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, 2000

                                       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 6, 2000 was 64,156,341.


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

               FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000

                                      INDEX

Part I - Financial Information
------------------------------
<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
   Item 1 - Financial Statements
<S>                                                                                               <C>

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

              Consolidated Balance Sheets -
                September 30, 2000 and December 31, 1999................................            2

              Consolidated Statements of Operations -
                Three and Nine Months Ended September 30, 2000 and 1999.................            3

              Consolidated Statements of Cash Flows -
                Nine Months Ended September 30, 2000 and 1999...........................            4

              Consolidated Statement of Stockholders' Equity -
                Nine Months Ended September 30, 2000....................................            5

              Notes to the Consolidated Financial Statements............................          6-11

   Item 2 - Management's Discussion and Analysis of Financial

              Condition and Results of Operations.......................................          12-17

   Item 3 - Quantitative and Qualitative Disclosures About Market Risk..................           17


Part II - Other Information

   Item 2 - Changes in Securities.......................................................           18

   Item 5 - Other Information...........................................................          18-24

   Item 6 - Exhibits and Reports on Form 8-K............................................           25


Signatures..............................................................................           26

</TABLE>


<PAGE>




                         PART I - FINANCIAL INFORMATION
                         ------------------------------

ITEM 1 - FINANCIAL STATEMENTS

                    INTRODUCTION TO THE FINANCIAL STATEMENTS

The financial statements have been prepared by Advanced Tissue Sciences, Inc.
(the "Company"), 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. The Company believes that the disclosures are adequate to make
the information presented not misleading when read together with the financial
statements and the notes included in the Company's Annual Report on Form 10-K,
as amended, for the year ended December 31, 1999 and Quarterly Reports on Form
10-Q for the quarters ended March 31, 2000 and June 30, 2000.

The financial information presented in this Quarterly Report on Form 10-Q
reflects all adjustments, consisting only of normal recurring adjustments, which
are, in the opinion of management, necessary for a fair statement of the results
for the interim periods presented. The results for the interim periods are not
necessarily indicative of results to be expected for the full year.


                                      -1-


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

                           CONSOLIDATED BALANCE SHEETS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                                  September 30,     December 31,
                                                       2000             1999
                                                  -------------     ------------
      ASSETS                                       (Unaudited)
Current assets:
   Cash and cash equivalents                        $  34,298        $  16,091
   Short-term investments                               3,959            9,988
   Receivable from joint ventures                       1,539            2,185
   Inventory                                            5,693            4,295
   Other current assets                                 1,159            1,664
                                                    ---------        ---------
       Total current assets                            46,648           34,223
Property - net                                         14,515           16,627
Patent costs - net                                      2,278            2,075
Restricted cash                                            --            5,000
Other assets                                            3,200            1,461
                                                    ---------        ---------
       Total assets                                 $  66,641        $  59,386
                                                    =========        =========

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                 $     436        $     755
   Payable to joint ventures                              447            3,550
   Accrued expenses                                     4,933            5,560
   Deferred revenue                                       899            3,595
   Current portion of long-term debt and capital
    lease obligations                                   2,592           10,112
                                                    ---------        ---------
       Total current liabilities                        9,307           23,572
Long-term debt and capital lease obligations            7,043            8,987
Long-term debt - related parties                        5,412               --
Minority interest in consolidated subsidiaries          1,889              104
Other long-term liabilities                               196              260
                                                    ---------        ---------
       Total liabilities                               23,847           32,923
                                                    ---------        ---------

Redeemable Convertible Series B Preferred Stock,
   $.01 par value; 1,000 shares authorized; issued
   and outstanding, no shares at September 30,
   2000 and 100.8 shares at December 31, 1999
   (aggregate redemption and liquidation value of
   $5,140 at December 31, 1999)                            --            5,040
                                                    ---------        ---------

Stockholders' Equity:
   Accrued cumulative preferred stock dividends            --               64
   Common Stock, $.01 par value; 125,000,000 shares
     authorized; issued and outstanding, 64,154,039
     shares at September 30, 2000 and 56,600,544
     shares at December 31, 1999                          642              566
   Additional paid-in capital                         303,592          262,588
   Note received in connection with sale of Common
     Stock and deferred compensation applicable to
     Common Stock                                        (437)          (2,033)
   Accumulated deficit                               (261,002)        (239,762)
   Accumulated other comprehensive income                  (1)              --
                                                    ---------        ---------
       Total stockholders' equity                      42,794           21,423
                                                    ---------        ---------
       Total liabilities and stockholders' equity   $  66,641        $  59,386
                                                    =========        =========


        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,
                                                    --------------------------       --------------------------
                                                       2000            1999             2000             1999
                                                    -----------      ---------       -----------      ---------
                                                                            (Unaudited)
<S>                                                  <C>             <C>              <C>             <C>
Revenues:
  Product sales -
    Related parties                                  $   2,879       $   3,496        $   9,497       $ 10,184
    Others                                                  --              --               --             --
  Contracts and fees -
    Related parties                                      1,704           7,662            6,592         22,623
    Others                                               1,197             753            3,364          1,096
                                                     ---------       ---------        ---------       --------
    Total revenues                                       5,780          11,911           19,453         33,903
                                                     ---------       ---------        ---------       --------

