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 September 30, 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 November 9, 2001 was 73,146,153.


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

               FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001


INDEX
-----


Part I - Financial Information                                            Page
------------------------------                                            ----
Item 1 - Financial Statements

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

         Consolidated Balance Sheets
           September 30, 2001 and December 31, 2000....................     2

         Consolidated Statements of Operations
           Three and Nine Months Ended September 30, 2001 and 2000....      3

         Consolidated Statements of Cash Flows
           Nine Months Ended September 30, 2001 and 2000..............      4

         Notes to the Consolidated Financial Statements...............     5-8

Item 2 - Management's Discussion and Analysis of Financial
           Condition and Results of Operations.......................      9-14

Item 3 - Quantitative and Qualitative Disclosures About Market Risk..       15

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

Item 5 - Other Information...........................................     16-22

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

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



<PAGE>


                                        1
                         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 plc. 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)

<TABLE>
<CAPTION>


                                                              September 30,         December 31,
                                                                  2001                  2000
                                                              -------------         ------------
                                                               (Unaudited)
<S>                                                           <C>                   <C>

     ASSETS
Current assets:
   Cash and cash equivalents                                  $     3,990           $   24,197
   Short-term investments                                              --                6,854
   Receivable from joint ventures                                   1,389                1,474
   Milestone payment receivable                                     5,000                   --
   Inventories                                                      9,366                5,773
   Other current assets                                             1,709                1,814
                                                              -----------           ----------
       Total current assets                                        21,454               40,112

Property - net                                                     11,807               13,681
Patent costs - net                                                  2,486                2,320
Other assets                                                        2,773                2,993
                                                              -----------           ----------
       Total assets                                           $    38,520           $   59,106
                                                              ===========           ==========

     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                           $       906           $    1,075
   Payable to joint ventures                                          276                  565
   Accrued expenses                                                 5,811                5,391
   Current portion of long-term debt and capital
     lease obligations                                              7,975                7,999
                                                              -----------           ----------
       Total current liabilities                                   14,968               15,030

Long-term debt and capital lease obligations                        4,480                6,400
Other long-term liabilities                                         1,944                1,874
                                                              -----------           ----------
       Total liabilities                                           21,392               23,304
                                                              -----------           ----------

Stockholders' Equity:
   Common Stock, $.01 par value; 125,000,000 shares
     authorized; 64,227,274 and 64,200,941 shares issued
     and outstanding at September 30, 2001 (unaudited)
     and December 31, 2000                                            642                  642
   Additional paid-in capital                                     301,486              301,168
   Note received in connection with sale of Common Stock
     and deferred compensation applicable to Common Stock          (1,369)              (1,672)
   Accumulated deficit                                           (283,631)            (264,333)
   Accumulated other comprehensive loss                                --                   (3)
                                                              -----------           ----------
       Total stockholders' equity                                  17,128               35,802
                                                              -----------           ----------
       Total liabilities and stockholders' equity             $    38,520           $   59,106
                                                              ===========           ==========

</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                  Nine Months Ended
                                                              September 30,                      September 30,
                                                      ----------------------------       -----------------------------
                                                         2001              2000              2001             2000
                                                      ----------        ----------       ------------     ------------
                                                               (Unaudited)                        (Unaudited)
<S>                                                   <C>               <C>              <C>              <C>
Revenues:
   Product sales
     Related parties                                  $    3,230        $    2,879       $    10,058      $     9,497
     Others                                                  790                --             1,228               --
   Contracts and fees
     Related parties                                         959             1,704             3,109            6,592
     Dermagraft approval milestone                         5,000                --             5,000               --
     Others                                                  406             1,197             1,355            3,364
                                                      ----------        ----------       -----------      -----------
     Total revenues                                       10,385             5,780            20,750           19,453
                                                      ----------        ----------       -----------      -----------
Costs and expenses:
   Cost of goods sold                                      4,032             2,879            12,064            9,497
   Research and development                                2,555             2,659             7,967           10,259
   Selling, general and administrative                     2,487             2,375            10,762           10,554
                                                      ----------        ----------       -----------      -----------
     Total costs and expenses                              9,074             7,913            30,793           30,310
                                                      ----------        ----------       -----------      ------------
Income (loss) from operations before equity in
  losses of joint ventures                                 1,311            (2,133)          (10,043)         (10,857)

