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, 2001

                                       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 4, 2000 was 64,203,358.


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

                 FORM 10-Q FOR THE QUARTER ENDED March 31, 2001


                                      INDEX

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

Item 1 - Financial Statements
-----------------------------

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

         Consolidated Balance Sheets -
           March 31, 2001 and December 31, 2000.......................     2

         Consolidated Statements of Operations -
           Three Months Ended March 31, 2001 and 2000.................     3

         Consolidated Statements of Cash Flows -
           Three Months Ended March 31, 2001 and 2000.................     4

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

Item 2 - Management's Discussion and Analysis of Financial
           Condition and Results of Operations........................    8-12

Item 3 - Quantitative and Qualitative Disclosures About
           Market Risk................................................     12

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

   Item 5 - Other Information.........................................   13-19

   Item 6 - Exhibits and Reports on Form 8-K..........................     20

Signatures............................................................     20


<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, 2000. Results for the interim periods are not
necessarily indicative of results to be expected for the full year.

     Dermagraft(R) and NouriCel(TM) are our trademarks. TransCyte(R) is a
registered trademark of our joint venture partner, Smith & Nephew. This Form
10-Q may also include trademarks and trade names owned by other parties, and all
other trademarks and trade names mentioned in this Form 10-Q are the property of
their respective owners.


                                       1


<PAGE>


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



                                                       March 31,    December 31,
                                                         2001          2000
                                                     ------------   ------------
    ASSETS                                           (Unaudited)
Current assets:
   Cash and cash equivalents                         $   17,685      $  24,197
   Short-term investments                                 2,473          6,854
   Receivable from joint ventures                         2,264          1,474
   Inventory                                              6,640          5,773
   Other current assets                                   2,260          1,814
                                                     ----------      ---------
      Total current assets                               31,322         40,112

Property - net                                           12,958         13,681
Patent costs - net                                        2,360          2,320
Other assets                                              2,847          2,993
                                                     ----------      ---------
      Total assets                                   $   49,487      $  59,106
                                                     ==========      =========
    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                  $      658      $   1,075
   Payable to joint ventures                                291            565
   Accrued expenses                                       4,824          5,391
   Current portion of long-term debt and
     capital lease obligations                            7,992          7,999
                                                     ----------      ---------
      Total current liabilities                          13,765         15,030

Long-term debt and capital lease obligations              5,760          6,400
Other long-term liabilities                               1,898          1,874
                                                     ----------      ---------
      Total liabilities                                  21,423         23,304
                                                     ----------      ---------
Stockholders' Equity:
   Common Stock, $.01 par value; 125,000,000
     shares authorized; 64,202,641 and
     64,200,941 shares issued and outstanding
     at March 31, 2001 and December 31, 2000                642            642
   Additional paid-in capital                           301,618        301,168
   Note received in connection with sale of
     Common Stock and deferred compensation
     applicable to Common Stock                          (1,601)        (1,672)
   Accumulated deficit                                 (272,594)      (264,333)
   Accumulated other comprehensive loss                      (1)            (3)
                                                     ----------      ---------
      Total stockholders' equity                         28,064         35,802
                                                     ----------      ---------
      Total liabilities and stockholders' equity     $   49,487      $  59,106
                                                     ==========      =========


        See accompanying notes to the consolidated financial statements.


                                       2


<PAGE>


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


                                                    Three Months Ended March 31,
                                                    ----------------------------
                                                        2001           2000
                                                    ------------   -------------
                                                            (Unaudited)
Revenues:
   Product sales -
     Related parties                                $    3,302     $     3,622
   Contracts and fees -
     Related parties                                     1,028           2,754
     Others                                                651           1,034
                                                    ----------     -----------
     Total revenues                                      4,981           7,410

Costs and expenses:
   Research and development                              3,074           3,901
   Cost of goods sold                                    3,305           3,622
   Selling, general and administrative                   4,036           4,615
                                                    ----------     -----------
     Total costs and expenses                           10,415          12,138

Loss from operations before equity
  in losses of joint ventures                           (5,434)         (4,728)

Equity in losses of joint ventures                      (2,959)         (3,713)

Loss from operations                                    (8,393)         (8,441)

Other income (expense):
   Interest income and other                               374            602
   Interest expense                                       (242)          (460)
                                                    ----------     ----------
Net loss                                                (8,261)        (8,299)

Dividends on preferred stock                                --            (48)

Net loss applicable to common stock                 $   (8,261)    $   (8,347)
                                                    ==========     ==========
Basic and diluted loss per common share             $     (.13)    $     (.14)
                                                    ==========     ==========
Weighted average number of common shares
  used in computation of basic and diluted
  loss per common share                                 64,202         58,183
                                                    ==========     ==========



        See accompanying notes to the consolidated financial statements.