Costs and expenses:
  Research and development                               2,659           4,165           10,259         12,292
  Cost of goods sold                                     2,879           3,496            9,497         10,184
  Selling, general and administrative                    2,512           2,457            7,996          8,628
  Compensation related to variable
    stock option                                         (137)              --            2,558             --
                                                     --------        ---------        ---------       --------
     Total costs and expenses                           7,913           10,118           30,310         31,104
                                                     --------        ---------        ---------       --------
Income (loss) from operations before equity
  in losses of joint ventures                          (2,133)           1,793          (10,857)         2,799

Equity in losses of joint ventures                     (3,137)          (4,894)         (10,392)       (15,349)
                                                     --------        ---------        ---------       --------
Loss from operations                                   (5,270)          (3,101)         (21,249)       (12,550)

Other income (expense):
  Interest income and other                                65              505            1,241            809
  Interest expense                                       (308)            (342)          (1,232)        (1,429)
                                                     --------        ---------        ---------       --------
Net loss                                               (5,513)          (2,938)         (21,240)       (13,170)

Dividends on preferred stock                               --              (63)             (48)          (494)
                                                     --------        ---------        ---------       --------
Net loss applicable to common stock                  $ (5,513)       $  (3,001)       $ (21,288)      $(13,664)
                                                     ========        =========        =========       ========
Basic and diluted loss per common share              $   (.09)       $    (.06)       $    (.36)      $   (.29)
                                                     ========        =========        =========       ========
Weighted average number of common
  shares used in computation of basic
  and diluted loss per share                           60,066           52,451           59,367         46,352
                                                     ========        =========        =========       ========

</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,
                                                                                -----------------------------------
                                                                                      2000                1999
                                                                                ----------------     --------------
                                                                                            (Unaudited)
<S>                                                                               <C>                  <C>
Operating activities:
   Net loss                                                                       $    (21,240)        $    (13,170)
   Adjustments to reconcile net loss to cash used in
     operating activities:
      Depreciation and amortization                                                      2,943                3,582
      Compensation for services paid in stock, options or warrants                       2,911                  183
      Equity in losses of joint ventures                                                10,392               15,349
      Other adjustments to net loss                                                        (25)                 497
      Deferred revenue                                                                  (2,696)               5,334
      Change in assets and liabilities:
        Receivables from joint ventures                                                    646                 (413)
        Inventory                                                                       (1,398)              (1,138)
        Other current assets                                                               511                1,154
        Accounts payable                                                                  (319)                 578
        Payable to joint ventures                                                       (3,103)                 790
        Accrued expenses                                                                  (615)                (215)
                                                                                  ------------         ------------
         Net cash provided by (used in) operating activities                           (11,993)              12,531
                                                                                  ------------         ------------
Investing activities:
   Purchases of short-term investments                                                  (4,959)              (9,009)
   Maturities and sales of short-term investments                                       10,989               11,007
   Acquisition of property                                                                (769)                (714)
   Investment in joint ventures                                                        (15,262)             (19,218)
   Distribution from joint ventures                                                      2,767                3,406
   Patent application costs                                                               (302)                (289)
   Other long-term assets                                                                  384                  (69)
                                                                                  ------------         ------------
         Net cash used in investing activities                                          (7,152)             (14,886)
                                                                                  ------------         ------------
Financing activities:
   Proceeds from borrowings                                                              7,612                1,340
   Payments of borrowings                                                               (5,988)              (2,043)
   Restricted cash                                                                       5,000                   --
   Net proceeds from sale of Common Stock                                               20,000                4,498
   Repurchase of Common Stock                                                               --                 (457)
   Payment of Note Receivable and Interest - Common Stock                                1,265                   --
   Options and warrants exercised                                                        7,772                    5
   Long-term obligations and other                                                       1,691                   65
                                                                                  ------------         ------------
         Net cash provided by financing activities                                      37,352                3,408
                                                                                  ------------         ------------
Net increase in cash and cash equivalents                                               18,207                1,053
Cash and cash equivalents at beginning of period                                        16,091               16,551
                                                                                  ------------         ------------
Cash and cash equivalents at end of period                                        $     34,298               17,604
                                                                                  ============         ============

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                      -4-

<PAGE>



                         ADVANCED TISSUE SCIENCES, INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                      Accrued
                                                                                                     Dividends/
                                                        Common Stock               Additional     Note Receivable/
                                                ----------------------------         Paid-In          Deferred
                                                   Shares           Amount           Capital        Compensation
                                                ------------     -----------       ----------     -----------------
<S>                                              <C>             <C>               <C>               <C>
  Balance, December 31, 1999                     56,600,544      $       566       $    262,588      $    (1,969)

  Sale of Common Stock                            3,494,365               35            19,965

  Common Stock Issued For Repayment
    of Debt                                         770,453                8             5,668

  Warrants Exercised                              1,750,000               17             6,983

  Conversion of Preferred Stock                   1,354,539               14             5,026

  Compensation Related to Variable
    Stock Option                                                                         2,558

  Payment of Note Receivable on
    Common Stock                                                                                          1,265

  Options Exercised                                 146,212                2               771

  Amortization of Compensation
    on Restricted Stock Award                                                                               335

  Preferred Stock Dividends                          37,926               --                63              (63)

  Net Loss

  Comprehensive Income (Loss) -
    Unrealized Loss on Securities

  Other                                                                                    (30)              (5)
                                                 ----------      -----------       -----------       ----------
  Balance, September 30, 2000                    64,154,039      $       642       $   303,592       $     (437)
                                                 ==========      ===========       ===========       ==========

