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

                                    FORM 10-Q
                                 _______________

           [X]   Quarterly Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                 For the quarterly period ended March 31, 2002

                                       or

           [ ]   Transition Report pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

             For the transition period from __________ to __________

                        Commission File Number: 0-016607

                         ADVANCED TISSUE SCIENCES, INC.
               (Exact name of registrant as specified in charter)

                                _______________


                     Delaware                           14-1701513
          -------------------------------           -------------------
          (State or other jurisdiction of            (I.R.S. Employer
           incorporation or organization)           Identification No.)



  10933 North Torrey Pines Road, La Jolla, California               92037
  ---------------------------------------------------             ----------
      (Address of principal executive offices)                    (Zip Code)


       Registrant's telephone number, including area code: (858) 713-7300

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

The number of shares of the Registrant's Common Stock, par value $.01 per share,
outstanding at May 10, 2002 was 73,154,753.


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

                 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002


INDEX
-----

Part I - Financial Information                                            Page
------------------------------                                            ----

Item 1 - Financial Statements

         Introduction to the Financial Statements...............            1

         Consolidated Balance Sheets
           March 31, 2002 and December 31, 2001.................            2

         Consolidated Statements of Operations
           Three Months Ended March 31, 2002 and 2001...........            3

         Consolidated Statements of Cash Flows
           Three Months Ended March 31, 2002 and 2001...........            4

         Notes to the Consolidated Financial Statements.........           5-7

Item 2 - Management's Discussion and Analysis of Financial
           Condition and Results of Operations..................           8-13

Item 3 - Quantitative and Qualitative Disclosures About
           Market Risk..........................................            13

Part II - Other Information
---------------------------

Item 5 - Other Information......................................          14-22

Item 6 - Exhibits and Reports on Form 8-K.......................            23

Signatures......................................................            24




<PAGE>


                         PART I - FINANCIAL INFORMATION


ITEM 1 - FINANCIAL STATEMENTS


                    INTRODUCTION TO THE FINANCIAL STATEMENTS

     The financial statements have been prepared by Advanced Tissue Sciences,
Inc. without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted under such rules and
regulations. We believe that the disclosures are adequate to make the
information presented not misleading when read together with the financial
statements and the notes included in our annual report on Form 10-K for the year
ended December 31, 2001, and the discussion of our critical accounting policies
indentified under the caption "Critical Accounting Policies" in that report.
Results for the interim period ended March 31, 2002 are not necessarily
indicative of results to be expected for the full year.

     Dermagraft(R), NouriCel(TM) and Anginera(TM) are our trademarks.
TransCyte(R) is a registered trademark of our joint venture partner, Smith &
Nephew plc. Each other trademark, trade name or service mark appearing in this
Form 10-Q belongs to its holder.


                                       1


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.
                           CONSOLIDATED BALANCE SHEETS
                (Dollars in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>


                                                                                 March 31,          December 31,
                                                                                   2002                 2001
                                                                              --------------       --------------
                                                                                (Unaudited)
<S>                                                                           <C>                  <C>
         ASSETS
Current assets:
   Cash and cash equivalents                                                  $      9,400         $    29,973
   Short-term investments                                                           11,991                  --
   Receivable from joint ventures                                                    1,979               1,852
   Receivable from Inamed                                                               --               3,546
   Inventories                                                                       7,677               6,605
   Other current assets                                                              2,877               2,669
                                                                              ------------         -----------
       Total current assets                                                         33,924              44,645

Property - net                                                                      10,225              11,067
Patent costs - net                                                                   2,666               2,527
Restricted cash                                                                      1,700               1,700
Other assets                                                                         2,194               1,983
                                                                              ------------         -----------
       Total assets                                                           $     50,709         $    61,922
                                                                              ============         ===========

         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                           $        694         $     1,050
   Payable to joint ventures                                                         5,727               6,039
   Accrued expenses                                                                  2,892               4,314
   Current portion of long-term debt and capital lease obligations                   2,648               2,734
                                                                              ------------         -----------
       Total current liabilities                                                    11,961              14,137

Long-term debt and capital lease obligations                                         3,200               3,840
Other long-term liabilities                                                          1,968               1,922
                                                                              ------------          ----------
       Total liabilities                                                            17,129              19,899
                                                                              ------------          ----------

Stockholders' Equity:
   Common stock, $.01 par value; 125,000,000 shares authorized;
     73,154,753 and 73,148,553 shares issued and outstanding at
     March 31, 2002 (unaudited) and December 31, 2001                                  732                 731
   Additional paid-in capital                                                      334,664             335,368
   Note received in connection with sale of common stock and deferred
     compensation applicable to common stock                                        (1,370)             (1,370)
   Accumulated deficit                                                            (300,443)           (292,706)
   Accumulated other comprehensive loss                                                 (3)                 --
                                                                              ------------         -----------
       Total stockholders' equity                                                   33,580              42,023
                                                                              ------------         -----------
       Total liabilities and stockholders' equity                             $     50,709         $    61,922
                                                                              ============         ===========

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       2


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In Thousands, Except Per Share Amounts)


<TABLE>
<CAPTION>

                                                                                       Three Months Ended
                                                                                           March 31,
                                                                            ----------------------------------------
                                                                                   2002                 2001
                                                                            ------------------   -------------------
                                                                                          (Unaudited)
<S>                                                                           <C>                  <C>
Revenues:
   Joint venture contract                                                     $       4,032         $    4,320
   Product sales to third parties                                                         3                 --
   Contracts and fees                                                                   719                661
                                                                              -------------         ----------
     Total revenues                                                                   4,754              4,981
                                                                              -------------         ----------
Costs and expenses:
   Joint venture contract                                                             4,008              4,280
   Cost of goods sold                                                                   396                391
   Research and development                                                           2,553              2,155
   Selling, general and administrative                                                2,680              3,745
                                                                              -------------         ----------
     Total costs and expenses                                                         9,637             10,571
                                                                              -------------         ----------
Loss from operations before equity in losses of joint ventures                       (4,883)            (5,590)


Equity in losses of joint ventures                                                   (2,768)            (2,959)
                                                                              ------------          ----------
Loss from operations                                                                 (7,651)            (8,549)

Other income (expense):
   Interest income and other                                                            (59)               374
   Interest expense                                                                     (27)               (86)
                                                                              -------------         ----------
Net loss                                                                      $      (7,737)       $    (8,261)
                                                                              =============        ===========

Basic and diluted net loss per common share                                   $        (.11)        $     (.13)
                                                                              =============         ==========
Weighted average number of common shares used in the computation of basic
and diluted loss per share                                                           73,150             64,202
                                                                              =============        ===========

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       3

<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In Thousands)

<TABLE>
<CAPTION>


                                                                                  Three Months Ended March 31,
                                                                              -----------------------------------
                                                                                   2002                 2001
                                                                              --------------       --------------
                                                                                          (Unaudited)
<S>                                                                           <C>                  <C>
Operating activities:
   Net loss                                                                   $     (7,737)        $     (8,261)
   Adjustments to reconcile net loss to cash used in
   Operating activities:
    Depreciation and amortization                                                      871                  917
    Additional (reversal of) compensation for services paid in stock,
       options or warrants                                                            (666)                 533
    Equity in losses of joint ventures                                               2,768                2,959
    Other adjustments to net loss                                                      (13)                 (21)
    Changes in assets and liabilities:
     Receivables from joint ventures                                                  (127)                (790)
     Receivable from Inamed                                                          3,546                   --
     Inventories                                                                    (1,072)                (867)
     Other current assets                                                             (208)                (446)
     Accounts payable                                                                 (356)                (417)
     Payable to joint ventures                                                        (312)                (274)
     Accrued expenses                                                               (1,422)                (567)
                                                                              ------------         ------------
   Net cash used in operating activities                                            (4,728)              (7,234)
                                                                              ------------         ------------
Investing activities:
   Purchases of short-term investments                                             (11,945)              (2,471)
   Maturities and sales of short-term investments                                       --                6,852
   Acquisition of property                                                             (44)                (173)
   Investment in joint ventures                                                     (3,283)              (2,918)
   Distributions from joint ventures                                                   424                  143
   Patent application costs                                                           (162)                 (63)
   Other long-term assets                                                             (115)                 (30)
                                                                              ------------         ------------
   Net cash (used in) provided by investing activities                             (15,125)               1,340
                                                                              ------------         ------------
Financing activities:
   Payments of borrowings                                                             (726)                (647)
   Options and warrants exercised                                                       21                    5
   Long-term obligations and other                                                     (15)                  24
                                                                              ------------         ------------
   Net cash used in  financing activities                                             (720)                (618)
                                                                              ------------         ------------

Net decrease in cash and cash equivalents                                          (20,573)              (6,512)

Cash and cash equivalents at beginning of period                                    29,973               24,197
                                                                              ------------         ------------
Cash and cash equivalents at end of period                                    $      9,400         $     17,685
                                                                              ============         ============
</TABLE>


        See accompanying notes to the consolidated financial statements.