                                       3


<PAGE>


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


                                                    Three Months Ended March 31,
                                                    ----------------------------
                                                        2001            2000
                                                    ------------   -------------
                                                             (Unaudited)
Operating activities:
   Net loss                                         $    (8,261)   $   (8,299)
   Adjustments to reconcile net loss to cash
    used in operating activities:
      Depreciation and amortization                         917         1,077
      Compensation for services paid in stock,
        options or warrants                                 533         2,127
      Equity in losses of joint ventures                  2,959         3,713
      Other adjustments to net loss                         (21)          (21)
      Deferred revenue                                       --          (899)
      Changes in assets and liabilities:
        Receivables from joint ventures                    (790)       (6,348)
        Inventory                                          (867)        4,125
        Other current assets                               (446)          (55)
        Accounts payable                                   (417)         (185)
        Payable to joint ventures                          (274)         (517)
        Accrued expenses                                   (567)         (749)
                                                     -----------    ----------
         Net cash (used in)
          operating activities                           (7,234)       (6,031)
                                                     -----------    ----------
Investing activities:
   Purchases of short-term investments                   (2,471)       (2,000)
   Maturities and sales of short-term investments         6,852         2,997
   Acquisition of property                                 (173)          (74)
   Investment in joint ventures                          (2,918)       (3,495)
   Distributions from joint ventures                        143           591
   Patent application costs                                 (63)         (110)
   Other long-term assets                                   (30)         (507)
                                                    -----------    ----------
         Net cash provided by (used in)
          investing activities                            1,340        (2,598)
                                                    -----------    ----------
Financing activities:
   Proceeds from borrowings                                  --         1,000
   Payments of borrowings                                  (647)         (645)
   Restricted cash                                           --         5,000
   Options and warrants exercised                             5         7,583
   Long-term obligations and other                           24          (112)
                                                    -----------    ----------
         Net cash provided by (used in)
          financing activities                             (618)       12,826

Net (decrease) increase in cash and cash equivalents     (6,512)        4,197
Cash and cash equivalents at beginning of period         24,197        16,091
                                                    -----------    ----------
Cash and cash equivalents at end of period          $    17,685    $   20,288
                                                    ===========    ==========


        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, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.

     The balance sheet at December 31, 2000 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, 2000.

     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. DermEquip is a special
purpose entity established to finance an expension 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 plc 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 months ended
March 31, 2001 and 2000 are as follows (in thousands):

                                                Three Months Ended March 31,
                                                ----------------------------
                                                    2001           2000
                                                ------------   -------------
Dermagraft Joint Venture
         Net sales                               $      904     $      732
         Cost of goods sold                           3,217          2,924
         Other costs and expenses                     3,124          3,550
         Net loss                                    (5,437)        (5,741)

NeoCyte Joint Venture
         Costs and expenses                      $      277     $    1,443
         Net loss                                      (277)        (1,443)


                                       5

<PAGE>


NOTE 3 - INVENTORIES

     Inventories consist of the following components as of March 31, 2001 and
December 31, 2000 (in thousands):

                                                    March 31,      December 31,
                                                      2001            2000
                                                  ------------    -------------

        Raw materials and supplies                $     5,086     $     5,021
        Work-in-process                                   980             683
        Finished goods                                    574              69
                                                  -----------     -----------

                                                  $     6,640     $     5,773
                                                  ===========     ===========

NOTE 4 - CAPITAL STOCK

     In May 1999, our Chairman and Chief Executive Officer exercised an employee
stock option. The purchase price was paid through the issue 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, the stock options
exercised through the issuance of the note were accounted for as variable stock
options which could result in significant increases and decreases in
compensation expense subject to variability in our stock price. In September
2000 the outstanding principal and interest of $1,265,000 was repaid by our
Chairman and Chief Executive Officer and we guaranteed a personal loan obtained
by the Chairman and Chief Executive Officer from a third party, for a like
amount. The third party loan was collateralized by the shares exercised through
the stock options, and its maintenance was dependent upon our share price
maintaining a certain value. Following a decline in our share price, in October
2000 we honored our guarantee to the third party and re-established a note from
our Chairman and Chief Executive Officer. The note receivable and accrued
interest of approximately $1.3 million at March 31, 2001 and at December 31,
2000, 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.
Both the basic and diluted loss per common share for the three month periods
ended March 31, 2001 and 2000 are based on the weighted average number of shares
of our common stock outstanding during the periods. Potentially dilutive
securities include options, warrants and restricted stock outstanding and debt
and convertible preferred stock, however, such securities have not been included
in the calculation of the diluted loss per share as their effect is
antidilutive. Since such securities are antidilutive, there is no difference
between basic and diluted loss per share for any of the periods presented. The
net loss applicable to common shares used in the calculation of basic and
diluted loss per common share for the three months ended March 31, 2000 includes
dividends of $48,000 accrued on our Convertible Series B Preferred Stock during
the same period. There were no such dividends accrued or paid in the three
months ended March 31, 2001.