</TABLE>

<TABLE>
<CAPTION>

                                                                       Accumulated
                                                                          Other           Total
                                                     Accumulated      Comprehensive    Stockholders'
                                                       Deficit        Income (Loss)       Equity
                                                    -------------     -------------    -------------
<S>                                                 <C>                <C>              <C>
  Balance, December 31, 1999                        $   (239,762)                       $    21,423

  Sale of Common Stock                                                                       20,000

  Common Stock Issued For Repayment
    of Debt                                                                                   5,676

  Warrants Exercised                                                                          7,000

  Conversion of Preferred Stock                                                               5,040

  Compensation Related to Variable
    Stock Option                                                                               2,558

  Payment of Note Receivable on
    Common Stock                                                                               1,265

  Options Exercised                                                                              773

  Amortization of Compensation
    on Restricted Stock Award                                                                    335

  Preferred Stock Dividends                                                                       --

  Net Loss                                               (21,240)                            (21,240)

  Comprehensive Income (Loss) -
    Unrealized Loss on Securities                                      $    (1)                   (1)

  Other                                                                                          (35)
                                                    ------------       -------          ------------
  Balance, September 30, 2000                       $   (261,002)      $    (1)         $     42,794
                                                    ============       =======          ============

</TABLE>

        See accompanying notes to the consolidated financial statements.


                                      -5-


<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)

NOTE 1 - BASIS OF PRESENTATION

Organization - Advanced Tissue Sciences, Inc. (the "Company") is a tissue
engineering company utilizing its proprietary technology to develop and
manufacture human-based tissue products for tissue repair and transplantation.
The Company is focusing on the worldwide commercialization of skin, cartilage
and cardiovascular products. The Company's leading therapeutic products are a
tissue-engineered skin product for the temporary covering of severe and
partial-thickness burns, which is on the market in the United States, and a
tissue engineered skin product for the treatment of diabetic foot ulcers, which
is under review by the United States Food and Drug Administration (the "FDA")
following clinical trials in the United States. In addition, both products
are on the market in Canada, the United Kingdom and several other European
countries. Both products are being commercialized through a joint venture with
Smith & Nephew plc ("Smith & Nephew").

Principles of Consolidation - The consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries and DermEquip, L.L.C.
("DermEquip"), a limited liability company owned jointly with Smith & Nephew.
DermEquip is a special purpose entity established to finance an expansion of the
Company's manufacturing facility. All intercompany accounts and transactions
have been eliminated. The Company's other interests in joint ventures with Smith
& Nephew are accounted for under the equity method (see Note 2 to the
consolidated financial statements).

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

Dependence on Certain Suppliers - Certain materials, such as the mesh frameworks
used by the Company in its therapeutic products, are sourced from single
manufacturers. Any significant supply interruption would adversely affect the
Company's product manufacturing. In addition, an uncorrected impurity or
supplier's variation in a raw material, either unknown to the Company or
incompatible with the Company's manufacturing process, could have a material
adverse effect on the Company's ability to manufacture its products.

Reclassification - Certain reclassifications have been made to prior year
amounts to conform to the presentation for the three and nine months ended
September 30, 2000.

NOTE 2 - STRATEGIC ALLIANCES

Smith & Nephew Joint Ventures
-----------------------------

In 1996, the Company entered into an agreement with Smith & Nephew to form a
joint venture for the worldwide commercialization of Dermagraft(R), the
Company's tissue engineered dermal skin replacement, for the treatment of
diabetic foot ulcers (the "Dermagraft Joint Venture"). In 1998, the Company and
Smith & Nephew expanded the Dermagraft Joint Venture to include products to
treat venous ulcers, pressure ulcers, burns and other skin tissue wounds. Smith
& Nephew is a global medical device company with established sales in 90
countries. Smith & Nephew markets technically innovative products, principally
in the areas of wound management, orthopedics and endoscopy.

As consideration for entering into the Dermagraft Joint Venture, Advanced Tissue
Sciences received a $10 million up-front fee in 1996. In addition, as a part of
the agreement to expand the joint venture, Smith & Nephew purchased $20 million,
or 1,533,115 newly issued shares, of the Company's Common Stock at approximately
$13.05 per share in 1998. The Company also received an additional $15 million as
consideration for the expansion of the joint venture in January 1999, and could
receive, subject to the achievement of certain milestones related to regulatory
approvals, reimbursement and sales levels, further payments of up to $136
million. The $15 million payment was recognized into contract revenues in 1999
as related financial commitments were met.


                                      -6-

<PAGE>


In February 2000, the Company and Smith & Nephew agreed in principle to
restructure certain payments associated with their Dermagraft Joint Venture as a
result of delays in the commercial introduction of Dermagraft in the United
States. The requirement for an additional clinical trial by the FDA
substantially increased the partners' investments necessitating the
restructuring. The objective of the restructuring is to defer the potential
payment of certain milestones by Smith & Nephew while providing the Company a
royalty stream and an opportunity to increase its long-term return from the
venture. Specifically, except for $10 million in regulatory approval and
reimbursement milestones related to Dermagraft in the treatment of diabetic foot
ulcers, the Company agreed to make all other approval, reimbursement and sales
milestones subject to, and payable from joint venture earnings exceeding certain
minimum levels. In return, the Dermagraft Joint Venture will pay the Company
royalties on joint venture product sales. In addition, as a part of the
agreement, as amended in September 2000, the Company sold the Dermagraft
manufacturing plant assets that it owned to DermEquip (see Note 1 to the
consolidated financial statements with regard to the DermEquip entity) and
retained its raw material inventory.