Equity in losses of joint ventures                        (2,883)           (3,137)           (9,212)         (10,392)
                                                      ----------        ----------       -----------      -----------
Loss from operations                                      (1,572)           (5,270)          (19,255)         (21,249)

Other income (expense):
   Interest income and other                                  18                65               507            1,241
   Interest expense                                         (134)             (308)             (550)          (1,232)
                                                      ----------        ----------       -----------      -----------
Net loss                                                  (1,688)           (5,513)          (19,298)         (21,240)

Dividends on preferred stock                                  --                --                --              (48)
                                                      ----------        ----------       -----------      -----------
Net loss applicable to common stock                   $   (1,688)       $   (5,513)      $   (19,298)     $   (21,288)
                                                      ==========        ==========       ===========      ===========
Basic and diluted net loss per common share           $     (.03)       $     (.09)      $      (.30)     $      (.36)
                                                      ==========        ==========       ===========      ===========
Weighted average number of common shares used in
  the computation of basic and diluted loss per
  share                                                   64,222            60,066            64,209           59,367
                                                      ==========        ==========       ===========      ===========

</TABLE>


        See accompanying notes to the consolidated financial statements.


                                       3


<PAGE>


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


<TABLE>
<CAPTION>

                                                                                 Nine Months Ended September 30,
                                                                               -----------------------------------
                                                                                    2001                 2000
                                                                               --------------       --------------
                                                                                           (Unaudited)
<S>                                                                             <C>                  <C>
Operating activities:
   Net loss                                                                     $   (19,298)         $   (21,240)
   Adjustments to reconcile net loss to cash used in
    operating activities:
      Depreciation and amortization                                                   2,760                2,943
      Compensation for services paid in stock, options or warrants                      581                2,911
      Equity in losses of joint ventures                                              9,212               10,392
      Other adjustments to net loss                                                     (64)                 (25)
      Deferred revenue                                                                   --               (2,696)
      Changes in assets and liabilities:
        Receivables from joint ventures                                                  85                  646
        Milestone payment receivable                                                 (5,000)                  --
        Inventories                                                                  (3,593)              (1,398)
        Other current assets                                                            105                  511
        Accounts payable                                                               (169)                (319)
        Payable to joint ventures                                                      (289)              (3,103)
        Accrued expenses                                                                420                 (615)
                                                                                -----------          -----------
         Net cash used in operating activities                                      (15,250)             (11,993)
                                                                                -----------          -----------
Investing activities:
   Purchases of short-term investments                                               (3,462)              (4,959)
   Maturities and sales of short-term investments                                    10,316               10,989
   Acquisition of property                                                             (820)                (769)
   Investment in joint ventures                                                      (9,356)             (15,262)
   Distributions from joint ventures                                                    737                2,767
   Patent application costs                                                            (234)                (302)
   Other long-term assets                                                              (352)                 384
                                                                                -----------          -----------
         Net cash used in investing activities                                       (3,171)              (7,152)
                                                                                -----------          -----------
Financing activities:
   Proceeds from borrowings                                                              --                7,612
   Payments of borrowings                                                            (1,944)              (5,988)
   Restricted cash                                                                       --                5,000
   Net proceeds from sale of common stock                                                --               20,000
   Payment of note receivable and interest - common stock                                --                1,265
   Options and warrants exercised                                                        87                7,772
   Long-term obligations and other                                                       71                1,691
                                                                                -----------          -----------
          Net cash (used in) provided by financing activities                        (1,786)              37,352
                                                                                -----------          -----------
Net (decrease) increase in cash and cash equivalents                                (20,207)              18,207
Cash and cash equivalents at beginning of period                                     24,197               16,091
                                                                                -----------          -----------
Cash and cash equivalents at end of period                                      $     3,990          $    34,298
                                                                                ===========          ===========

</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 or nine-month periods ended
September 30, 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 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.

     In June, 2001, the FASB issued Statements of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets". Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. We do not expect the adoption of SFAS No. 141 and No. 142 to have a
material impact on our financial statements.