NOTE 6 - RELATED PARTY TRANSACTIONS

     During the three month periods ended March 31, 2001 and 2000, 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 fifty percent interest in each of the
Dermagraft and NeoCyte Joint Ventures.

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

     Product sales to related parties includes 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, 2001 and 2000 such amounts
totaled (in thousands):

                                                       March 31,      March 31,
                                                         2001           2000
                                                       ---------      ---------
Products sold to the Dermagraft Joint Venture          $   3,302      $  3,622
Contract Revenues for activities performed             $     887      $  1,792



                                       6

<PAGE>


     As a purpose of the Dermagraft Joint Venture is to share the costs of
manufacturing Dermagraft and TransCyte, product sales to the Dermagraft Joint
Venture reflect our cost of goods sold for such products including period costs.
Period costs reflect overhead costs related to excess production capacity and
include rent, depreciation, and quality control, facilities, supplies and other
such costs to support, or related to, the excess production capacity. Due to
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
months ended March 31, 2001 and 2000, such write-downs by the Dermagraft Joint
Venture totaled (in thousands):

                                                       March 31,      March 31,
                                                         2001           2000
                                                       ---------      ---------
Dermagraft Joint Venture inventory write-downs         $   2,511      $   2,128

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

     We recognized amounts in contract revenues for research and development
activities performed for the NeoCyte Joint Venture. During the three months
ended March 31, 2001 and 2000, such amounts totaled (in thousands):

                                                       March 31,      March 31,
                                                         2001           2000
                                                       ---------      ---------
Contract Revenues for activities performed
  for NeoCyte Joint Venture                            $    141       $    962

     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 months ended March
31, 2001 and 2000, such costs charged totaled (in thousands):

                                                       March 31,      March 31,
                                                         2001           2000
                                                       ---------      ---------
Charged to Dermagraft and NeoCyte Joint Ventures       $   2,186      $   2,993



                                       7

<PAGE>



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

     This report may contain predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties. This outlook
represents our current judgment on the future direction of our business. Such
risks and uncertainties could cause actual results to differ materially from any
future performance suggested below. 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.

     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
tissue-engineered 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
human collagen and our nutrient solution, NouriCel, in development for aesthetic
and reconstructive applications.

     Since 1996 we have shared in a joint venture, the Dermagraft Joint Venture,
with Smith & Nephew plc for the worldwide commercialization of Dermagraft in the
treatment of diabetic foot ulcers. In 1998, we expanded the Dermagraft Joint
Venture to include additional technology for the treatment of skin tissue wounds
and applications such as venous ulcers, pressure ulcers, and TransCyte for full
and partial-thickness burns. We received marketing approval for TransCyte in the
United States from the FDA in 1997, as a temporary covering for severe,
full-thickness, or third degree burns and for partial-thickness, or second
degree burns. Until September 1998, we marketed TransCyte for burns through a
direct sales force in the United States, however, subsequent to the expansion of
the Dermagraft Joint Venture in 1998, TransCyte was and will continue to be
marketed in the United States and throughout the rest of the world for burn and
other wound care applications under the Dermagraft Joint Venture.

     Dermagraft for the treatment of diabetic foot ulcers was approved for sale
in Canada and was introduced by the Dermagraft Joint Venture in the United
Kingdom and several other European countries in 1997. We also submitted a
Pre-market Approval, or PMA, application to the FDA for approval to market
Dermagraft for the treatment of diabetic foot ulcers in the United States. In
1998 the FDA decided the PMA application was not approvable without supportive
data from an additional controlled clinical trial. The additional clinical trial
began in late 1998, and in February 2000, the FDA approved an application for an
amendment to the Investigational Device Exemption, or IDE, for the trial. Based
on the data from the interim analysis, which we announced in December 1999, the
IDE was amended to revise the enrollment criteria and the statistical plan for
data analysis. The amended IDE allowed for the modification of the study
inclusion criteria to limit future enrollment to patients with ulcers of greater
than six weeks duration. In addition, the amended statistical plan allowed us to
integrate the interim analysis data from the clinical trial with additional data
generated subsequently from patients with ulcer duration of greater than six
weeks.