Under the joint venture, the Company and Smith & Nephew are sharing equally in
the expenses and revenues of the Dermagraft Joint Venture, except the Company
will fund 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. In addition, the Company funded specified manufacturing and
distribution costs and specified costs related to post-market studies of
TransCyte through 1999. However, such manufacturing and distribution costs are
to be returned to the Company out of future gross margin or net profits, if any,
from sales of TransCyte for burns in the United States. See Note 9 to the
consolidated financial statements with respect to related party transactions
with the Dermagraft Joint Venture.

Pursuant to the agreement, as amended in September 2000, the Company and Smith &
Nephew also agreed that certain of the proceeds from the sale of the Company's
manufacturing plant assets discussed above would be used to pay down a portion
of the outstanding balance of the loan from Smith & Nephew related to the
NeoCyte Joint Venture (the "NeoCyte Loan", as defined below). This transaction
was completed in September 2000, at which time the outstanding balance of
principal and interest due on the loan was $10 million. The cash portion paid
down by the Company amounted to $4.3 million, the balance of $5.7 million being
paid by means of issuing 770,453 shares of the Company's Common Stock to Smith &
Nephew based on the average market price over a specified period.

In a subsequent transaction in September 2000, the Dermagraft Joint Venture made
a new loan to the Company (the "Dermagraft Joint Venture Loan") of $5.4 million
payable on December 31, 2001 with raw material inventory being pledged as
collateral security (see Note 4 to the consolidated financial statements).

In 1994, Smith & Nephew and the Company entered into a separate joint venture
for the development of tissue-engineered cartilage for orthopedic applications
(the "NeoCyte Joint Venture"). Under the NeoCyte Joint Venture, Smith & Nephew
contributed the first $10 million in funding and the Company contributed certain
technology licenses. The NeoCyte Joint Venture's total funding since inception
reached $10 million in January 1997 and, as provided in the joint venture
agreement, the Company and Smith & Nephew are sharing equally in NeoCyte Joint
Venture revenues and expenditures. See Note 9 to the consolidated financial
statements with respect to related party transactions with the NeoCyte Joint
Venture.

The results of operations of the joint ventures for the three and nine months
ended September 30, 2000 and 1999 are as follows (in thousands):

                                   Three Months Ended        Nine Months Ended
                                     September 30,             September 30,
                                 ----------------------    ---------------------
                                    2000        1999         2000         1999
                                 ---------    --------     --------    ---------
Dermagraft Joint Venture
------------------------
Net sales                        $  1,384     $    875    $  3,112     $  1,903
Cost of goods sold                  3,565        2,740       9,920       10,309
Other costs and expenses            2,937        5,119       9,713       14,543
Net loss                            5,117        6,984      16,521       22,949

NeoCyte Joint Venture
---------------------
Costs and expenses              $     886     $  1,423    $  3,567     $  3,898
Net loss                              886        1,423       3,567        3,898


                                      -7-

<PAGE>


Inamed Agreements
-----------------

In May 1999, the Company and Inamed entered into a strategic alliance for the
development and marketing of several of the Company's human-based,
tissue-engineered products for certain aesthetic and reconstructive
applications. Specifically, Inamed licensed rights to further develop,
manufacture and sell tissue-engineered products for use in cosmetic surgery as a
temporary covering after laser resurfacing or chemical peels, cartilage for
plastic and reconstructive surgery, and extracellular matrix for use in breast
reconstruction. In addition, in September 1999, Inamed also received license
rights to use extracellular matrix, including human collagen, from the Company's
three-dimensional culture system for soft tissue augmentation (wrinkles and
cosmetic correction) and as a bulking agent for the treatment of urinary
incontinence. Inamed is a global surgical and medical device company engaged in
the development, manufacturing and marketing of medical products for aesthetic
medicine, plastic and reconstructive surgery and the treatment of obesity.

In total, under the agreement between the parties, in exchange for worldwide
licensing rights, Inamed has made a series of payments to the Company totaling
$10 million, including $5 million to purchase Advanced Tissue Sciences' Common
Stock. Inamed also received five-year warrants to purchase up to 500,000 shares
of Common Stock. In addition to royalties on product sales, the Company may
potentially receive up to a total of $10 million in milestones based on product
approvals in the United States.

The Company will be responsible for the funding and development of the products
and the related manufacturing processes while Inamed will be responsible for
clinical and regulatory activities. Advanced Tissue Sciences, or an affiliate,
may elect to manufacture the products developed under the agreement. Fees for
licensing rights and milestone payments will be recognized into revenues as the
related financial commitments for product development and manufacturing
processes are incurred.

NOTE 3 - INVENTORIES

Inventories consist of the following components as of September 30, 2000 and
December 31, 1999 (in thousands):

                                       September 30,       December 31,
                                           2000                1999
                                      ----------------    ---------------

       Raw materials and supplies       $     4,968         $     3,618
       Work-in-process                          725                 677
                                        -----------         -----------

                                        $     5,693         $     4,295
                                        ===========         ===========

NOTE 4 - LONG-TERM DEBT

During the nine-months ended September 30, 2000, the Company borrowed $2.2
million from Smith & Nephew pursuant to a commitment under the agreement forming
the NeoCyte Joint Venture, however in September 2000 this loan was repaid in
full (see Note 2 to the consolidated financial statements). Subsequently, the
company received a loan of $5.4 million which is payable on December 31, 2001
(the Dermagraft Joint Venture Loan, see Note 2 to the consolidated financial
statements).