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 and
nine-month periods ended September 30, 2001 and 2000 are as follows (in
thousands):

                                     Three Months Ended      Nine Months Ended
                                        September 30,          September 30,
                                   ----------------------  ---------------------
                                     2001          2000      2001         2000
                                   --------      --------  --------    ---------
Dermagraft Joint Venture
     Net sales                     $  1,144      $  1,384  $  2,954    $  3,112
     Cost of goods sold               3,209         3,565    10,436       9,920
     Other costs and expenses         3,154         2,936     9,406       9,713
     Net loss                        (5,219)       (5,117)  (16,888)    (16,521)

NeoCyte Joint Venture
     Costs and expenses           $     307      $    886  $    832    $  3,567
     Net loss                          (307)         (886)     (832)     (3,567)


                                       5

<PAGE>


NOTE 3 - INVENTORIES

     Inventories consist of the following components as of September 30, 2001
and December 31, 2000 (in thousands):

                                            September 30,       December 31,
                                               2001                2000
                                           ----------------    --------------

     Raw materials and supplies            $     5,336          $    5,021
     Work-in-process                             1,180                 683
     Finished goods                              2,850                  69
                                           -----------          ----------
                                           $     9,366          $    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 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 September 30, 2001 and approximately $1.3 million
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, in
periods in which they are dliutive. Both the basic and diluted loss per common
share for the three and nine-month periods ended September 30, 2001 and
September 30, 2000 are based on the weighted-average number of shares of our
common stock outstanding during these periods. The net loss applicable to common
stock used in the calculation of basic and diluted net loss per common share for
the nine-month period ended September 30, 2000 includes dividends of $48,000
accrued on our Convertible Series B Preferred Stock. There were no such
dividends accrued or paid in the three months ended September 30, 2000 or in the
nine months ended September 30, 2001.

NOTE 6 - RELATED PARTY TRANSACTIONS

     During the three and nine-month periods ended September 30, 2001 and
September 30, 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 50%
interest in each of the Dermagraft and NeoCyte Joint Ventures and share equally
with Smith & Nephew in the expenses and revenues, except we are funding the
first $6 million of expenses for conducting clinical trials and for regulatory
support of Dermagraft and TransCyte in the treatment of venous and pressure
ulcers.

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. 2001 contract revenue includes the recognition in September of a $5
million milestone payment on the approval of Dermagraft in the treatment of
diabetic foot ulcers. During the three and nine-month periods ended September
30, 2001 and September 30, 2000, product sales and contract revenue amounts
totaled (in thousands):

<TABLE>
<CAPTION>

                                                           Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                       --------------------------   -------------------------
                                                         2001              2000       2001             2000
                                                       --------          --------   -------          --------
<S>                                                    <C>               <C>        <C>              <C>
Products sold to the Dermagraft Joint Venture          $  3,230          $  2,879   $10,058          $  9,497
Contract revenues for activities performed             $  5,829          $  1,086   $ 7,729          $  4,160

</TABLE>


                                       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, 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
and nine-month periods ended September 30, 2001 and September 30, 2000, such
write-downs by the Dermagraft Joint Venture totaled (in thousands):

<TABLE>
<CAPTION>

                                                           Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                       --------------------------   -------------------------
                                                         2001              2000       2001             2000
                                                       --------          --------   -------          --------
<S>                                                    <C>               <C>        <C>              <C>
Dermagraft Joint Venture inventory write-downs         $  2,075          $  2,681   $ 7,480          $  7,814

</TABLE>


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

     We recognize amounts in contract revenues for research and development
activities performed for the NeoCyte Joint Venture. During the three and
nine-month periods ended September 30, 2001 and September 30, 2000, such amounts
totaled (in thousands):

<TABLE>
<CAPTION>

                                                           Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                       --------------------------   -------------------------
                                                         2001              2000       2001             2000
                                                       --------          --------   -------          --------
<S>                                                    <C>               <C>        <C>              <C>
Contract revenues for activities performed             $    130          $    619   $   380          $  2,433

</TABLE>

     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 and nine-month
periods ended September 30, 2001 and September 30, 2000, such costs charged
totaled (in thousands):