     By August of 2000, statistical significance was reached for the primary
endpoint in the additional trial in Dermagraft for the treatment of diabetic
foot ulcers and a PMA application was submitted to the FDA. The data
demonstrated that in difficult-to-heal chronic ulcers, with duration greater
than six weeks at the time of screening, Dermagraft healed significantly more
ulcers than the control treatment. In February 2001, we received a letter from
the FDA stating that the FDA had completed its initial review of the PMA
application and requesting clarification and additional information. We are
continuing to work with the FDA to provide the additional information requested.
In addition to the clinical trial, since October 1998 Dermagraft has been used
in the treatment of diabetic foot ulcers in the United States after the FDA
approved our application for a Treatment Investigational Device Exemption, or
Treatment IDE, allowing us to make Dermagraft for the treatment of diabetic foot
ulcers available to selected centers in the United States under an approved
clinical protocol. The Treatment IDE is a regulatory provision for devices that
permits companies to make available promising new products to patients with
serious diseases for which there is no satisfactory alternative, and also allows
companies to recover the costs of manufacturing and distributing the product.

     As a result of delays in the commerical introduction of Dermagraft in the
United States, in 2000 we agreed with Smith & Nephew to restructure specified
payments associated with the Dermagraft Joint Venture. The FDA's request for an
additional clinical trial substantially increased the partner's investments
necessitating the


                                       8

<PAGE>


restructuring. The objective of the restructuring was to defer the potential
payment of specified milestones by Smith & Nephew while providing us a royalty
stream and an opportunity to increase our long-term return from the venture.

     In addition to the Dermagraft Joint Venture, since 1994 we have shared in a
separate joint venture with Smith & Nephew, the NeoCyte Joint Venture, for the
worldwide development, manufacture and marketing of human tissue engineered
cartilage for orthopedic applications. We are sharing equally with Smith &
Nephew in the expenses of the joint venture. During 2000, an IDE was submitted
to the FDA requesting approval to begin pilot human clinical studies of human
tissue engineered cartilage. 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 preclinical studies. We continue to work closely
with the FDA to address these issues.

     In May 1999, we entered into a strategic alliance with Inamed Corporation
for the development and marketing of several of our human-based,
tissue-engineered products for aesthetic and certain reconstructive
applications. Under the related agreements, Inamed licensed rights to further
develop, manufacture and sell certain of our tissue-engineered products such as
human collagen for use in wrinkle correction and as a bulking agent for the
treatment of urinary incontinence, cartilage for plastic and reconstructive
surgery, and extracellular matrix for use in breast reconstruction and other
soft tissue augmentation. We received certain payments in 1999 and will be
entitled to royalties on the future sales of our tissue-engineered products by
Inamed. We will be responsible for the development of the products and the
related manufacturing processes while Inamed will be responsible for clinical
and regulatory activities. We, or an affiliate, have the right to manufacture
the products developed for Inamed.

     In September 2000, we signed a license and supply agreement with Biozhem
Cosmeceuticals, Inc. Under the agreement, we granted a license to use and will
sell NouriCel to Biozhem. NouriCel is a patent-pending by-product of our tissue
engineering processes, to be used in Biozhem's branded skin care products. As
well as a selling price for sales of NouriCel to Biozhem, we will be entitled to
specified milestone payments and future royalties on sales of Biozhem's products
in the skin care marketplace. Additionally, we were granted warrants to purchase
Biozhem common stock at specified prices in future time periods.

     In October 2000, we signed a license and supply agreement with SkinMedica,
Inc. Under this agreement, we granted a license to use and will sell NouriCel to
SkinMedica, to be used in SkinMedica's branded skin care products sold through a
network of dermatologists and plastic surgeons. We will be entitled to a selling
price for sales of NouriCel to SkinMedica and to specified milestone payments
and future royalties on sales of SkinMedica's products in the skin care
marketplace. We were also granted warrants to purchase SkinMedica common stock
at specified prices in future time periods.

     In September 2000, we were awarded a $2 million Advanced Technology Program
grant from the National Institute of Standards and Technology, or NIST, for
development of a tissue-engineered Ischemic Repair Device to induce
vascularization of and restore function to tissues and organs with reduced blood
supplies, or ischemia. The grant commenced in 2000 and is payable over three
years. This grant follows a $2 million award in October 1997 from NIST to fund
collaborative cardiovascular research with the University of California, San
Diego that began in 1998 and will be completed in the second quarter of 2001.