Debt and capital lease obligations as of September 30, 2000 and December 31,
1999 were as follows (in thousands):

                                               September 30,       December 31,
                                                   2000                1999
                                             ----------------    ---------------

        Chase Loan                             $     9,600         $    11,520
        NeoCyte Loan                                    --               7,525
        Dermagraft Joint Venture Loan                5,412                  --
        Obligations under capital leases
         and other                                      35                  54
        Less current portion                        (2,592)            (10,112)
                                               -----------         -----------

                                               $    12,455         $     8,987
                                               ===========         ===========


                                      -8-

<PAGE>


At December 31, 1999 the NeoCyte Loan was included in the current portion, being
payable within twelve months after that date. The Dermagraft Joint Venture Loan
at September 30, 2000 is classified as long-term and therefore not included in
the current portion.

NOTE 5 - CAPITAL STOCK

In September 2000, the Company completed a private placement of 3,494,365 shares
of Common Stock at $5.7235 per share, resulting in proceeds to the Company of
$20 million. In this regard the Company filed a form 8-K with the Securities and
Exchange Commission on September 20, 2000 regarding the Company's public
announcement of the completion of the private placement. In addition, a Form S-3
Registration Statement, registering the 3,494,365 shares of Common Stock for
resale, was filed on September 25, 2000 and declared effective on October 3,
2000. These proceeds will be used to fund existing operations and to provide
additional resources to move the Company's products and programs forward.

Also in September 2000, the Company issued 770,453 shares of Common Stock to
Smith & Nephew to pay off the remaining balance of the NeoCyte Loan (see Note 2
to the consolidated financial statements).

In March 2000, 100.8 shares, representing all of the Company's Convertible
Series B Preferred Stock (the "Series B Preferred Stock") as of December 31,
1999, were converted into 1,354,539 shares of the Common Stock at $3.72 per
share. All of the Company's Convertible Series B Preferred Stock has been
converted and no preferred stock remains outstanding as of September 30, 2000.
Further, in conjunction with a public offering in November 1999, the Company had
agreed that $5 million of the proceeds would be reserved for the redemption of
any of its Series B Preferred Stock submitted for conversion at or below $3.58
per share. As a result of the March conversion, the previously restricted $5
million became available to support the Company's operations.

In November 1999, the Company completed a public offering of 3,750,000 units at
$4.00 per unit, resulting in proceeds to the Company of $15 million. Upon
issuance, the units separated into 3,750,000 shares of the Company's Common
Stock and warrants to purchase an additional 1,750,000 shares of Common Stock at
$4.00 per share. In January 2000, the Company received an additional $7.0
million from the exercise of warrants to purchase all 1,750,000 shares of Common
Stock.

NOTE 6 - BASIC AND DILUTED LOSS PER SHARE

Basic earnings per common share are determined based on the weighted average
number of shares outstanding during the period. Diluted earnings per common
share include the weighted average number of shares outstanding and give effect
to potentially dilutive common shares such as options and warrants outstanding.
Both the basic and diluted loss per common share for the three and nine months
ended September 30, 2000 and 1999 are based on the weighted average number of
shares of Common Stock outstanding during the periods. Potentially dilutive
securities include options and warrants outstanding and debt and preferred stock
convertible into Common Stock; however, such securities have not been included
in the calculation of the diluted loss per share as their effect is
anti-dilutive. Since such securities are anti-dilutive, there is no difference
between basic and diluted loss per common share for the periods presented. The
net loss applicable to common shares used in the calculation of basic and
diluted loss per common share for the three months ended September 30, 1999
includes dividends of $63,000, and for the nine months ended September 30, 2000
and 1999 includes dividends of $48,000 and $494,000, respectively, accrued or
paid on the Company's Convertible Series B Preferred Stock during such periods.


                                      -9-

<PAGE>


NOTE 7 - STOCK INCENTIVE PLANS

The following table summarizes activity under the Company's 1997 Stock Incentive
Plan (the "1997 Plan") and for other options and warrants for Common Stock for
the nine months ended September 30, 2000:

<TABLE>
<CAPTION>

                                                       1997 Plan               Other Options and Warrants
                                            -----------------------------    -----------------------------
                                                              Weighted                         Weighted
                                                Number      Average Price        Number      Average Price
                                               of Shares      Per Share         of Shares      Per Share
                                            --------------  -------------    -------------   -------------
   <S>                                         <C>              <C>            <C>               <C>
   Outstanding, December 31, 1999              4,044,640        $8.64           3,759,640        $6.55
     Granted                                   1,096,920        $7.30                  --           --
     Exercised                                  (101,212)       $3.86          (1,795,000)       $4.11
     Canceled                                   (474,912)       $8.01             (29,640)       $7.09
                                               ---------                       ----------

   Outstanding, September 30, 2000             4,565,436        $8.49           1,935,000        $8.80
                                               =========                       ==========

</TABLE>

In September 2000, the Company's Chairman and Chief Executive Officer repaid in
full the principal and interest on a note related to stock options exercised in
1995. These amounts were accounted for as variable stock options which could
result in significant increases and decreases in compensation expense subject to
the variability of the Company's stock price. During the three and nine months
ended September 30, 2000, the Company recorded a gain of $137,000 and a charge
of $2,558,000, respectively, to expense for such variable stock options.
Concurrent with the repayment of the note in September 2000, which amounted to
$1,265,000, the Company guaranteed a personal loan obtained by the Chairman and
Chief Executive Officer from a third party, for a like amount. Any payment made
by the Company could be accounted for as a variable stock option.

NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended September 30, 2000, non-cash financing activities
have included (i) the repayment of $5.7 million of principal and interest on the
NeoCyte Loan by issuing 770,453 shares of the Company's Common Stock based on a
specified average market price (see Note 2 to the consolidated financial
statements) and (ii) the conversion of $5 million of the Company's Series B
Preferred Stock into 1,354,539 shares of Common Stock (See Note 5 to the
consolidated financial statements). Additionally, in 1999, non-cash financing
transactions included (i) the repayment of a $10 million loan and accrued
interest payable through the issuance of 2,800,595 shares of the Company's
Common Stock and (ii) the exercise of stock options for 775,000 shares of Common
Stock wherein the purchase price and withholding taxes of approximately $1.8
million were paid by the delivery of 463,154 shares of Common Stock. In
addition, compensation expense of $2,911,000 and $183,000 has been recognized
related to compensatory and variable stock options and a restricted stock award
in the nine-month periods ended September 30, 2000 and 1999, respectively.

Net cash from operating activities reflects cash payments for interest expense
of approximately $441,000 and $341,000 for the three month periods and
$1,227,000 and $1,140,000 for the nine month periods ended September 30, 2000
and 1999, respectively.

NOTE 9 - RELATED PARTY TRANSACTIONS

During the three and nine months ended September 30, 2000 and 1999, the Company
performed services for its Dermagraft and NeoCyte Joint Ventures and has
manufactured products for the Dermagraft Joint Venture to sell to customers or
for use in clinical trials as described below (see Note 2 to the consolidated
financial statements). The Company has a 50% interest in each of the Dermagraft
and NeoCyte Joint Ventures.

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

During the three-month periods ended September 30, 2000 and 1999, the Company
recognized $1,086,000 and $6,859,000 and in the nine-month periods recognized
$4,160,000 and $20,523,000, respectively, in royalties and contract revenues for
research and development, marketing and other activities performed for the
Dermagraft Joint Venture. These amounts include $4,257,000 and $13,624,000 in
the three and nine-month periods ended September 30, 1999, respectively, related
to the recognition of a $15 million milestone payment (see Note 2 to the
consolidated financial statements). In addition, product sales to related
parties include products sold to the Dermagraft Joint


                                      -10-

<PAGE>


Venture of $2,879,000 and $3,496,000 in the three-month periods and $9,497,000
and $10,184,000 in the nine-month periods ended September 30, 2000 and 1999,
respectively.

As a purpose of the Dermagraft Joint Venture is to share the costs of
manufacturing and commercializing the Company's Dermagraft and TransCyte
products between the joint venture's partners, product sales to the Dermagraft
Joint Venture are equal to the Company's cost of goods sold for such products
including period costs. Period costs reflect overhead costs related to excess
production capacity and include rent, depreciation and quality control,
facilities, supplies and other such costs to support or related to the excess
production capacity. Due to the 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. For the three
months ended September 30, 2000 and 1999 such write-downs totaled $2,681,000 and
$2,777,000 and for the nine months ended September 30, 2000 and 1999 were
$7,814,000 and $8,777,000, respectively.

As a result of restructuring the Dermagraft Joint Venture Agreement with Smith &
Nephew in February 2000, the Company also receives certain royalty payments from
the joint venture on product sales made by the joint venture (see Note 2 to the
consolidated financial statements). For the three and nine months ended
September 30, 2000 these royalty payments were not material.

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

During the three and nine months ended September 30, 2000, the Company
recognized $619,000 and $2,433,000, respectively, in contract revenues for
research and development activities performed for the NeoCyte Joint Venture
compared with $803,000 and $2,100,000 during the corresponding periods of 1999.

The Company's share of the above costs incurred by the Company 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 and totaled
$2,690,000 and $3,543,000 in the three months ended September 30, 2000 and 1999
and $8,399,000 and $11,391,000 for the nine-months periods, respectively.

NOTE 10 - SUBSEQUENT EVENTS

There have been no material subsequent events.


                                      -11-


<PAGE>


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

     This Quarterly Report on Form 10-Q may contain predictions, estimates and
other forward-looking statements that involve a number of risks and
uncertainties, including those discussed under Item 5 below. 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 Quarterly Report.

Advanced Tissue Sciences, Inc. (the "Company" or "Advanced Tissue Sciences") is
engaged in the development and manufacture of human-based tissue products for
tissue repair and transplantation using its proprietary tissue engineering
technology. The Company's leading therapeutic products are tissue-engineered
skin products, TransCyte(TM) for the temporary covering of severe and
partial-thickness burns and Dermagraft(R) for the treatment of severe skin
ulcers. In addition to its TransCyte and Dermagraft skin products, the Company
is focusing its resources on the development of tissue-engineered products for
other wound care, orthopedic, aesthetic, reconstructive and cardiovascular
applications.

In 1997, the Company received marketing approval in the United States from the
U.S. Food and Drug Administration (the "FDA") for its first therapeutic product,
TransCyte, as a temporary covering for severe, full-thickness, or third degree,
burns and for partial-thickness, or second degree, burns. Through September
1998, TransCyte was marketed for burns by Advanced Tissue Sciences through a
direct sales force in the United States. Since October 1998, TransCyte has been
or will be marketed in the United States and throughout the rest of the world
consistent with regulatory approvals for burn and other wound care applications
under a joint venture with Smith & Nephew plc ("Smith & Nephew").