<TABLE>
<CAPTION>

                                                           Three Months Ended           Nine Months Ended
                                                              September 30,               September 30,
                                                       --------------------------   -------------------------
                                                         2001              2000       2001             2000
                                                       --------          --------   -------          --------
<S>                                                    <C>               <C>        <C>              <C>
Charged to Dermagraft and NeoCyte Joint Ventures       $  2,883          $  2,690   $ 7,681          $  8,399

</TABLE>


                                       7

<PAGE>


NOTE 7 - SUBSEQUENT EVENTS

     On October 3, 2001, 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. An affiliate of Medtronic,
Medtronic Asset Management, Inc., simultaneously purchased $20 million of our
common stock at $3.72 per share, equal to the average closing price for the 12
days prior to the signing of the agreement. We agreed to register the resale of
the shares purchased with the Securities and Exchange Commission and granted
limited rights to purchase additional shares.

     In return for the purchase of our common stock, Medtronic obtained
specified rights including the following:

     o    a right of first refusal to collaborate in the further development and
          commercialization of the our epicardial angiogenesis therapy;
     o    a right of first offer/first negotiation to collaborate in other
          programs within the cardiovascular, neurological, endocrine and
          spinal areas where we elect not to pursue those programs internally;
          and
     o    a limited non-exclusive license to our intellectual property in the
          four therapeutic areas identified to facilitate Medtronic's
          exploration of cell and tissue-engineered technology in combination
          with Medtronic's medical devices.

     Separately, on November 2, 2001 we completed a private placement of
approximately $14.7 million in gross proceeds covering the sale of 3,534,335
shares of unregistered common stock at $4.15 per share to a group of
institutional investors led by the State of Wisconsin Investment Board, which
purchased 2,450,000 shares in this offering. Net proceeds from the private
placement were approximately $13.7 million.


                                       8


<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, some of which are
discussed in Part II - Item 5 of this report. 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-based collagen and our nutrient solution, NouriCel, 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 has been approved for
sale in Canada and was introduced by the Dermagraft Joint Venture in the United
Kingdom and several other European countries in 1997 after receipt of the
required regulatory approvals. Dermagraft was approved for sale in Canada in
January 2001 for the treatment of lower limb ulcers, partial and full-thickness
chronic wounds, the promotion of granulation tissue and the preparation of
wounds for skin grafting. In September 2001, we received a letter from the FDA
stating that the agency had approved the PMA for Dermagraft in the treatment of
chronic foot ulcers in patients with diabetes. This approval resulted in a $5
million milestone payment to us from Smith & Nephew, which was recognized into
revenue in September and received in October.

     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.

     In 2000 we restructured specified payments associated with the Dermagraft
Joint Venture. 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 with the
FDA to address these issues.


                                       9

<PAGE>


     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 specified reconstructive
applications. Under the related agreements, Inamed licensed rights to further
develop, manufacture and sell specified tissue-engineered products of ours such
as human-based 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 specified payments in 1999 and will be
entitled to royalties on potential future sales of our tissue-engineered
products by Inamed. Such sales may be subject to regulatory approval. Under our
agreement, we are responsible for the development of the products and the
related manufacturing processes, and we, or an affiliate, have the right to
manufacture the products. Inamed is responsible for clinical and regulatory
activities.

     In May 2001, McGhan Medical Corporation, a subsidiary of Inamed, filed a
PMA amendment with the FDA, seeking approval to change McGhan Medical's
injectable collagen from bovine to our human-based collagen. Clearance of the
PMA amendment filing by the FDA would permit McGhan to market an injectable form
of tissue-engineered, human-based collagen for wrinkle treatment. The
human-based collagen, once purified and sterilized, may be injected or implanted
into the human body, pending FDA clearance.

     In the second quarter of 2001, we commenced sales of our human-based
collagen to McGhan Medical for testing and inventory. In October 2001, Inamed
announced that the FDA had requested additional pre-clinical data and had asked
Inamed to conduct skin-test studies. Inamed has informed us that the additional
studies will commence in the fourth quarter of 2001. However, in 2002, sales of
collagen to McGhan are expected to decline, pending FDA approval.

     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 May 2001, the agreement was
amended to change specified commencement and termination provisions.

     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 was 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.