     Also in September 2000, we were awarded a grant in excess of $800,000 from
the National Institutes of Health and the National Institute of Dental and
Craniofacial Research to develop tissue-engineered cartilage for the treatment
of temporomandibular disorders. Payments under the grant are payable over four
years.

     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 partners are structured to share some or all of these
costs as well as to provide us with income from milestone payments, royalties
and licensing fees for the respective products.


                                       9

<PAGE>


Results of Operations
---------------------

     Product sales were $3,302,000 for the three months ended March 31, 2001,
which compared to sales of $3,622,000 in the corresponding period of 2000.
Product sales are to related parties and reflect sales of Dermagraft and
TransCyte to the Dermagraft Joint Venture at cost.

     Revenues from contracts and fees were $1,679,000 for the three months ended
March 31, 2001, compared to $3,788,000 for the corresponding period of 2000.
This decrease is partially due to the recognition of $899,000 in the three
months ended March 31, 2000 in licensing payments previously received from
Inamed in 1999. No such payments were recognized in 2001. Other contract and fee
revenues are principally for research and development activities performed for
the Dermagraft and NeoCyte Joint Ventures. Revenues for research and development
were reduced by $1,726,000 in the first quarter of 2001 compared to 2000,
primarily due to the completion of the additional clinical trial of Dermagraft
in the treatment of diabetic foot ulcers. An increase of $516,000 in grant
revenue partially offset the decrease in revenue from research and development
activities performed for the Joint Ventures.

     Research and development expenditures decreased to $3,074,000 in the three
months ended March 31, 2001, from $3,901,000 in the corresponding period of
2000. The decrease primarily reflects expenditure reductions of $763,000 due to
the completion of the additional clinical trial of Dermagraft in the treatment
of diabetic foot ulcers and a decrease of $902,000 in research and development
expenditures for the NeoCyte Joint Venture. These reductions are partially
offset by an increase of $431,000 in research and development costs for work
performed under research grants and $327,000 related to the development of
cosmeceutical products.

     Cost of goods sold of $3,305,000 for the three months ended March 31, 2001
decreased from $3,622,000 in the corresponding period of 2000. Cost of goods
sold represents the cost of TransCyte and Dermagraft sold to the Dermagraft
Joint Venture. As a result of the FDA's decision to require additional clinical
data for Dermagraft in the treatment of diabetic foot ulcers, we are continuing
to incur significant costs associated with excess production capacity within our
manufacturing facility. 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. For the three-month period ended March 31, 2001
such write-downs were $2,511,000 compared to $2,128,000 in the corresponding
period of 2000. 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.

     Selling, general and administrative costs were $4,036,000 for the three
months ended March 31, 2001 as compared to $4,615,000 in the corresponding
period of 2000. During the three month period ended March 31, 2001, we recorded
expense of $444,000, compared to $1,991,000 in the corresponding period of 2000,
related to compensation expense for a variable stock option. These amounts are
non-cash transactions and relate to stock options exercised in 1995 by our
Chairman and Chief Executive Officer for which we issued a loan that is being
accounted for as a variable stock option, which can result in significant
increases and decreases in compensation expense subject to the variability of
our stock price.

     The decrease in non-cash expense is offset by an increase of $968,000 in
other selling, general and administrative costs for the three months ended March
31, 2001 compared to the same period in 2000. This increase is primarily related
to salary expenses and one-time recruitment and relocation costs of $609,000
resulting from senior management additions that were made in 2001 and the fourth
quarter of 2000. In addition, outside service costs for consultants, legal
services and accounting services increased by $202,000 as a result of planning
and business development initiatives that were undertaken in the first quarter
of 2001. These initiatives and their related costs are expected to continue for
the balance of 2001.

     Equity in losses of joint ventures were $2,959,000 for the three month
period ended March 31, 2001 and $3,713,000 for the corresponding period in 2000.
These amounts represent our share of losses of the Dermagraft and NeoCyte Joint
Ventures. The joint venture losses were lower in 2001 due to a $1,893,000
savings in research and development costs. This reduction in research and
development costs is primarily associated with the completion of the additional
clinical trial of Dermagraft in the treatment of diabetic foot ulcers and
decreased spending by the NeoCyte Joint Venture. Higher selling and marketing
costs partially offset the decrease in research and development costs.


                                       10

<PAGE>


     The equity in losses of joint ventures includes costs incurred by us and
charged to the Dermagraft and NeoCyte Joint Ventures totaling $2,186,000 for the
three-month period ended March 31, 2001 and $2,993,000 for the three-month
period ended March 31, 2000.