Dermagraft for the treatment of diabetic foot ulcers was approved for sale in
Canada and was introduced in the United Kingdom and several other European
countries in 1997 through the joint venture with Smith & Nephew. The Company
also submitted a Pre-market Approval ("PMA") application to the FDA for approval
to market Dermagraft for the treatment of diabetic foot ulcers in the United
States. In January 1998, an FDA advisory panel recommended approval of
Dermagraft with the condition that the Company perform a post-marketing study to
confirm efficacy and provide physician training. However, the FDA decided the
PMA application was not approvable without supportive data from an additional
controlled clinical trial. The additional clinical trial began in late 1998 and
the results of a planned interim analysis of data from this trial were announced
in December 1999.

In February 2000, the FDA approved an application for an amendment to the
Investigational Device Exemption ("IDE") for the ongoing clinical trial of
Dermagraft in the treatment of diabetic foot ulcers. Based on the data from the
interim analysis in the clinical trial, the IDE was amended to revise the
enrollment criteria and the statistical plan for data analysis. The amended IDE
allowed for the modification of the study inclusion criteria to limit future
enrollment to patients with ulcers of greater than six weeks duration. In
addition, the amended statistical plan allowed the Company to integrate the
interim analysis data from the clinical trial with additional data generated
subsequently from patients with ulcer duration of greater than six weeks.

By August of 2000, statistical significance was reached for the primary endpoint
in the additional trial in Dermagraft for the treatment of diabetic foot ulcers
and a PMA application was submitted to the FDA. The data demonstrated that in
difficult-to-heal chronic ulcers, with duration greater than six weeks at the
time of screening, Dermagraft healed significantly more ulcers than the control
treatment. The PMA application is currently under review by the FDA.

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 the Company's application for a Treatment Investigational Device
Exemption ("Treatment IDE"), allowing the Company 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 (1) permits companies to make available promising new
products to patients with serious diseases for which there is no satisfactory
alternative, and (2) allows companies to recover the costs of manufacturing and
distributing the product.



                                      -12-

<PAGE>


In 1996, the Company entered into an agreement with Smith & Nephew to form a
joint venture (the "Dermagraft Joint Venture") for the worldwide
commercialization of Dermagraft in the treatment of diabetic foot ulcers. In
1998, Advanced Tissue Sciences and Smith & Nephew 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. In connection with the expanded joint venture, the
Company received a $15 million milestone payment in January 1999, which was
recognized in contract revenues in 1999 as related financial commitments were
met.

In February 2000, the Company and Smith & Nephew agreed in principle to
restructure specified milestone payments associated with the Dermagraft Joint
Venture as a result of delays in the commercial introduction of Dermagraft in
the United States. The requirement for an additional clinical trial by the FDA
substantially increased the partners' investments necessitating the
restructuring. The objective of the restructuring is to defer the potential
payment of certain milestones by Smith & Nephew while providing the Company a
royalty stream and an opportunity to increase its long-term return from the
venture. Specifically, except for $10 million in regulatory approval and
reimbursement milestones related to Dermagraft in the treatment of diabetic foot
ulcers, the Company agreed to make all other approval, reimbursement and sales
milestones subject to, and payable from, joint venture earnings exceeding
certain minimum levels. In return, the Dermagraft Joint Venture will pay the
Company royalties on joint venture product sales. In addition, as a part of the
agreement, as amended in September 2000, the Company sold the Dermagraft
manufacturing assets that it owned to DermEquip and retained its raw material
inventory. The proceeds of this sale were used in September 2000 to pay down a
portion of the outstanding balance of the NeoCyte Loan, with the remaining
outstanding principal and interest being paid in the Company's Common Stock
based on a specified average market price. Subsequent to this transaction, the
Dermagraft Joint Venture in September 2000 made a new loan to the Company
payable on December 31, 2001 with raw material inventory being pledged as
collateral security (see Notes 2 and 4 to the consolidated financial
statements).

Under the joint venture, Advanced Tissue Sciences and Smith & Nephew are sharing
equally in the expenses and revenues of the Dermagraft Joint Venture, except
that the Company is funding the first $6 million of expenses for conducting
clinical trials and regulatory support of Dermagraft and TransCyte in the
treatment of venous ulcers and pressure ulcers. In addition, the Company funded
specified manufacturing and distribution costs and specified costs related to
post-market studies for TransCyte through 1999. See Note 2 to the consolidated
financial statements.

In 1994, the Company and Smith & Nephew entered into a separate joint venture
(the "NeoCyte Joint Venture") for the worldwide development, manufacture and
marketing of human tissue-engineered cartilage for orthopedic applications. In
this regard, an IDE was submitted to the FDA in 2000 requesting approval to
begin pilot human clinical studies. 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. The Company
continues to work closely with the FDA to address these issues. The joint
venture partners are sharing equally in the NeoCyte Joint Venture's expenses.
See Note 2 to the consolidated financial statements.

In May 1999, the Company and Inamed Corporation ("Inamed") entered into a
strategic alliance for the development and marketing of several of the Company's
human-based, tissue-engineered products for aesthetic and certain reconstructive
applications. Specifically, Inamed licensed rights to further develop,
manufacture and sell certain of the Company's tissue-engineered products for use
in cosmetic surgery, cartilage for plastic and reconstructive surgery, and
extracellular matrix for use in breast reconstruction, and extracellular matrix,
including human collagen, for soft tissue augmentation (wrinkles and cosmetic
correction) and as a bulking agent for the treatment of urinary incontinence. As
part of this alliance, the Company received certain payments in 1999 and will be
entitled to royalties on the future sales of the Company's tissue-engineered
products by Inamed. Under the related agreements, Advanced Tissue Sciences will
be responsible for the development of the products and the related manufacturing
processes while Inamed will be responsible for clinical and regulatory
activities. Advanced Tissue Sciences, or an affiliate, has the right to
manufacture the products developed for Inamed. See Note 2 to the consolidated
financial statements.