     In October 2001, 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. An affiliate of Medtronic
simultaneously purchased $20 million of our common stock at $3.72 per share, in
return for specified rights including a right of first refusal to collaborate in
the further development and commercialization of our epicardial angiogenesis
therapy, a right of first offer/first negotiation to collaborate in other
programs within the cardiovascular, neurological, endocrine and spinal areas
where we elect not to pursue those programs internally, and a limited
non-exclusive license to our intellectual property in the four therapeutic areas
identified to facilitate Medtronic's exploration of cell and tissue-engineered
technology in combination with Medtronic's medical devices.


                                       10


<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 the development of
NouriCel, 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.

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

     Product sales were $4,020,000 for the three months ended September 30,
2001, compared to sales of $2,879,000 in the corresponding period of 2000. For
the nine months ended September 30, 2001, product sales of $11,286,000 represent
an increase of $1,789,000 from sales of $9,497,000 in the same period of the
prior year. These increases primarily reflect $790,000 of collagen sales to
Inamed in the third quarter of 2001 and $1,228,000 of collagen sales to Inamed
in the nine months ended September 30, 2001. There were no collagen sales during
the same periods of 2000. We expect to continue sales of collagen for testing
and inventory in the fourth quarter of 2001, however in 2002 sales of collagen
to Inamed are expected to decline, pending FDA approval.

     Product sales to related parties primarily reflect sales of Dermagraft and
TransCyte to the Dermagraft Joint Venture at cost.

     Revenues from contracts and fees were $6,365,000 for the three months ended
September 30, 2001, compared to $2,901,000 for the same period in 2000. The
increase of $3,464,000 resulted from the $5 million Dermagraft PMA approval
milestone from Smith & Nephew that was recognized into revenue in September
2001. For the nine months ended September 30, 2001, such revenues decreased to
$9,464,000, from $9,956,000 in the corresponding period in the prior year.
Although revenue from related parties was $1,517,000 higher as a result of the
Dermagraft PMA approval milestone, this was partially offset by lower joint
venture contract revenues due to the completion of the additional clinical trial
of Dermagraft in the treatment of diabetic foot ulcers in 2000 and reduced
spending in the NeoCyte Joint Venture. The decrease in revenues from others is
primarily due to a $5 million licensing payment received from Inamed in 1999,
$2,696,000 of which was recognized in the first three quarters of 2000. No such
licensing payments were recognized in 2001. These revenue reductions were
partially offset by an increase in grant revenue of $92,000 in the third quarter
of 2001, and $680,000 for the nine months ended September 30, 2001, compared to
the prior year.

     Cost of goods sold of $4,032,000 for the three months ended September 30,
2001 represents an increase from $2,879,000 in the corresponding period of 2000;
while for the nine months ended September 30, 2001 cost of goods sold increased
to $12,064,000, from $9,497,000 in the same period in 2000. These increases
primarily reflect $1,451,000 in production costs for collagen in the second and
third quarters of 2001, while there were no comparable collagen costs in 2000.
The remaining cost of goods sold primarily represents the cost of TransCyte and
Dermagraft sold to the Dermagraft Joint Venture. As a result of the delay in
Dermagraft approval by the FDA, 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 September 30, 2001 such write-downs
were $2,075,000, compared to $2,681,000 in the corresponding period of 2000. For
the nine-month period ended September 30, 2001 such write-downs were $7,480,000,
compared to $7,814,000 in the same 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.

Research and development expenditures decreased to $2,555,000 in the three
months ended September 30, 2001, from $2,659,000 in the prior year; and to
$7,967,000 in the nine months ended September 30, 2001 from $10,259,000 in the
corresponding period of 2000. Of these reductions, the completion of the
additional clinical trial


                                       11


<PAGE>


of Dermagraft in the treatment of diabetic foot ulcers in 2000 accounts for
$228,000 in the third quarter and $1,534,000 for the first nine months of 2001,
compared to 2000. In addition, compared to 2000, there were reductions of
$433,000 in the third quarter and $1,965,000 for the first nine months of 2001,
in research and development expenditures for the NeoCyte Joint Venture.
Additionally, collagen product development costs included in research and
development decreased by $340,000 for the three-month period and $639,000 for
the nine-month period ended September 30, 2001, as our collagen product was
moved from product development into manufacturing. These reductions are
partially offset by an increase, over the prior year, of $93,000 for the third
quarter of 2001 and $684,000 for the nine months ended September 30, 2001, in
research and development costs related to the development of NouriCel.