     Interest income and other was $374,000 in the three months ended March 31,
2001, as compared to $602,000 in the corresponding period of 2000. The decrease
primarily results from the reduction of interest earning assets reflected in the
consolidated balance sheets.

     Interest expense was $242,000 in the three months ended March 31, 2001 as
compared to $460,000 in the corresponding period of 2000. The decrease in
interest expense primarily reflects the repayment of a $10 million loan from
Smith & Nephew in September 2000, partially offset by $5.4 million of borrowings
from the Dermagraft Joint Venture.

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, government grants, product sales and lease financing transactions.

     Cash and cash equivalents at March 31, 2001 decreased by approximately $6.5
million from December 31, 2000. Major outflows included the use of $7.2 million
to fund operations, a net investment of $2.8 million to support the Dermagraft
and NeoCyte Joint Ventures, $600,000 for payment of debt and $200,000 for
capital expenditures. These outflows have been partially offset by $4.3 million
in net proceeds from short-term investments.

     Receivables from joint ventures from December 31, 2000 to March 31, 2001
increased by $790,000, primarily as a result of the timing of payments.
Inventory increased by $867,000, largely as a result of collagen production in
2001. Long-term debt at March 31, 2001 decreased by $647,000 from December 31,
2000, primarily reflecting payments made under the Chase loan, a loan used by
DermEquip to purchase manufacturing assets. The timing of payments made to the
Dermagraft Joint Venture reduced payables by joint ventures by $274,000 during
the first quarter of 2001.

     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, and
expenditures for capital equipment and patents. 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. 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 and from other potential revenue sources. If, for any reason, Smith &
Nephew were to terminate the Dermagraft Joint Venture or, to a lesser extent,
the NeoCyte Joint Venture, we would experience a substantial increase in the
need for and use of our cash to support the commercialization and manufacture of
Dermagraft and TransCyte, or the development of orthopedic cartilage products.

     Our cash requirements are dependent upon a number of factors, including the
achievement and timing of regulatory approvals and third-party reimbursement,
the timing and expense of preclinical and clinical studies, sales and marketing
efforts by our partners, new technological innovations, market acceptance of our
products and potential products and the establishment of new strategic
alliances. We currently believe we have sufficient funds to support our planned
operations into the fiscal year 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 and Inamed. We may also
pursue additional public or private offerings of debt or equity securities.
Additional funding could potentially be obtained through new strategic alliances
or other collaborative arrangements, or through the extension 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


                                       11

<PAGE>


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.

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 certain 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, 2001.


                                       12

<PAGE>


                          PART II - OTHER INFORMATION

ITEM 5 - OTHER INFORMATION

FACTORS THAT MAY AFFECT FUTURE RESULTS

The following is a summary description of some of the many risks we face in our
business. You should carefully review these risks in evaluating our business and
the businesses of our subsidiaries. You should also consider the other
information described in this report.

RISKS RELATED TO OUR BUSINESS
-----------------------------

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. To March 31, 2001, we had
incurred cumulative net operating losses of $272.6 million. Our ability to
achieve profitability depends in part upon our ability to successfully
manufacture and market Dermagraft and TransCyte for skin ulcers and burns, and
to manufacture collagen and our nutrient solution for aesthetic applications. 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 MATERIALLY ADVERSELY
AFFECT YOUR INVESTMENT AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL.

     We expect our operating results to fluctuate from quarter to quarter 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.

IF OUR PRODUCTS FAIL IN CLINICAL STUDIES, WE WILL BE UNABLE TO OBTAIN FDA
APPROVAL AND WILL NOT BE ABLE TO SELL THOSE PRODUCTS.

     To sell our products that are under development, and our existing products
for additional applications, we must receive regulatory approvals. To obtain
those approvals, we must conduct clinical studies demonstrating that our
products are safe and effective, which can be expensive and time-consuming. We
may be unable to obtain FDA approval on a timely basis, if at all. If we cannot
obtain FDA approval for a product or any additional application of a product,
that product cannot be sold and revenues will suffer.