                                       4

<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002.

     The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

     For further information, refer to the consolidated financial statements and
footnotes included in our annual report on Form 10-K for the year ended December
31, 2001.

     The consolidated financial statements include the accounts of Advanced
Tissue Sciences, its wholly owned subsidiaries, and DermEquip, L.L.C., a limited
liability company owned jointly with Smith & Nephew plc. DermEquip is a special
purpose entity established to finance the expansion of our manufacturing
facility. All intercompany accounts and transactions have been eliminated. Our
other interests in joint ventures with Smith & Nephew are accounted for under
the equity method.

NOTE 2 - SMITH & Nephew Joint Ventures

     In 1994, we entered into a joint venture with Smith & Nephew for the
development of tissue-engineered cartilage for orthopedic applications, the
NeoCyte Joint Venture.

     In 1996, we entered into a separate agreement with Smith & Nephew to form
the Dermagraft Joint Venture for the worldwide commercialization of Dermagraft
for the treatment of diabetic foot ulcers. In January 1998, we agreed with Smith
& Nephew to expand the Dermagraft Joint Venture to include venous ulcers,
pressure ulcers, burns and other skin tissue wounds. The Dermagraft Joint
Venture agreement was restructured in 2000.

     The results of operations of the joint ventures for the three-month periods
ended March 31, 2002 and 2001 are as follows (in thousands):

                                                     Three Months Ended
                                                          March 31,
                                             -----------------------------------
                                                  2002                 2001
                                             --------------      ---------------
Dermagraft Joint Venture
------------------------
         Net sales                           $    1,132          $       904
         Contract revenue                            44                   --
         Cost of goods sold                       3,149                3,217
         Other costs and expenses                 3,279                3,124
         Net loss                                (5,252)              (5,437)

NeoCyte Joint Venture
---------------------
         Costs and expenses                  $      308          $       277
         Net loss                                  (308)                (277)


                                       5

<PAGE>


NOTE 3 - INVENTORIES

     Inventories consist of the following components as of March 31, 2002 and
December 31, 2001 (in thousands):

                                                    March 31     December 31
                                                     2002            2001
                                                --------------  ---------------

       Raw materials and supplies                $  4,623         $  5,277
       Work-in-process                              2,647            1,221
       Finished goods                                 407              107
                                                 --------         --------
       Total inventory                           $  7,677         $  6,605
                                                 ========         ========

     The increase from December 31, 2001 to March 31, 2002 in work-in-process
and finished goods relates primarily to our collagen product. At March 31, 2002,
approximately 53% of our work-in-process and all of our finished goods inventory
relate to collagen, the balance of our work-in-process being primarily
TransCyte and Dermagraft.

     Approximately 75% of our raw materials and supplies at March 31, 2002 are
specific to Dermagraft.

NOTE 4 - CAPITAL STOCK

     In May 1999, our Chairman, President and Chief Executive Officer exercised
an employee stock option. The purchase price was paid through the issuance of an
interest-bearing, full recourse promissory note. In July 1999, we extended the
repayment terms on the note. As a result of the extension, these stock options
were thereafter accounted for as variable stock options, which could result in
significant increases and decreases in compensation expense subject to
variability in our stock price. The note receivable and accrued interest of
approximately $1.4 million at March 31, 2002, and at December 31, 2001, are
included in stockholders' equity in the accompanying balance sheets.

NOTE 5 - BASIC AND DILUTED LOSS PER SHARE

     Basic earnings per share are determined based on the weighted-average
number of shares outstanding during the period. Diluted earnings per share
include the weighted-average number of shares outstanding and give effect to
potentially dilutive common shares, such as options and warrants outstanding, in
periods in which they are dilutive. Both the basic and diluted loss per common
share for the three-month periods ended March 31, 2002 and March 31, 2001 are
based on the weighted-average number of shares of our common stock outstanding
during these periods.

NOTE 6 - RELATED PARTY TRANSACTIONS

     During the three-month periods ended March 31, 2002 and March 31, 2001, we
performed services for the Dermagraft and NeoCyte Joint Ventures, and
manufactured products for the Dermagraft Joint Venture to sell to customers or
for use in clinical trials, as described below. We have a 50% interest in each
of the Dermagraft and NeoCyte Joint Ventures and share equally with Smith &
Nephew in the expenses and revenues, except we funded the first $6 million of
expenses for conducting clinical trials and for regulatory support of TransCyte
and Dermagraft in the treatment of venous and pressure ulcers, through the
first quarter of 2002.

Dermagraft Joint Venture
------------------------

     Product sales to related parties include products sold to the Dermagraft
Joint Venture. In addition, we recognize amounts in contract revenues for
research and development, marketing and other activities performed for the joint
venture. During the three months ended March 31, 2002 and March 31, 2001,
product sales and contract revenue amounts totaled (in thousands):

                                                 Three Months Ended March 31,
                                                 ----------------------------
                                                      2002          2001
                                                 -------------- -------------
Products sold to the Dermagraft Joint Venture       $ 2,960       $ 3,302
Contract revenues for activities performed          $ 1,021       $   887


                                       6

<PAGE>


     As a purpose of the Dermagraft Joint Venture is to share the costs of
manufacturing TransCyte and Dermagraft, product sales to the Dermagraft Joint
Venture reflect our cost of goods sold for such products, including period
costs. Period costs reflect overhead expenses related to ongoing excess
production capacity, and include rent, depreciation, quality control,
facilities, supplies and other such costs to support, or which are related to,
the excess production capacity. Due to such costs related to excess production
capacity, the Dermagraft Joint Venture immediately writes the inventory down to
estimated market value at the date of purchase, which is the net realizable
value at which the joint venture believes it will be able to sell the products
to its customers. During the three-month periods ended March 31, 2002 and March
31, 2001, such write-downs by the Dermagraft Joint Venture totaled (in
thousands):

                                                 Three Months Ended March 31,
                                                 ----------------------------
                                                      2002          2001
                                                 -------------  -------------
Dermagraft Joint Venture inventory write-downs      $ 1,369       $ 2,511


NeoCyte Joint Venture
---------------------

     We recognize amounts in contract revenues for research and development
activities performed for the NeoCyte Joint Venture. During the three months
ended March 31, 2002 and March 31, 2001, such amounts totaled (in thousands):

                                                 Three Months Ended March 31,
                                                 ----------------------------
                                                      2002          2001
                                                 -------------  -------------
Contract revenues for activities performed          $    51       $   141

     Our share of the costs incurred by us and charged to the Dermagraft and
NeoCyte Joint Ventures are reflected in the equity in losses of joint ventures
in the accompanying statement of operations. For the three-month periods ended
March 31, 2002 and March 31, 2001, such costs charged totaled (in thousands):

                                                 Three Months Ended March 31,
                                                 ----------------------------
                                                      2002          2001
                                                 ------------   -------------
Charged to Dermagraft and NeoCyte Joint Ventures    $ 2,111       $ 2,186


                                       7

<PAGE>


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
          OF OPERATIONS


     The following discussion and analysis should be read with our financial
statements and related notes thereto included elsewhere in this report on Form
10-Q. The discussion and analysis in this report may contain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this report should be read as applying to all related forward-looking
statements wherever they appear in this report. Our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
these differences include those discussed in "Factors That May Affect Future
Results" included in Part II, Item 5 below, as well as those discussed
elsewhere. Such risks and uncertainties could cause actual results to differ
materially from any future performance suggested in this report. We undertake no
obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date of this report. This caution is made under the safe horbor provisions of
the Private Securities Litigation Reform Act of 1995.

     Advanced Tissue Sciences, Inc. is engaged in the development and
manufacture of human-based tissue products for tissue repair and transplantation
using our proprietary tissue engineering technology. Our leading products are
skin products, TransCyte for the temporary covering of severe and
partial-thickness burns, and Dermagraft for the treatment of severe skin ulcers.
In addition, we are focusing our resources on the development of tissue
engineered products for other wound care, aesthetic and reconstructive,
cardiovascular and orthopedic applications. These other applications include
collagen and our nutrient solution, NouriCel, for aesthetic and reconstructive
applications.

     TransCyte and Dermagraft are both being commercialized through a joint
venture, the Dermagraft Joint Venture, with Smith & Nephew plc. TransCyte is
available for sale in the United States, the United Kingdom and other European
countries, Canada, Australia, New Zealand and South Africa, for the treatment of
full and partial-thickness burns. Dermagraft is available for sale in Canada,
Australia, New Zealand and South Africa, and on a limited basis in the United
Kingdom and other European countries. In September 2001, we received approval
from the FDA to market Dermagraft in the treatment of chronic foot ulcers in
patients with diabetes in the United States.

