................         --            --
                                                   ==========    ==========

        The net increase in the deferred tax valuation allowance for 1995 and
1996 was $1,691,000, and $1,440,000, 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 1994, 1995 and 1996.

8.  COLLABORATIONS AND CORPORATE ALLIANCES

        MEDTRONIC CARDIOVASCULAR COLLABORATION

        During March 1994, the Company entered into a collaboration with
Medtronic, Inc. (Medtronic) for the development and commercialization of
universal tissue heart valves engineered with LifeCell's proprietary technology.
Medtronic paid the Company an initial licensing fee of $1,500,000, agreed to
fund development of heart valve products, and acquired $500,000 of the Company's
Common Stock at a price of $7.77 per share. Medtronic is obligated to pay
royalties, up to a maximum of $25,000,000, on any product sales . Medtronic was
also granted a right of first refusal to evaluate technology and negotiate
license and development agreements for vascular conduit products utilizing the
Company's technology. In the event Medtronic terminates funding of the heart
valve program, Medtronic may convert its initial $1.5 million license fee into
newly issued shares of the Company's Common Stock at the then-current market
price. Accordingly, the Company has deferred recognition of the initial license
fee and recorded a $1.5 million deferred credit in the accompanying balance
sheet. Medtronic also has the right, subject to certain restrictions, to
purchase additional shares of the Company's Common Stock, to have the Company
register the resale of any Common Stock acquired from it, and to appoint one
member of the Board of Directors of the company through March 1999.

        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. The markets served by these arrangements include
plastic and reconstructive surgery.

9.  COMMITMENTS AND CONTINGENCIES:

        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, 1996, the Company had received $138,792
of deferred revenue, including advance payments from a corporate alliance, for
research to be

                                      F-15
<PAGE>
conducted during 1997. Additionally, as of December 31, 1996, the Company has
unfunded awards totaling $1,597,000 for research that is expected to occur and
be funded during 1997 and 1998.

        EXCLUSIVE LICENSE AGREEMENT

        The Company has an exclusive license agreement with the Board of Regents
of the University of Texas System (Board) to technology and patents related to
the analysis or preservation of certain cells or tissues. The Company is
required to pay the Board royalties on net sales of products encompassing the
licensed technologies. For the periods ended December 31, 1994, 1995 and 1996 no
significant royalties were paid under the agreement.

        LEASES

        The Company leases approximately 20,000 square feet for office and
laboratory space. The future minimum lease payments under noncancelable lease
terms in excess of one year as of December 31, 1996 were as follows:

               1997................................... $  218,028
               1998...................................    221,320
               1999...................................    221,320
               2000...................................    221,320
               2001...................................     18,443
                                                        ---------
                         Total........................ $  900,431
                                                       ==========

10.  TRANSACTIONS WITH RELATED PARTIES:

        The Company leases office space from an affiliate of a stockholder of
the Company. The Company paid rent expense of approximately $139,000, $129,000
and $142,000 during 1994, 1995, and 1996 respectively, related to this lease.

        The Company paid consulting fees and expenses to an affiliate of a
stockholder and a former director of the Company, totaling approximately
$96,000, $91,000 and $80,000 during the years ended December 31, 1994, 1995 and
1996 respectively, pursuant to a consultant agreement.

        As of December 31, 1996, the Company has notes receivable totaling
$95,060 from participants, two of whom are directors 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.

                                      F-16
<PAGE>

11.  QUARTERLY FINANCIAL DATA (UNAUDITED)

        The following table presents summary unaudited financial data for the
years ended December 31, 1995 and 1996. 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.

                                First       Second         Third         Fourth
                               Quarter      Quarter       Quarter       Quarter
                               -------      -------       -------       -------
                                    (In thousands except per share amounts)

1995
Product Sales ............      $  98       $   130       $   251       $   263
Total Revenues ...........      $ 430       $   399       $   514       $   464
Gross Margin .............      $  (5)      $   (52)      $    (7)      $  (119)
Net loss .................      $(958)      $(1,016)      $  (867)      $(1,064)
Loss per share ...........      $(0.27)     $ (0.29)      $ (0.25)      $ (0.29)

1996
Product Sales ............      $ 421       $   429       $   561       $   602
Total Revenues ...........      $ 576       $   678       $   816       $   876
Gross Margin .............      $ 149       $   157       $   205       $   220
Net loss .................      $(949)      $  (909)      $(1,023)      $(1,209)
Loss per share ...........      $(0.25)     $ (0.24)      $ (0.33)      $ (0.32)

                                      F-17
<PAGE>
                                   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:  March 26, 1997.

        In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:

        SIGNATURE                  TITLE                             DATE


/S/ PAUL M. FRISON           Chairman of the Board,              March 26, 1997
(Paul M. Frison)             President and Chief
                             Executive Officer (Principal
                             Executive Officer)

/S/ J. DONALD PAYNE          Vice President, Secretary           March 26, 1997
(J. Donald Payne)            and Chief Financial Officer
                            (Principal Financial and
                              Accounting Officer)

/S/ MICHAEL E. CAHR          Director                            March 26, 1997
(Michael E. Cahr)

/S/ JAMES G. FOSTER          Director                            March 26, 1997
(James G. Foster)

/S/ LORI KOFFMAN             Director                            March 26, 1997
(Lori Koffman)

/S/ STEPHEN A. LIVESEY       Director                            March 26, 1997
(Stephen A. Livesey)

/S/ K. FLYNN MCDONALD        Director                            March 26, 1997
(K. Flynn McDonald)