     Early in 1998, an FDA Advisory Panel recommended the FDA approve Dermagraft
for marketing in the United States for the treatment of diabetic foot ulcers.
The Advisory Panel's recommendation included certain conditions we would have
needed to satisfy after the commercial introduction of Dermagraft. However, in
June 1998, the FDA requested we complete an additional controlled clinical trial
to support our application for approval to market Dermagraft for the treatment
of diabetic foot ulcers. The clinical trial began in late 1998 and the results
of a planned interim analysis of data from this trial were announced in December
1999. These data showed that, although statistical significance was not achieved
at the interim analysis, Dermagraft was healing more ulcers than the control
treatment in those diabetic foot ulcers having a duration of greater than six
weeks. In February 2000, the FDA approved an application for an amendment to the
Investigational Device Exemption, or IDE, for the clinical trial of Dermagraft
in the treatment of diabetic foot ulcers. Based on the data presented to the FDA
in December 1999, the IDE has been amended to revise the enrollment criteria and
the statistical plan for data analysis. Enrollment in this additional clinical
trial has been completed and we submitted our PMA application for approval of
Dermagraft for the treatment of diabetic foot ulcers to the FDA in August 2000.
In February 2001, we received a letter from the FDA stating that the FDA has
completed its initial review of the PMA application and requesting clarification
and additional information. We are continuing to work with the FDA to provide
the additional information requested. However, the FDA may never approve our
application.


                                       13

<PAGE>


     Dermagraft may not be successful in future clinical trials. Current or
future clinical studies of Dermagraft or our other products 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 Dermagraft, or any of our other
products, are safe and effective after we complete clinical trials.

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. Potential sources of additional funds include
payments from our alliances with Smith & Nephew and Inamed Corporation. If, for
any reason, Smith & Nephew were to terminate the Dermagraft Joint Venture or, to
a lesser extent, the NeoCyte 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 Dermagraft and TransCyte products or
the development of our orthopedic cartilage 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.

     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.

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.

     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. Sales of our products may be
adversely affected by:

     o their respective cost;

     o concerns related to efficacy;

     o the effectiveness of alternative methods of treatment; and

     o the insufficiency of third-party reimbursement.

     Any future negative events or other unfavorable publicity involving the use
of our products could also adversely affect 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. To date it has not achieved widespread commercial acceptance in the
United States. Similarly, Dermagraft has only been sold internationally and may
never achieve commercial acceptance in the United States even if it receives FDA
approval.


                                       14


<PAGE>


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 Corporation and others to market
our products both domestically and internationally. Our success in generating
market acceptance of Dermagraft and TransCyte will depend on the marketing
efforts of Smith & Nephew. Market acceptance of human collagen will depend in
part on the marketing efforts of Inamed Corporation. We cannot control the
amount and timing of resources that Smith & Nephew, Inamed or others may devote
to marketing and selling our products. In addition, the Dermagraft and NeoCyte
Joint Venture agreements provide that they may be terminated before their
expiration under certain circumstances that are outside our control. If Smith &
Nephew does not perform its obligations as expected or if Smith & Nephew has a
strategic shift in its business focus, it would be difficult for us to
successfully complete the development efforts of the Dermagraft Joint Venture
and NeoCyte Joint Venture. 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 collagen 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.

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:

     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 technology 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 enormous 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.


                                       15

<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 ADVERSELY AFFECT OUR POTENTIAL FUTURE PROFITABILITY.

     Although most of the raw materials used in the manufacture of our
Dermagraft and TransCyte products are available from more than one supplier,
changes in certain 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 our Dermagraft and TransCyte 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. Similarly, the synthetic mesh
framework used by us in the manufacture of TransCyte is available from only one
FDA-qualified manufacturing source. 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 the current suppliers.

     Interruptions in supplies for the manufacture of our Dermagraft and
TransCyte products may occur in the future and we may have to obtain substitute
vendors for these materials. Any significant supply interruption would delay our
clinical trials as well as our product development and marketing 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 would have an
adverse effect on 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, only
TransCyte has been approved for commercial sale and only Dermagraft has advanced
to clinical trials in the United States. However, Dermagraft still requires
further marketing approvals from the FDA, and all of our other products are at
earlier stages of research, development and testing. These products, including
additional indications for Dermagraft and TransCyte, will require significant
additional research and development, as well as extensive preclinical 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; or

     o our products fail to achieve market acceptance because of competing
       technologies and products.

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 development and commercial partners are subject to extensive
government regulation. The FDA and other state and foreign regulatory
authorities require rigorous preclinical testing, clinical trials and other
product approval procedures for our products. Numerous regulations also govern
the manufacturing, safety, labeling, storage, record keeping, reporting and
marketing of our 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


                                       16


<PAGE>



equivalent state or foreign authorities. If we obtain regulatory product
approval, the approval may limit the uses for which we may market the product.

     For example, in June 1998, the FDA indicated that our marketing application
for Dermagraft for the treatment of diabetic foot ulcers was not approvable
without supportive data from an additional clinical trial. We reached the
primary endpoint in the additional clinical trial and submitted a PMA to the FDA
in August, 2000, however, if we do not subsequently receive FDA approval it will
prevent or at least delay sales of Dermagraft in the United States.