     In addition to the Dermagraft Joint Venture, we share in a separate joint
venture with Smith & Nephew, the NeoCyte Joint Venture, for the worldwide
development, manufacture and marketing of human-based tissue engineered
cartilage for orthopedic applications. We have a strategic alliance with Inamed
Corporation for the development of tissue engineered products for aesthetic and
reconstructive markets. We entered into a broad strategic collaboration with
Medtronic, Inc. to explore the application of our technology in the areas of
cardiovascular, neurological, endocrine and spinal. We also have license and
supply agreements related to the use and sale of different formulations of
NouriCel and the potential development of NouriCel for additional applications
with four separate companies.

     In March 2002, we announced the formation of a wholly-owned subsidiary,
BioNuvia, Inc., to develop and market our products and potential products for
aesthetics, and other markets, for enhancing appearance and rejuvenating the
human body. We believe BioNuvia will leverage our investment in core technology
and expertise to structure its current product offerings to include NouriCel and
our human-based collagen products for aesthetic applications.

     To date, we have experienced significant operating losses in funding the
research, development, testing and marketing of our products and expect to
continue to incur substantial operating losses. We may never achieve a
profitable level of operations, or even if we achieve profitability we may not
be able to sustain it on an ongoing basis. Through March 31, 2002, we had
incurred cumulative net operating losses of $300.4 million. Our ability to
achieve profitability depends in part upon:

     o our ability to successfully manufacture TransCyte and Dermagraft for skin
       burns and skin ulcers,

     o the ability of our collaborator, Inamed, to obtain regulatory approval
       for its human-based collagen product,

     o our ability cost-effectively manufacture collagen and our nutrient
       solution for aesthetic applications,

     o each of these products being successfully marketed by our collaborators,
       and

     o successfull development and commercialization of other products derived
       from our core technology.


                                       8

<PAGE>


     We have incurred and expect to continue to incur, either directly or
through the Dermagraft Joint Venture, substantial expenditures in support of the
commercialization, development, clinical trials and post-market studies of
TransCyte and Dermagraft for burn and skin ulcer applications, for manufacturing
systems and in advancing other applications of our core technology. We also
expect to incur additional costs for the development of products and
manufacturing processes under our strategic alliance with Inamed, additional
costs for the development and clinical trials of tissue engineered cartilage
products through the NeoCyte Joint Venture, costs for products we may develop
for cardiovascular applications, and costs which may be associated with other
products which we may undertake from time to time. Our agreements with our
current strategic alliance collaborators are structured to share some or all of
these costs as well as to potentially provide us with income from milestone
payments, royalties and licensing fees for the respective products.

RESULTS OF OPERATIONS

     Joint venture contract revenues were $4,032,000 for the three months ended
March 31, 2002, which compared to $4,320,000 for the corresponding period in
2001. Joint venture contract revenues include sales of TransCyte and Dermagraft
to the Dermagraft Joint Venture at cost, and revenues for research and
development, administration, and other services performed for the Dermagraft and
NeoCyte Joint Ventures under collaborative agreements. See Notes 2 and 6 to the
consolidated financial statements for further discussion of transactions with
the Dermagraft and NeoCyte Joint Ventures.

     Sales of TransCyte and Dermagraft to the Dermagraft Joint Venture were
$2,960,000 in the three months ended March 31, 2002, and $3,302,000 in the
corresponding period in 2001. This decrease relates primarily to reductions in
manufacturing cost for TransCyte and Dermagraft, and in the timing of the sale
of such products to the Dermagraft Joint Venture. Growth in sales of TransCyte
and Dermagraft in 2002 and beyond will primarily depend on the Dermagraft Joint
Venture's success in obtaining product reimbursement from both national
healthcare systems and private insurers, and on the success of Smith & Nephew in
marketing the products.

     Revenue for services performed for the joint ventures was $1,072,000 for
the three months ended March 31, 2002, compared to $1,028,000 for the
corresponding period in 2001.

     Product sales to third parties were approximately $3,000 in the three
months ended March 31, 2002, while there were no third party product sales in
the first quarter of 2001. These revenues represent sales of NouriCel to two of
our strategic collaborators. The agreements with these strategic collatorators
are primarily royalty-based, whereby we expect to receive the majority of our
income from royalties on future product sales, if any, rather than from transfer
prices.

     Other contract and fee revenue was $719,000 in the the three months ended
March 31, 2002, compared to $661,000 in the three months ended March 31, 2001,
primarily reflecting an increase in government grant revenue.

     Joint venture contract expense was $4,008,000 in the three months ended
March 31, 2002, compared to $4,280,000 in the three months ended March 31, 2001.
Joint venture contract expenses include (in thousands):

                                                         2002           2001
                                                     ------------  -------------
     Manufacturing and distribution costs -
          Dermagraft & TransCyte                       $ 3,228        $ 3,418
     Research and development costs                        361            405
     Administration and other expenses                     419            457
                                                       -------        -------
        Total joint venture contract expenses          $ 4,008        $ 4,280
                                                       =======       ========

     As a result of a delay in Dermagraft approval by the FDA until September
2001, we continue to incur significant costs associated with excess production
capacity within our manufacturing facility. We expect to continue to have excess
production capacity in future years. The Dermagraft Joint Venture purchases
TransCyte and Dermagraft from us as they are manufactured at cost, including
period costs, and immediately writes the inventory down to estimated market
value at the date of purchase. The estimated market value is the net realizable
value at which the joint venture believes it will be able to sell the products
to its customers. In the three months ended March 31, 2002 inventory write-downs
by the Dermagraft Joint Venture totaled $1,369,000, down from $2,511,000 in the
corresponding period of 2001. This decrease is primarily related to reduced
manufacturing costs for TransCyte and Dermagraft, largely as a result of
increased production quantities in our manufacturing facility, including the
manufacture of our collagen product. We incur our share of the write-downs,
currently 50%, through


                                       9

<PAGE>


our equity in the joint venture. To the extent that we do not sell such products
to the Dermagraft Joint Venture, we would be required to write such inventories
down to net realizable value.

     Cost of goods sold for products sold to third parties increased from
$391,000 in the three months ended March 31, 2001, to $396,000 in the the three
months ended March 31, 2002. This increase primarily reflects manufacturing
period and distribution costs for human-based collagen.

     Research and development expense for projects other than those performed
for our joint ventures increased by $398,000, to $2,553,000 in the three months
ended March 31, 2002, from $2,155,000 in the comparable period of 2001. Costs
related to the development of human-based collagen increased by $477,000. In
2001, collagen development costs of $356,000 were included in cost of goods sold
as they related to development of the ongoing collagen manufacturing process. In
the three months ended March 31, 2002, costs of $485,000 relate to development
of new processes not directly related to the current manufacturing process, and
are therefore included in research and development expenses. In addition, in the
three months ended March 31, 2002, we incurred expenses of $178,000 related to
pre-clinical research into periodontal applications, while there were no
comparable costs in 2001. These increases were offset by a reduction of $316,000
in other projects and administration costs. Our research and development costs,
under both our joint ventures and for other projects, will continue to be
significant due to continuing and anticipated clinical trials and post-market
studies during 2002 and beyond. In addition, from the second quarter of 2002
onwards we will incur increased costs related to our new research facility. A
discussion of our current research and development projects appears below :

                        RESEARCH AND DEVELOPMENT EXPENSES
                    FOR THE THREE MONTHS ENDED MARCH 31, 2002
                           (IN THOUSAND, EXCEPT DATES)
           Expenditure includes overheads and support services such as
                  quality assurance and information technology

<TABLE>
<CAPTION>

                                                                                                  EXPENDITURE TO
                                                                       2002           2001             DATE
                                                                   -------------- -------------- -----------------
<S>                                                                 <C>            <C>               <C>
Projects:
--------
Dermagraft & TransCyte R&D
(Dermagraft Joint Venture)                                          $     276.3    $     506.3          **

Articular cartilage pre-clinical research
(NeoCyte Joint Venture)                                                    84.3           26.3          **

NIST grant - vascular grafts                                                 --           32.6       4,365.5

Development of aesthetic & reconstructive manufacturing
processes                                                                 795.4          359.6       3,369.9

NIST grant - ischemic repair devices                                      206.2          182.7       1,123.1

Anginera pre-clinical research                                            168.9           99.4         858.0

Initial 5 year phase of NIH grant to grow heart tissue
(University of Washington)                                                158.6           85.9         733.0

NIH grant - tempromandibular disorders                                     75.4           88.4         367.1

Periodontal pre-clinical research                                         178.3             --         451.0

Other active grants                                                       117.9          137.3         888.6

Other research & development expenditure, including
management & administration                                               852.7        1,169.5          **
                                                                    -----------    -----------

Total research & development                                        $   2,914.0   $    2,688.0
                                                                    ===========   ============

</TABLE>

** Total expenditure to date not available or estimable, due to historical
changes in reporting methodologies or business re-organization.