     Selling, general and administrative costs were $2,487,000 for the three
months ended September 30, 2001 compared to $2,375,000 in the corresponding
period of 2000; and $10,762,000 for the nine months ended September 30, 2001
compared to $10,554,000 in the same period of 2000. During the three months and
nine months ended September 30, 2001, we recorded a credit of $798,000 and an
expense of $231,000, respectively, related to compensation expense for a
variable stock option. During the three and nine months ended September 30,
2000, we recorded a gain of $137,000 and expense of $2,448,000, respectively,
related to such variable stock option.

     The impact of the credit to non-cash expense is offset by an increase in
other selling, general and administrative costs of $773,000 for the three-month
period. Other general and administrative costs increased by $2,425,000 in the
nine-month period ended September 30, 2001, compared to the same period in 2000.
Salary and benefits expenses increased by $704,000 for the third quarter
compared to the same period in 2000, largely as a result of senior management
additions that were made in the fourth quarter of 2000 and the first quarter of
2001. Salary and benefits expenses for the nine months ended September 30, 2001
increased by $1,469,000 over the prior year, including $590,000 of recruitment
related costs. Outside service costs for consultants and professional services
decreased by $5,000 for the third quarter and increased by $520,000 for the nine
months ended September 30, 2001 over the prior year period, 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. Other increases in selling, general and
administrative expenses over 2000 are related to the building of infrastructure
in support of anticipated product launches.

     Equity in losses of joint ventures were $2,883,000 for the three-month
period ended September 30, 2001 and $3,137,000 for the corresponding period in
2000; and $9,212,000 for the nine-month period ended September 30, 2001 compared
to $10,392,000 for the same period in 2000. These amounts represent our share of
losses of the Dermagraft and NeoCyte Joint Ventures. Joint venture losses were
reduced in 2001 primarily as a result of reductions in research and development
expenditures. During the three-month period ended September 30, 2001 research
and development costs decreased by $727,000 from the comparable period in 2000,
and in the nine-month period ended September 30, 2001 decreased by $3,910,000,
largely due to the completion of the additional clinical trial of Dermagraft in
the treatment of diabetic foot ulcers in 2000, and decreased spending in the
NeoCyte Joint Venture.

Dermagraft Joint Venture sales of TransCyte for the three months and nine
months ended September 30, 2001 were $1,035,000 and $2,674,000, respectively, a
decrease over the same periods of 2000 of $251,000 and $187,000, as our ability
to meet market demand remained constrained by declines in manufacturing yields.
The manufacturing issues are currently being addressed.

     The equity in losses of joint ventures includes costs incurred by us and
charged to the Dermagraft and NeoCyte Joint Ventures totaling $2,883,000 for the
three-month period ended September 30, 2001 and $3,137,000 for the three-month
period ended September 30, 2000; and $9,212,000 for the nine-month period ended
September 30, 2001 compared to $10,392,000 for the nine-month period ended
September 30, 2000.

    Interest income and other was $18,000 in the three months ended September
30, 2001 compared to $65,000 in the corresponding period of 2000; and $507,000
in the nine months ended September 30, 2001 compared to $1,241,000 in the same
period of 2000. The decrease primarily results from the reduction of interest
earning assets reflected in the consolidated balance sheets.


                                       12

<PAGE>


     Interest expense was $134,000 in the three months ended September 30, 2001
compared to $308,000 in the corresponding period of 2000; and $550,000 in the
nine months ended September 30, 2001 compared to $1,232,000 in the same 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
approximately $5,400,000 of borrowings from the Dermagraft Joint Venture,
associated with the restructuring of that 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 September 30, 2001 decreased by $20,207,000
from December 31, 2000. Major outflows included the use of $15,250,000 to fund
operations, a net investment of $8,619,000 to support the Dermagraft and NeoCyte
Joint Ventures, $1,944,000 for payment of debt and $820,000 for capital
expenditures. These outflows have been partially offset by $6,854,000 in net
proceeds from short-term investments.