     In addition, although the FDA has classified TransCyte as a medical device,
the state of California and the state of New York have notified us that we must
register as a tissue bank to manufacture or distribute TransCyte 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 TransCyte. In June 1997, we submitted a petition to the FDA requesting an
advisory opinion that the FDA's federal regulation of this product as a medical
device preempts conflicting New York laws from regulating the product as banked
human tissue. In January 2000, the FDA denied our petition to preempt applicable
New York laws, determining that state legislation would prevail. In view of the
FDA's decision, the Company has initiated discussions at the individual state
level, beginning with the state of California in an attempt to resolve this
matter. Unless the outcome of these discussions concludes otherwise, we and our
customers will be subjected to a costly new layer of regulation. 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 in California and New York under tissue
banking licenses. Due to the similarities of our products, regulations
applicable to TransCyte are also expected to apply to our Dermagraft product and
potentially to our NeoCyte product as well.

     In 2000, an IDE was submitted to the FDA requesting approval to begin pilot
human clinical studies using tissue-engineered cartilage 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
preclinical studies.

     After regulatory approval is obtained, our product, its 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 the manufacturing facility early in 1998 in
conjunction with our application for the approval of Dermagraft for the
treatment of diabetic foot ulcers, the FDA notified us of numerous objectionable
conditions under a Form FDA 483 list of observations. These observations
concerned our manufacturing processes and systems for Dermagraft and TransCyte.
In March 1998, the FDA issued a warning letter requiring us to investigate and
correct the conditions identified by the FDA. In September 1998, we successfully
completed a re-inspection by the FDA of our manufacturing facility and quality
systems. 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 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. In some cases, such payors may refuse to provide any coverage for
uses of approved products for indications that the FDA has not granted marketing
approval. Initiatives to reform healthcare delivery are increasing these cost
containment efforts. As managed care organizations continue to


                                       17


<PAGE>


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 from universities, research
institutions and pharmaceutical, chemical and biotechnology companies is
intense. Many competitors or potential competitors have greater financial
resources, research and development capabilities and manufacturing and marketing
experience than we do. In general, the first biomedical product to be
commercialized for a particular therapeutic indication is often at a significant
competitive advantage relative to later entrants to the market. Accordingly, the
relative speed with which we can develop products, complete clinical trials,
obtain regulatory approvals and develop commercial manufacturing capability may
affect our competitive position.

     Other 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 to compete successfully.

IF WE ARE UNABLE TO ATTRACT KEY PERSONNEL AND ADVISORS OR IF OUR CURRENT
MANAGEMENT AND TECHNICAL PERSONNEL LEAVE THE COMPANY, IT MAY ADVERSELY AFFECT
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. In particular, if we lose the
services of either Arthur J. Benvenuto, our Chairman and Chief Executive
Officer, or Dr. Gail K. Naughton, our President, it will limit our ability to
achieve our business objectives and could make it difficult to raise additional
funds or to attract partners.

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 adverse 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. Such insurance can
be expensive and difficult to obtain. Adequate insurance coverage may not be
available in the future at an acceptable cost, if at all, or in sufficient
amounts to protect us against any such liability. 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 well-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.


                                       18


<PAGE>


ADDITIONAL RISKS
----------------

OUR STOCK PRICE COULD CONTINUE TO BE VOLATILE AND ANY INVESTMENT COULD SUFFER A
DECLINE IN VALUE, ADVERSELY AFFECTING OUR ABILITY TO RAISE ADDITIONAL CAPITAL
WHICH COULD IN TURN DELAY COMMERCIALIZATION OF OUR PRODUCTS.

     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 2001, 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 preclinical and clinical trials;

     o new technological innovations;

     o developments concerning technology rights;

     o litigation and related developments; and

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

     Fluctuations in our financial performance from period to period, the
issuance of analysts' reports and general industry and market conditions also
tend to have a significant impact on the market price of our common stock.

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 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 then-current
market price. These provisions also may limit our stockholder's 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.


                                       19

<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 10,
               Shareholder Services, L.L.C. and Advanced Tissue   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.

</TABLE>

(b)   Reports on Form 8-K

         None

                                   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 8, 2001                             /s/ Arthur J. Benvenuto
      --------------------                      -------------------------------
                                                Arthur J. Benvenuto
                                                Chairman of the Board, Chief
                                                 Executive Officer


Date:    May 8, 2001                             /s/ Nikhil A. Mehta
      --------------------                      -------------------------------
                                                Nikhil A. Mehta
                                                Senior Vice President, Finance
                                                 and Chief Financial Officer



                                       21