     We generally do not provide forward-looking estimates of costs and time to
complete current projects, as such estimates involve a high degree of
uncertainty. Uncertainties include, but are not limited to, our ability to
predict the outcome of complex research, regulatory requirements placed upon us
by regulatory authorities such as


                                       10

<PAGE>


the FDA, our ability to raise capital to finance research activities,
competition from other entities of which we may become aware in future periods,
predictions of market potential from products that may be derived from our
research projects, and our ability to recruit and retain personnel with the
necessary knowledge and skills to perform the research. We have made commitments
to third parties in order to receive funds under our research grants. Such
commitments involve estimates of time needed and activities required to complete
projects. However significant uncertainty exists in our ability to accurately
forecast the costs of performing the activities, such as the cost of recruiting
and retaining the necessary personnel with the knowledge and skills to perform
the research, the cost of required materials, and the overhead required to
support the specific projects.

     Selling, general and administrative expenses in the three months ended
March 31, 2002 decreased by $1,065,000 to $2,680,000, compared to the same
period in 2001. In the three months ended March 31, 2002 we recorded a non-cash
credit of $666,000 related to compensation expense for a variable stock option,
compared to an expense for the same period in 2001 of $444,000. See note 4 to
the consolidated financial statements for a discussion of transactions
associated with our capital stock.

     Our equity in losses of joint ventures was $2,768,000 in the three months
ended March 31, 2002, compared to $2,959,000 million for the comparable period
of 2001. These amounts represent our share of the losses of the Dermagraft and
NeoCyte Joint Ventures. Joint venture losses were reduced in 2002 primarily as a
result of higher sales of Dermagraft.

     Joint venture product sales to third parties for the three months ended
March 31, 2002 were $1,132,000, compared to $904,000 in the same period of 2001.
Of these sales, TransCyte accounted for $808,000 in 2002, and $798,000 in 2001.
Dermagraft sales increased by $217,000, from $106,000 in the three months ended
March 31, 2001, to $323,000 in the three months ended March 31, 2002.

     Interest income and other accounted for a net expense of $59,000 in the
three months ended March 31, 2002, compared to income of $374,000 in the
comparable period of 2001. Interest income received in the 2002 period decreased
by $263,000 from the same period in 2001, primarily due to lower interest rates.
Total interest expense was $62,000 in the three months ended March 31, 2002,
compared to $242,000 in the comparable period of 2001. Excluding interest
expense incurred on behalf of our joint ventures with Smith & Nephew, which
appears in joint venture contract expense in our statement of operations,
interest expense in the three months ended March 31, 2002 was $27,000, compared
to $86,000 in the same period of 2001. The decrease in total interest expense
reflects lower interest rates and a declining balance in the Chase loan, a loan
used by DermEquip to purchase manufacturing assets. See Note 1 to the
consolidated financial statements for a discussion of DermEquip.

LIQUIDITY AND CAPITAL RESOURCES

     To date, we have funded our operating and capital expenditures primarily
through the sale of equities, contract revenues, funding from strategic
partners, bank loans, government grants, product sales and lease financing
transactions.

     In addition to investments in money market funds, our cash equivalents
consist primarily of investments in commercial paper, which are unsecured
obligations, and obligations issued or guaranteed by the United States
Government with maturities of three months or less at the date of acquisition.
Short-term investments are valued on the basis of quoted market value and
consist primarily of investments in commercial paper and obligations issued or
guaranteed by the United States Government with maturities of one year or less
but more than three months, at the date of acquisition. Cash equivalents and
short-term investments are stated at amortized cost, which approximates market
value. As of March 31, 2002 and December 31, 2001, our cash equivalents and
short-term investments were classified as available-for-sale. These investments
all mature in less than one year. There were no material unrealized or realized
gains or losses related to such securities in the three months ended March 31,
2002. When making investments in commercial paper, we use ratings supplied by
recognized debt-rating agencies to assess potential risks.

     Cash, cash equivalents and short-term investments decreased by $8,582,000
from December 31, 2001 to March 31, 2002. Major outflows included the use of
$4,727,000 to fund operations, a net investment in the Dermagraft and NeoCyte
Joint Ventures of $2,859,000, and $727,000 for the repayment of debt. Included
in the $4,727,000 to fund operations were an increase in inventory of $1,072,000
from December 31, 2001, largely as a result of collagen production in the first
quarter of 2002, and the receipt of $3,546,000 from Inamed relating to shipments
of collagen in the fourth quarter of 2001. We are continuing to manufacture
collagen for subsequent sale


                                       11

<PAGE>


to Inamed. If Inamed's skin-test studies are not successful, or if Inamed does
not decide to launch their human-based collagen product, we would be required to
write off the value of our collagen inventory.

     Current and long-term debt at March 31, 2002 decreased by $726,000 from
December 31, 2001, primarily reflecting the reduction in the DermEquip Chase
loan. Accrued expenses decreased primarily as a result of a decrease in accrued
wages and benefits.

     There were no deferred revenues at March 31, 2002.

     Under an agreement with our supplier of the mesh framework used by us in
the manufacture of Dermagraft, we are committed to purchasing minimum
quantities. Based upon current market prices the commitment is estimated to be
approximately $2.5 million in 2002, with the current agreement expiring in
January 2003.

     We expect to continue to expend cash as we incur substantial research and
development expenses, additional costs in support of clinical trials, general
and administrative costs in support of product commercialization, expenditures
for capital equipment and patents, and as we invest in product inventory. In
addition, under the terms of our agreements with Smith & Nephew, we have agreed
to fund our share of the costs of the Dermagraft and NeoCyte Joint Ventures. To
the extent that such costs can be forecast, they are mutually agreed by us and
Smith & Nephew as partners in the joint ventures. We have also agreed to fund
specified costs to develop products, and related manufacturing processes, which
will be marketed by Inamed under the terms of our licensing agreement. These
uses of cash are expected to be only partially offset by revenues received from
the Dermagraft and NeoCyte Joint Ventures with Smith & Nephew, from the Inamed
alliance, from sale or royalties under our alliance agreements for the marketing
of NouriCel-based products, or from other potential revenue sources. If, for any
reason, Smith & Nephew were to terminate the Dermagraft Joint Venture, we would
experience a substantial increase in the need for and use of our cash to support
the commercialization and manufacture of TransCyte and Dermagraft. If Smith &
Nephew were to terminate the NeoCyte Joint Venture, we would experience an
increase in the need for and use of our working capital to support the
development of our orthopedic cartilage products, or we would need to reduce or
terminate our investment in such development if funding from other sources were
not available to us.

     Our cash requirements are dependent upon a number of factors, including the
achievement and timing of regulatory approvals and third-party reimbursement,
sales and marketing efforts by our collaborators, market acceptance of our
products and potential products, the establishment of new strategic alliances,
the timing and expense of pre-clinical and clinical studies, and new
technological innovations. We currently believe we have sufficient funds to
support our planned operations at least through 2002.

     The further development of our technology and commercialization of our
products, as well as any further development of manufacturing capabilities or
the establishment of any additional sales, marketing and distribution
capabilities, will require the commitment of substantial funds. Sources of funds
may include payments from alliances with Smith & Nephew, Inamed, or our other
strategic collaborators. We may also pursue additional public or private
offerings of equity or debt securities. Additional funding could potentially be
obtained through new strategic alliances or other collaborative arrangements, or
through the extension or expansion of existing strategic alliances. However,
funds from the sources outlined above may not be available when needed or on
terms favorable to us, under existing arrangements or otherwise, and we may not
be successful in entering into any other strategic alliances or collaborative
arrangements.

     We continually review our product development activities in an effort to
allocate available resources to those products we believe have the greatest
commercial potential. Factors considered by us in determining the products to
pursue include projected market demand, potential for regulatory approval and
reimbursement, if required, under the existing healthcare system, as well as
anticipated healthcare reforms, technical feasibility, expected and known
product attributes and estimated costs to bring the product to market. Based on
these and other factors that we consider relevant, we may from time to time
reallocate resources among product development activities. Additions to products
under development or changes in products being pursued can substantially and
rapidly change our funding requirements.


                                       12

<PAGE>


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We are exposed to changes in interest rates primarily from our long-term
debt arrangements and, secondarily, our investments in interest-rate sensitive
securities. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We believe that a
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at March 31, 2002.