     Receivables from joint ventures decreased by $85,000 from December 31, 2000
to September 30, 2001, primarily as a result of the timing of receipts.
Inventory increased by $3,593,000 during the same period, largely as a result of
collagen production in 2001. Long-term debt at September 30, 2001 decreased by
$1,944,000 from December 31, 2000, primarily reflecting payments made under the
loan used by DermEquip to purchase manufacturing assets. The timing of payments
made to the Dermagraft Joint Venture reduced payables to joint ventures by
$289,000 during the nine months ended September 30, 2001.

     Subsequent to the end of the third quarter, we received additional net cash
inflows of approximately $38.7 million. Firstly, $5 million, which had been
recognized into revenue in September, was received from Smith & Nephew on the
approval of the PMA for Dermagraft in the treatment of chronic foot ulcers in
patients with diabetes. Also in October, we announced a broad strategic
collaboration with Medtronic, Inc. to explore the application of our technology
in areas of therapeutic interest to Medtronic. An affiliate of Medtronic
simultaneously purchased $20 million of our common stock. In November, we
completed a private placement of approximately $14.7 million covering the sale
of 3,534,335 shares of unregistered common stock at $4.15 per share, the net
proceeds from which were approximately $13.7 million.

     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. In
addition, we are incurring costs to develop NouriCel and to develop potential
cardiovascular applications. 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 such as our licensing agreements for NouriCel. 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,
sales and marketing efforts by our partners, market acceptance of our products
and potential products, the establishment of new strategic alliances, the timing
and expense of preclinical and clinical studies, and new technological
innovations.

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


                                       13

<PAGE>


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 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.


                                       14


<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 September 30, 2001.


                                       15


<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. Through September 30, 2001, we
had incurred cumulative net operating losses of $283.6 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 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. 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 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.


                                       16

<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. 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;

     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 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, however it has not achieved widespread commercial acceptance.
Similarly, Dermagraft was only recently approved for marketing in the United
States. TransCyte, Dermagraft or our human-based collagen may never achieve
commercial acceptance in the United States or elsewhere.

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 market
acceptance of Dermagraft and TransCyte 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. 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
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-based 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, OR OUR PARTNERS, 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 partners, must usually receive
regulatory approvals. To obtain approvals for new products, we, or our partners,
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 partners, 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.


                                       17

<PAGE>


     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:

     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.

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 Dermagraft,
TransCyte, and our human-based collagen product 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 such products, which could have the effect of
restricting our ability to commercialize our products.


                                       18

<PAGE>


     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, 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 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,
TransCyte is the only regulated product approved for commercial sale in the
United States that has been marketed. Dermagraft is now approved for commercial
sale in the United States, however as with any novel medical technology, private
and public reimbursement is not automatically conveyed upon FDA approval. 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
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 equivalent state or foreign authorities. If we obtain
regulatory product approval, the approval may limit the uses for which we may
market the product.

 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 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


                                       19


<PAGE>


TransCyte. In September 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, we have 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 may also apply to our Dermagraft product.

     Additionally, 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 McGhan Medical's injectable
collagen. Clearance of the PMA supplement filing by the FDA would permit McGhan
to market an injectable form of tissue-engineered, human-based collagen for
wrinkle treatment. However, in October of 2001 Inamed announced that the FDA had
requested additional pre-clinical data and had asked for skin-test studies to be
conducted. Purchases of our human-based collagen may be delayed until such time
as McGhan Medical received FDA approval of their PMA supplement.

     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 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 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 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 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


                                       20

<PAGE>


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 US, 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.


                                       21

<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
September 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.


                                       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 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.

    10.1*      Letter agreement dated September 17, 2001          Filed Herewith
               between Advanced Tissue Sciences, Inc. and
               UBS Warburg LLC, regarding the engagement
               of UBS Warburg as placement agent


</TABLE>

* The Company has requested confidential treatment with respect to certain
portions of this document.


(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:  November 13, 2001                        /s/ Arthur J. Benvenuto
      -------------------                      --------------------------------
                                               Arthur J. Benvenuto
                                               Chairman of the Board,
                                               Chief Executive Officer


Date:  November 13, 2001                        /s/ Nikhil A. Mehta
      -------------------                      --------------------------------
                                               Nikhil A. Mehta
                                               Senior Vice President, Finance
                                               and Chief Financial Officer


                                       24