                                       13

<PAGE>


                           PART II - OTHER INFORMATION

ITEM 5 - OTHER INFORMATION

FACTORS THAT MAY AFFECT FUTURE RESULTS

WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE.

     To date, we have experienced significant operating losses in funding the
research, development, testing and marketing of our products and expect to
continue to incur substantial operating losses. Through March 31, 2002, we had
incurred cumulative net operating losses of $300.4 million. Our ability to
achieve profitability depends in part upon our ability to successfully
manufacture TransCyte and Dermagraft for burns and skin ulcers, for our
collaborator, Inamed, to obtain regulatory approval for their human-based
collagen product, for us to cost-effectively manufacture collagen and our
nutrient solution for aesthetic applications, and for each of these products to
be successfully marketed by our collaborators, and for us to successfully
develop and commercialize other products derived from our core technology. We
may never achieve a profitable level of operations or even if we achieve
profitability, we may not be able to sustain it on an ongoing basis.

IF OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, IT COULD RESULT IN A LOWER
PRICE OF OUR STOCK, WHICH COULD NEGATIVELY AFFECT YOUR INVESTMENT AND OUR
ABILITY TO RAISE ADDITIONAL CAPITAL.

     We expect our operating results to fluctuate from period to period based
upon when we incur expenses and receive revenues from product sales, contract
fees, milestones and other fees. We believe some of these fluctuations may be
significant, and you could lose all or some of your investment.

WE WILL NEED ADDITIONAL FUNDS TO SUPPORT OPERATIONS. IF WE ARE UNABLE TO OBTAIN
THEM, WE WOULD BE UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT PROGRAMS AND WOULD
HAVE TO REDUCE OR CEASE OPERATIONS, OR ATTEMPT TO SELL SOME OR ALL OF OUR
OPERATIONS OR TO MERGE WITH ANOTHER ENTITY.

     The further development of our technology and products as well as any
further development of manufacturing capabilities or the establishment of
additional sales, marketing and distribution capabilities will require the
commitment of substantial funds. Our existing working capital will not be
sufficient to meet our needs in 2003 and beyond. We base our forecasts of
additional funds on many uncertain variables. Such uncertainties include the
timing of events outside our direct control such as product launches by
collaborators, the success of such product launches, negotiations with potential
strategic partners, regulatory approvals, and other factors. Any of these
uncertain events can significantly change our cash requirements, as they
determine, among other factors, one-time events such as the receipt of major
milestones and other payments.

     Potential sources of additional funds include payments from our alliances
with Smith & Nephew and Inamed, and to a lesser extent Biozhem and SkinMedica.
If, for any reason, Smith & Nephew were to terminate the Dermagraft Joint
Venture, we would experience a substantial increase in the need for and use of
our working capital to support the commercialization and manufacture of our
TransCyte and Dermagraft products, and we would need to pursue other means to
obtain funds, such as public or private offerings of debt or equity securities,
collaborative agreements or extensions of existing arrangements. If Smith &
Nephew were to terminate the NeoCyte Joint Venture, we would experience an
increase in the need for and use of our working capital to support the
development of our orthopedic cartilage products, or we would need to reduce or
terminate our investment in such development if funding from other sources were
not available to us.

     We may not satisfy the milestones for additional funds under the joint
ventures with Smith & Nephew or the alliance with Inamed. We also may not be
able to obtain adequate funds under other existing or future arrangements when
such funds are needed or, if available, on terms acceptable to us.

     Insufficient funds may require us to delay, scale back or eliminate certain
of our research and product development programs, license third parties the
right to commercialize products or technologies that we would otherwise
commercialize ourselves, or attempt to merge with another entity or otherwise
reduce or cease operations.


                                       14

<PAGE>


OUR PRODUCTS MAY NOT BE ACCEPTED BY THE MARKET AND MAY NOT BE SUCCESSFULLY
COMMERCIALIZED BECAUSE PHYSICIANS AND PATIENTS MAY NOT PURCHASE OR USE THEM, OR
PATIENTS MAY HAVE ADVERSE REACTIONS.

     Our products are based on new and innovative technologies and the medical
community or the general population may not broadly purchase or use our products
as alternatives to existing methods of treatment. We may be unable to sell our
products, or unable to sell our products in quantities that meet our forecasts,
due to:

     o their respective cost;

     o concerns related to efficacy;

     o the effectiveness of alternative methods of treatment;

     o the insufficiency of third-party reimbursement; and

     o reports of adverse reactions.

     Any future negative events or other unfavorable publicity involving the use
of our products could also limit the acceptance of our products. Both we and
Smith & Nephew have limited direct experience marketing or obtaining third-party
reimbursement for these types of products.

     Additionally, TransCyte has been marketed and sold in the United States
since 1997, however it has not achieved widespread commercial acceptance.
Similarly, Dermagraft was only recently approved for marketing in the United
States and our experience, and that of Smith & Nephew, in marketing Dermagraft
is therefore limited. TransCyte, Dermagraft or our human-based collagen, if
approved by the FDA, may never achieve commercial acceptance in the United
States or elsewhere. Similarly, our strategic partners may never achieve
significant sales of products containing NouriCel.

     Known adverse reactions to TransCyte and Dermagraft, or any other
commercially available products that are regulated by the FDA, are detailed in
an extensive document that accompanies each product that is shipped. We work
extensively with the FDA to arrive at approved language that describes
commercially available products in detail, including a listing of adverse
reactions that may have occurred.

WE RELY ON THIRD PARTIES TO MARKET, DEVELOP AND SELL OUR PRODUCTS AND THOSE
THIRD PARTIES MAY NOT PERFORM SUCCESSFULLY. OUR DEPENDENCE ON THIRD PARTIES AND
OUR LACK OF SALES AND MARKETING PERSONNEL COULD LIMIT OUR ABILITY TO DEVELOP OUR
PRODUCTS OR TO GENERATE REVENUES FROM PRODUCT SALES.

     We are relying on Smith & Nephew, Inamed and others to market our products
both domestically and internationally. Our success in generating revenues from,
and market acceptance of, TransCyte and Dermagraft will depend on the marketing
efforts of Smith & Nephew. Market acceptance of human-based collagen will depend
in part on the regulatory and marketing efforts of Inamed. Sales of products
containing NouriCel will depend on the marketing capabilities of Biozhem,
SkinMedica and other parties to whom we license rights to sell products. We
cannot control the amount and timing of resources that Smith & Nephew, Inamed or
others may devote to marketing and selling our products, or their ability or
willingness to continue investment in such activities. In addition, the
Dermagraft and NeoCyte Joint Venture agreements provide that they may be
terminated before their expiration if specified events occur, such as a material
default, change of control, partner's election to withdraw, the cessation of the
partnership's regular operations for implementing its business purpose, mutual
agreement or a voting deadlock on a material issue, all or some of which may be
outside of our control.

     If Smith & Nephew does not perform its obligations as expected, or if they
have a strategic shift in their business focus, it would be difficult for us to
successfully complete the development and marketing efforts of the Dermagraft
and/or NeoCyte Joint Ventures. Our failure to achieve broad use of Dermagraft
for the treatment of diabetic foot ulcers and, to a lesser extent, TransCyte for
burn care, and human-based collagen or NouriCel for aesthetic applications,
would hurt our ability to generate revenues and any future profits.

     To the extent that we choose not to or are unable to establish such
arrangements, we would experience increased capital requirements to undertake
research, development and marketing of our proposed products at our own expense.
If we are unable to meet these expenses, we may be unable to continue our
operations.


                                       15

<PAGE>


IF WE OR OUR COLLABORATORS ARE NOT ABLE TO OBTAIN REGULATORY APPROVAL, WE WILL
NOT BE ABLE TO SELL THE AFFECTED PRODUCTS.

     To sell our products that are under development, and our existing products
for additional applications, we or our collaborators must usually receive
regulatory approvals. To obtain approvals for new products, we, or our
collaborators, must conduct clinical studies demonstrating that the respective
products are safe and effective, which can be expensive and time-consuming.
Similar clinical studies may also be required to obtain approval for additional
applications of our existing products. We, or our collaborators, may be unable
to obtain regulatory approval on a timely basis, if at all. If regulatory
approval cannot be obtained for a regulated product or any additional
application of such a product, that product cannot be sold and revenues will
never materialize.

     Our products or potential products, may not be successful in ongoing or
future clinical trials. Such trials may be delayed or halted for various
reasons, including:

     o the product is not effective or physicians think that it is not
       effective;

     o patients experience severe side effects during treatment;

     o patients do not enroll in the study at the rate we expect; or

     o product supplies are not sufficient to treat the patients in the study.

     In addition, the FDA and foreign regulatory authorities have substantial
discretion in the approval process. The FDA and foreign regulatory authorities
may not agree that we have demonstrated that our products are safe and effective
after clinical trials are completed.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WE MAY BE UNABLE TO
PREVENT OTHER COMPANIES FROM USING OUR TECHNOLOGY IN COMPETITIVE PRODUCTS. IF WE
INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY BE PREVENTED FROM
DEVELOPING OR MARKETING OUR PRODUCTS.

     Our ability to compete effectively will depend, in part, on our ability to
maintain the proprietary nature of our technology and manufacturing processes.
Our competitors may develop products that are similar to or the same as our
products and market those products after our patents expire, or may design
around our existing patents. If this happens, sales of our products would suffer
and our ability to generate revenues will be severely impacted. Furthermore,
patents may be issued to others that prevent the manufacture or sale of our
products. We may have to pay significant fees or royalties to license those
patents to continue marketing our products. This would cause any future profits
on sales of our products to decline.

     Our dependence upon having exclusive rights to the technology covered under
our owned or licensed patents and patent applications is subject to the
following risks, among others:

     o applications may not result in issued patents;

     o current or future issued or licensed patents, trade secrets or know-how
       may not afford protection against competitors with similar technologies
       or processes;

     o any patents issued may be infringed upon or be designed around by others,
       or be challenged and invalidated; and

     o others may independently develop technologies or processes that are the
       same as or substantially equivalent to ours.

     In addition to patent protection, we also rely on trade secrets, know-how
and technological advances. We enter into confidentiality agreements with our
employees and others, but these agreements may not be effective in protecting
our proprietary information. Others may independently develop substantially
equivalent information or obtain access to our know-how.

     Litigation, which is very expensive, may be necessary to enforce or defend
our patents or rights and may not end favorably for us or, even if successful,
may consume extensive financial and management resources. Any of our licenses,
patents or other intellectual property may be challenged, invalidated, canceled,
infringed or circumvented and may not provide any competitive advantage to us.


                                       16


<PAGE>


IF THE THIRD-PARTY SUPPLIERS THAT SUPPLY THE MATERIALS NECESSARY TO MANUFACTURE
OUR PRODUCTS DO NOT SUPPLY QUALITY MATERIALS IN A TIMELY MANNER, IT MAY DELAY OR
IMPAIR OUR ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS ON A TIMELY AND
COMPETITIVE BASIS, OR PREVENT OR LIMIT OUR POTENTIAL FUTURE PROFITABILITY.

     Although most of the raw materials used in the manufacture of Dermagraft,
TransCyte, and our human-based collagen product are available from more than one
supplier, changes in critical components could cause the FDA to require us to
prove equivalency of the materials, or potentially to modify or perform
additional clinical trials for such products, which could have the effect of
restricting our ability to commercialize our products.

     The mesh framework used by us in the manufacture of Dermagraft is available
from only one FDA-qualified manufacturing source, Ethicon, Inc., a subsidiary of
Johnson & Johnson. Pursuant to our agreement with Ethicon, so long as we meet
agreed purchase levels, Ethicon is to use reasonable efforts to manufacture and
sell to us such quantities as we require. The synthetic mesh framework used by
us in the manufacture of TransCyte is also available from only one FDA-qualified
manufacturing source, Bertek Pharmaceuticals, Inc. Under our agreement with
Bertek, Bertek agrees to manufacture and sell to us such quantities ordered
which do not exceed certain thresholds based on previous forecasts provided by
us. Because the FDA approval process requires manufacturers to specify their
proposed suppliers of active ingredients and certain component parts and
packaging materials in their applications, FDA approval of a new supplier would
be required if these materials become unavailable from Ethicon or Bertek.
Although there may be other suppliers who have equivalent materials that would
be available to us, FDA approval of any alternate suppliers could take several
months or years.

     Interruptions in supplies for the manufacture of our Dermagraft, TransCyte
and human-based collagen products may occur and we may have to obtain substitute
vendors for these materials. Any significant supply interruption would delay our
marketing, product development or clinical trial programs. In addition, an
uncorrected impurity or supplier's variation in a raw material, either unknown
to us or incompatible with our manufacturing process, could prevent or delay our
ability to manufacture products. These delays may limit our revenues.

IF OUR PRODUCTS THAT ARE IN AN EARLY STAGE OF DEVELOPMENT ARE NEVER SUCCESSFULLY
COMMERCIALIZED, WE MAY NOT HAVE REVENUES TO CONTINUE OPERATIONS.

     We have products that are in an early stage of development. To date,
TransCyte and Dermagraft are the only regulated products of ours that are
approved for commercial sale in the United States, however, Dermagraft was only
approved in September 2001, and as with any novel medical technology, private
and public reimbursement is not automatically conveyed upon FDA approval. In
December 2001, Dermagraft received an Ambulatory Payment Classification
pass-through code under the Hospital Outpatient Prospective Payment System from
Centers for Medicare and Medicaid Services, covering Medicare patients with
diabetic foot ulcers treated in a hospital outpatient setting. Each Medicare
local carrier or fiscal intermediary can begin developing coverage guidelines to
determine when, how often, and under what conditions they will pay for the use
of Dermagraft for patients with chronic diabetic foot ulcers. However, there can
be no assurances that Medicare local carriers or fiscal intermediaries will pay
for the use of Dermagraft.

     Our human-based collagen product still requires further marketing approvals
from the FDA, and all of our other regulated products are at earlier stages of
research, development and testing. These products, including additional
indications for TransCyte and Dermagraft, will require significant additional
research and development, as well as extensive pre-clinical and clinical
testing.

     Since our products are based on innovative technologies, there are many
reasons why our products may not advance beyond their early stage of
development. These reasons include the possibilities that:

     o any or all of these products will be found to be unsafe or ineffective or
       otherwise fail to receive necessary regulatory approvals;

     o our products are uneconomical to market;

     o third parties may hold legal rights that preclude us from marketing such
       products;

     o our products fail to achieve market acceptance because of competing
       technologies or products; or,

     o we may have insufficient financial resources to pursue all or any of our
       potential programs through to commercialization.


                                       17

<PAGE>


RISKS RELATED TO OUR INDUSTRY

IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL ANY
OF OUR PRODUCTS, OR IF APPROVAL IS DELAYED, IT COULD INCREASE THE COST OF
PRODUCT DEVELOPMENT, OR ULTIMATELY PREVENT OR DELAY OUR ABILITY TO SELL OUR
PRODUCTS AND GENERATE REVENUES.

     We and our collaborators are subject to extensive government regulation.
The FDA and other state and foreign regulatory authorities require rigorous
pre-clinical testing, clinical trials and other product approval procedures for
our regulated products. Numerous regulations also govern the manufacturing,
safety, labeling, storage, record keeping, reporting and marketing of our
regulated products. The process of obtaining these approvals and complying with
applicable government regulations is time consuming and expensive. The FDA and
other state or foreign regulatory authorities have limited experience with our
technology and products. As a result, our products are susceptible to requests
for clinical modifications or additional supportive data, or changes in
regulatory policy, which could substantially extend the test period for our
products resulting in delays or rejections. Even after substantial time and
expense, we may not be able to obtain regulatory product approval by the FDA or
any equivalent state or foreign authorities. If we obtain regulatory product
approval, the approval may limit the uses for which we may market the product.

     TransCyte, Dermagraft and cartilage products are subject to regulation by
the FDA as medical devices. The FDA has informed us that Anginera will be
regulated as a biologic. In 2000, an IDE was submitted to the FDA requesting
approval to begin pilot human clinical studies using human-based cartilage
tissue for articular resurfacing of the knee joint, under the NeoCyte Joint
Venture. The FDA raised agency jurisdictional issues as to whether or not this
product should be regulated as a medical device or biologic, as well as
questions about the pre-clinical studies. Our other tissue products, currently
in various stages of development, could be regulated as medical devices,
biologic products or pharmaceutical products. Legislative and regulatory
initiatives concerning the regulation of tissue and organ transplants are
ongoing and could possibly affect the future regulation of our products. It is
not possible at the present time to predict accurately either the time frame for
such action, or the ultimate effect that such initiatives could have, if any, on
the products under development. Unlike PMA submissions for medical devices, the
FDA has no regulatory time limit within which it must review and act upon
submissions treated as biologics. As a result, the time period for final action
often takes several years from submission, usually exceeding that expected for a
PMA application. In addition, we have very limited experience of biologic
applications, and neither we nor the FDA have experience of applying biologic
regulations to our technology and products.

     In Europe, we have been seeking approval of Dermagraft as a pharmaceutical
through the Mutual Recognition process. We had filed an application with the
Swedish regulatory authorities as the Reference Member State to review the
initial marketing approval application of Dermagraft in the treatment of chronic
full-thickness diabetic foot ulcers. In 2001, the Swedish regulatory authority
completed its initial review of the marketing application and determined that
additional clinical data and technical elements are required to comply with
pharmaceutical approval requirements. We have decided to withdraw the
application pending the development of a European strategy, including the
appropriate use of our financial resources and those of our joint venture
partner.

     Although the FDA has classified TransCyte and Dermagraft as medical
devices, the state of California and the state of New York have notified us that
we must register as a tissue bank in order to manufacture or distribute the
products in those states. Although some states do not regulate tissue banks,
there are certain other states besides California and New York that do. Such
states could take a position similar to California and New York with regard to
the regulatory status of our tissue products. In June 1997, we submitted a
petition to the FDA requesting an advisory opinion that the FDA's federal
regulation of TransCyte as a medical device pre-empts conflicting New York
statutes from regulating the product as banked human tissue. In January 2000,
the FDA responded to our request with an opinion stating that New York State
tissue bank licensing requirements were not pre-empted by the FDA's federal
regulation. Subject to individual state regulations, we and our customers could
be subjected to additional regulation, registrations and associated costs. In
addition, under the laws of some states that regulate tissue, including New York
and Florida, the sale of human tissues for valuable consideration is prohibited.
We are currently distributing TransCyte and Dermagraft in California and New
York under tissue banking licenses that enable us to charge a fee for services
rendered at a profit. In California the license is provisional. Due to the
similarities of our products and their common technology platform, regulations
applicable to TransCyte and Dermagraft are also expected to apply to other
future products, if successfully developed, including NeoCyte.


                                       18

<PAGE>


     In May 2001, McGhan Medical Corporation, a subsidiary of Inamed, filed a
PMA supplement with the FDA, seeking approval to add our human-based collagen as
an alternative source of injectable collagen. Clearance of the PMA amendment
filing by the FDA would permit Inamed to market an injectable form of
human-based collagen for wrinkle treatment. However, in October 2001 Inamed
announced that the FDA had requested certain additional pre-clinical data and
had asked for skin-test studies to be conducted. These studies are currently
being performed. Further purchases of our human-based collagen are expected to
cease until the results of the skin-test studies are known and Inamed makes an
evaluation of the expected timing of FDA approval. We are continuing to
manufacture collagen for subsequent sale to Inamed. If Inamed's skin-test
studies are not successful, or if Inamed does not decide to launch their
human-based collagen product, we would be required to write off the value of our
collagen inventory.

     After regulatory approval is obtained, our products, their manufacture and
related manufacturing facilities will be subject to continual review and
periodic inspections. Any subsequent discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on the
product or manufacturer, including withdrawal of the product from the market.
For example, after inspecting our manufacturing facility early in 1998, the FDA
notified us of numerous objectionable conditions under a Form FDA 483 list of
observations concerning our manufacturing processes and systems for TransCyte
and Dermagraft. In September 1998, we successfully completed a re-inspection by
the FDA of our manufacturing facility and quality systems and have passed
subsequent inspections. However, we must continue to pass future facility
inspections by the FDA and foreign regulatory authorities.

     Our research and development activities and operations involve the
controlled use of small quantities of radioactive compounds, chemical solvents
and other hazardous materials. In addition, our business involves the growth of
human tissues. If an accident occurs, we could be held liable for any damages
that result. In addition, these research activities and operations are subject
to continual review under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other federal, state or local laws and
regulations which impact our ability to develop and market our products.

HEALTHCARE REFORM MEASURES AND REIMBURSEMENT PROCEDURES MAY PREVENT US FROM
OBTAINING AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS THAT IN TURN WOULD
DECREASE OUR ABILITY TO GENERATE REVENUES.

     Our ability to commercialize our regulated products successfully will
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other organizations. In
the United States, government and other third-party payors are increasingly
attempting to contain healthcare costs by limiting both coverage and the level
of reimbursement for new products. Initiatives to reform healthcare delivery are
increasing these cost containment efforts. As managed care organizations
continue to expand as a means of containing healthcare costs, we believe there
may be attempts by such organizations to restrict the use of, delay
authorization to use, or limit coverage and the level of reimbursement for, new
products, such as those being developed and commercialized by us, pending
completion of cost/benefit analyses of such products by those managed care
organizations. Internationally, where national healthcare systems are prevalent,
little, if any, funding may be available for new products, and cost containment
and cost reduction efforts can be more pronounced than in the United States.

     Our TransCyte and Dermagraft products are novel and as such are subject to
inherent uncertainty in the area of reimbursement. Adequate government or
private payor coverage or levels of reimbursement may not be available for any
of our products and we may not be able to maintain price levels sufficient for
the realization of an appropriate return on our investment in such products.
Failure to obtain sufficient coverage and reimbursement levels for uses of our
products could decrease the market acceptance of such products.

DISCOVERIES OR DEVELOPMENT OF NEW TECHNOLOGIES BY OUR COMPETITORS OR OTHERS MAY
MAKE OUR PRODUCTS LESS COMPETITIVE, OR MAKE OUR PRODUCTS OBSOLETE.

     The biomedical technology industry is subject to rapid, unpredictable and
significant technological change. Competition to our technology is intense and
may come from universities, research institutions, tissue engineering companies,
xenotransplant companies, various divisions of major pharmaceutical companies
and other pharmaceutical, biotechnology and medical products companies. Many
competitors or potential competitors have greater financial resources, research
and development capabilities, and manufacturing and marketing experience


                                       19

<PAGE>


than us. We rely and will continue to rely on our partners and potential
partners to provide some or all of these resources in order for us to compete.

     The relative speed with which we can develop products, complete clinical
trials, obtain regulatory approvals and develop commercial manufacturing
capability are some of the major determinative factors in
establishing our competitive position. Our ability to attract and retain
qualified scientific, manufacturing, marketing and other personnel, obtain and
maintain patent protection and secure funding are also expected to be key
competitive factors for us.

     In the field of tissue engineering and the treatment of damaged or diseased
tissue, we compete with several companies which are developing various tissue
replacement products, including skin substitutes and cultured cartilage. In
addition, we are aware of a number of biotechnology, pharmaceutical, medical
device and chemical companies that are developing other types of products as
alternatives to tissue replacement for a variety of indications, including burns
and chronic skin ulcers.

     In the field of wound care, several companies have developed technologies
involving cadaver, human-cell or animal-derived tissues as dermal replacement
products. Products that compete with TransCyte in the burn market include
LifeCell Corporation's Alloderm, processed from cadaver skin, and Genzyme
Biosurgery's EpiCel, sheets of epidermis grown from the patient's own tissue. In
addition, we are aware that Ortec International, Inc. has received marketing
approval from the FDA for its composite cultured skin product, OrCel, consisting
of human fibroblasts and keratinocytes on a bovine collagen sponge for use in
healing donor site wounds in burn victims. Burn products that contain
animal-derived tissue include Integra Life Sciences' Integra Artificial Skin,
consisting of a bovine collagen and glycosaminoglycan matrix with a synthetic
polymer covering.

     Organogenesis, Inc. is marketing, under an alliance with Novartis Pharma
AG, Apligraf, made with two types of living human skin cells, epidermal
keratinocytes and dermal fibroblasts, for diabetic foot ulcers and venous
ulcers. We also compete with larger pharmaceutical or biotechnology companies
who have biological based products for the treatment of wounds. One such product
is Regranex, a genetically-engineered platelet-derived growth factor used in the
treatment of neuropathic diabetic foot ulcers, produced by Chiron Corporation
and marketed by the Ortho-McNeil division of Johnson & Johnson. Several other
companies are also developing or plan to develop growth factors as a treatment
for partial-thickness or small full-thickness wounds.

     Potential competition for our human-based collagen product, to be marketed
by Inamed within the wrinkle revision market, will, we believe, come from
existing therapies such as collagen derived from bovine and cadaver sources, as
well as from new potential products. We are aware of potential competitors
capable of producing recombinant human collagen. Within the wrinkle revision
market, we believe that our human-based collagen may compete with products such
as Zyderm and Zyplast, Inamed's existing bovine collagen derived products, fat
injections, gelatin or cadaver-based collagen products, and hyaluronic acid
products, currently available in Europe, Canada and Australia. We are also aware
of two hyaluronic acid based products, Hylaform, licensed by Genzyme Biosurgery
to Inamed, and Restylane, from Q-Med of Sweden, that are currently in clinical
trials for wrinkle revision. In April 2002, Botox, a botulinum toxin product
marketed and manufactured by Allergan, Inc., was approved by the FDA for use in
the treatment of moderate to severe glabellar lines in adults aged 65 and
younger. This approval applies to the vertical lines between the eyebrows, or
the "frown lines", a limited segment of the target market for Inamed's collagen
product.

     Competition in the cosmeceuticals field is very highly fragmented. Many of
our competitors and potential competitors have greater financial and marketing
resources than us, or our current partners.

     With respect to cartilage repair, Genzyme Tissue Repair is currently
selling a service to process a patient's own cartilage cells as a treatment for
articular defects in the knee. We are aware that Integra and Osiris
Therapeutics, Inc. are also engaged in research on cartilage regeneration
products.

     Factors such as our ability to secure regulatory approval for our products,
to implement production and marketing plans and to secure adequate capital
resources, will also impact our competitive position. We may not have the
resources, or may not be able to secure partners with sufficient resources, to
compete successfully. This may negatively affect our results of operations.


                                       20

<PAGE>


IF WE ARE UNABLE TO ATTRACT KEY PERSONNEL AND ADVISORS OR IF OUR CURRENT
MANAGEMENT AND TECHNICAL PERSONNEL LEAVE US, IT MAY LIMIT OUR ABILITY TO OBTAIN
FINANCING OR TO DEVELOP OUR PRODUCTS.

     Our success will depend in large part upon our ability to attract and
retain qualified scientific, administrative and management personnel, as well as
the continued contributions of our existing senior management and scientific and
technical personnel. We face strong competition for such personnel and we may be
unable to attract or retain such individuals. For instance, some competitors
have begun to expand their research and manufacturing capabilities in San Diego,
resulting in significantly increased competition for personnel, and potential
increases in the cost of retaining qualified personnel. Failure to continue to
attract and retain qualified personnel will limit our ability to achieve our
business objectives and could make it difficult to raise additional funds or to
attract partners. We do not have employment agreements with any of our executive
officers or other employees, although our executive officers have change of
control agreements in place.

WE MAY NOT HAVE ADEQUATE INSURANCE AND, IF WE BECOME SUBJECT TO PRODUCT
LIABILITY CLAIMS, IT MAY RESULT IN REDUCED DEMAND FOR OUR PRODUCTS OR DAMAGES
THAT EXCEED OUR INSURANCE LIMITATIONS.

     The use of any of our products, whether for commercial applications or
during clinical trials, exposes us to an inherent risk of product liability
claims if such products cause injury, disease or result in harmful effects. Such
liability might result from claims made directly by healthcare institutions,
contract laboratories or others selling or using such products. We currently
maintain product liability insurance coverage, however such insurance coverage
might not be sufficient to fully cover any potential claims. Additionally, such
coverage may not always be available to us, or available at an acceptable cost,
as such insurance can be expensive and difficult to obtain. Any product
liability claim in excess of insurance coverage would have to be paid out of our
cash reserves, which would have a detrimental effect on our financial condition.

DISCOVERY OF PREVIOUSLY UNKNOWN PROBLEMS WITH A PRODUCT, MANUFACTURER, OR
FACILITY, COULD RESULT IN PRODUCT RECALLS OR WITHDRAWALS AND SIGNIFICANTLY
REDUCE OUR RESOURCES.

         Our tissue repair and transplantation products are complex and must be
manufactured under controlled and sterile conditions, in addition to meeting
strict product release criteria. Any manufacturing errors or defects, or
uncorrected impurity or variation in a raw material, either unknown or
undetected by us, could affect the quality and safety of our products. If any of
the defects were material, we could be required to undertake a market withdrawal
or recall of the affected products. The cost of a market withdrawal or product
recall could significantly reduce our resources.

ADDITIONAL RISKS

OUR STOCK PRICE COULD CONTINUE TO BE VOLATILE AND ANY INVESTMENT COULD SUFFER A
DECLINE IN VALUE, WHICH MAY PREVENT OR LIMIT OUR ABILITY TO RAISE ADDITIONAL
CAPITAL. THIS COULD IN TURN DELAY COMMERCIALIZATION OF OUR PRODUCTS OR LEAD US
TO CEASE OPERATIONS.

     The market price of our common stock has fluctuated significantly in recent
years and is likely to fluctuate in the future. For example, from April 1998 to
March 2002, our common stock has closed as high as $12.13 per share and as low
as $1.97 per share. Factors contributing to this volatility have included:

     o the timing of approval and commercialization of products;

     o the results of research or scientific discoveries by us or others;

     o progress or the results of pre-clinical and clinical trials;

     o new technological innovations;

     o developments concerning technology rights;

     o litigation and related developments;

     o public perception regarding the safety and efficacy of our products;

     o fluctuations in our financial performance; and

     o general and industry specific equity market volatility.


                                       21

<PAGE>


FUTURE SALES OF OUR SECURITIES IN THE PUBLIC MARKET COULD LOWER OUR STOCK PRICE
AND IMPAIR OUR ABILITY IN NEW STOCK OFFERINGS TO RAISE FUNDS TO CONTINUE
OPERATIONS.

     The market price of our securities could drop due to sales of a large
number of our securities, or the perception that these sales could occur. Such
sales also might make it more difficult for us to sell equity securities in the
future at a price that we deem to be appropriate.

OUR CHARTER DOCUMENTS AND STOCKHOLDER RIGHTS PLAN MAY PREVENT US FROM
PARTICIPATING IN TRANSACTIONS THAT COULD BE BENEFICIAL TO STOCKHOLDERS.

     Our stockholder rights plan and provisions in our amended and restated
certificate of incorporation and by-laws may discourage transactions involving
an actual or potential change in our ownership, including transactions in which
you might otherwise receive a premium for your shares over the prevailing market
price. These provisions may also limit our stockholders' ability to approve
transactions that they deem to be in their best interest. In addition, our board
of directors may issue shares of preferred stock without any further action by
stockholders. Such share issuances may have the effect of delaying or preventing
a change in our ownership.


                                       22

<PAGE>


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits

<TABLE>
<CAPTION>

   Exhibit
     No.                             Title                                         Method of Filing
 -----------                         -----                                         ----------------
    <S>        <C>                                                <C>
     3.1       Amended and Restated Certificate of                Incorporated by Reference to Exhibit 3.1 to the
               Incorporation of the Company                       Company's Form 10-Q for the Quarter Ended June 30,
                                                                  2000

     3.2       Restated By-Laws of the Company                    Incorporated by Reference to Exhibit 3.2 to the
                                                                  Company's Form 10-Q for the Quarter Ended June 30,
                                                                  2000

     4.1       Rights Agreement, dated as of January 6, 1995,     Incorporated by Reference to Exhibit 1 to the
               between the Company and Chemical Trust Company     Company's Current Report on Form 8-K dated January
               of  California, including the Certificate of       5, 1995
               Determination for the Series A Junior
               Participating Preferred Stock as Exhibit A, the
               Form of Summary of Rights to Right Certificate
               as Exhibit B and the Purchase Preferred Shares
               as Exhibit C

     4.2       First Amendment to Rights Agreement entered into   Incorporated by Reference to Exhibit 1 to the
               as of November 8, 1999, between ChaseMellon        Company's Form 8-A, as amended, dated November
               Shareholder Services, L.L.C. and Advanced Tissue   10, 1999
               Sciences, Inc.

     4.3       Second Amendment to Rights Agreement entered       Incorporated by Reference to Exhibit 1 to the
               into as of December 13, 1999, between              Company's Form 8-A, as amended, dated March 28,
               ChaseMellon Shareholder Services, L.L.C. and       2000
               Advanced Tissue Sciences, Inc.

    10.1*      First Amendment to License and Supply Agreement,   Filed Herewith
               as of January 1, 2002, by and among  Advanced
               Tissue Sciences, Inc., and Biozhem
               Cosmeceuticals, Inc.

    10.2*      License and Supply Agreement, as of January 15,    Filed Herewith
               2002, by and between Advanced Tissue Sciences,
               Inc., and AQ TechSystems, LLC.

    10.3*      Supply & License Agreement, as of January 29,      Filed Herewith
               2002, by and between Advanced Tissue Sciences,
               Inc., and Advanced Nutraceuticals, Inc.

</TABLE>

*  The Company has requested confidential treatment with respect to certain
   portions of these documents.

(b)   Reports on Form 8-K

         None


                                       23

<PAGE>



                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                             ADVANCED TISSUE SCIENCES, INC.




Date:    May 13, 2002                         /s/ Arthur J. Benvenuto
      ---------------------                  ----------------------------------
                                             Arthur J. Benvenuto
                                             Chairman of the Board, President
                                             and Chief Executive Officer



Date:    May 13, 2002                         /s/ Mark J. Gergen
      ---------------------                  ----------------------------------
                                             Mark J. Gergen
                                             Chief Financial and Development
                                             Officer (Chief Financial Officer)



Date:    May 13, 2002                         /s/ Andrew J. Buckland
      ---------------------                  ----------------------------------
                                             Andrew J. Buckland
                                             Executive Director, Finance
                                             (Chief Accounting Officer)



                                       24