In September 2000, the Company signed a license and supply agreement with
Biozhem Cosmeceuticals Inc. ("Biozhem"). Under the agreement, the Company has
granted a license to use and will sell to Biozhem a "Nutrient Solution" that is
a patent-pending by-product of the Company's tissue engineering processes, to be
used in Biozhem's branded skin care products. As well as a selling price for the
Nutrient Solution, the Company will be


                                      -13-

<PAGE>


entitled to specified milestone payments and future royalties on sales of
Biozhem's products in the skin care marketplace. Additionally, the Company was
granted warrants to purchase Biozhem Common Stock at specified prices in future
time periods.In September 2000, the Company was awarded a $2 million Advanced
Technology Program grant from the National Institute of Standards and Technology
("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 (ischemia). The grant will commence in 2000 and be 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 continues through 2000.

Also in September 2000, the Company was 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.

The Company has incurred, and expects to continue to incur, substantial
expenditures in support of the commercialization, development and clinical
trials of its TransCyte and Dermagraft products for burn and skin ulcer
applications, for manufacturing systems and in advancing other applications of
the Company's core technology. In particular, the Company will incur, either
directly or through the Dermagraft Joint Venture, substantial costs in support
of clinical trials and post-market studies of TransCyte in the treatment of skin
ulcers and for full and partial-thickness burns. The Company also expects to
incur additional costs for the development of products and manufacturing
processes under its strategic alliance with Inamed, additional costs for the
development and clinical trials of tissue-engineered cartilage products through
the NeoCyte Joint Venture, costs for products the Company may develop for
cardiovascular applications, and costs which may be associated with other
products which the Company may undertake from time to time. Our agreements with
our current strategic alliance partners are structured to share certain of these
costs as well as to provide the Company with income from milestone payments,
royalties and licensing fees.

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

Product sales totaled $2,879,000 and $9,497,000 for the three and nine months
ended September 30, 2000, respectively, which compared to sales of $3,496,000
and $10,184,000 in the corresponding periods of 1999. Product sales are to
related parties and reflect sales of Dermagraft and TransCyte to the Dermagraft
Joint Venture at cost (see Notes 2 and 9 to the consolidated financial
statements).

Revenues from contracts and fees were $2,901,000 and $9,956,000 for the three
and nine months ended September 30, 2000, respectively, compared to $8,415,000
and $23,719,000 for the corresponding periods of 1999. The decrease in 2000 over
the prior year periods primarily reflects the recognition of $4,257,000 and
$13,624,000, respectively, in the three and nine-month periods ended September
30, 1999 in revenue related to a $15 million payment received in January 1999
associated with the expansion of the Dermagraft Joint Venture. This decrease in
2000 is partially offset by the recognition of $899,000 and $2,696,000 in the
three and nine-month periods ended September 30, 2000 in licensing payments
received from Inamed in 1999. Additionally, revenues for research and
development were reduced in the third quarter of 2000 compared to 1999 due to
the completion of the additional clinical trial of Dermagraft in the treatment
of diabetic foot ulcers. Contract and fee revenues are principally for research
and development activities performed for the Dermagraft and NeoCyte Joint
Ventures. See Notes 2 and 9 to the consolidated financial statements.

Research and development expenditures decreased to $2,659,000 and $10,259,000 in
the three and nine months ended September 30, 2000, respectively, as compared to
$4,165,000 and $12,292,000 in the corresponding periods of 1999. The decrease
for the three-month period includes a decrease in expenditure of $1,174,000 due
to the completion of the additional clinical trial of Dermagraft in the
treatment of diabetic foot ulcers and a decrease of $332,000 in other costs. In
addition to the above decreases, the decrease in total research and development
expenditure for the nine-month period also reflects a savings to the Company of
$965,000 for facility costs as a result of the Company terminating two building
leases in the first half of 1999 and consolidating its operations into its two
remaining buildings.

Cost of goods sold of $2,879,000 and $9,497,000, respectively, for the three and
nine months ended September 30, 2000 compares to $3,496,000 and $10,184,000 in
the corresponding periods in 1999. Cost of goods sold represents the cost of
TransCyte and Dermagraft sold to the Dermagraft Joint Venture. As a result of
the FDA's decision to


                                      -14-

<PAGE>


require additional clinical data for Dermagraft in the treatment of diabetic
foot ulcers, the Company is continuing to incur significant costs associated
with excess production capacity within its 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 periods ended September 30, 2000 and 1999 such
write-downs totaled $2,681,000 and $2,777,000, respectively, and were $7,841,000
and $8,777,000 for the nine-month periods ended September 30, 2000 and 1999,
respectively. To the extent the Company does not sell such products to the
Dermagraft Joint Venture, it will be required to write such inventories down to
net realizable value.

Selling, general and administrative costs were $2,512,000 and $7,996,000 for the
three and nine months ended September 30, 2000, respectively, as compared to
$2,457,000 and $8,628,000 in the corresponding periods of the prior year. As
discussed above, the Company consolidated its operations into two facilities
during the second quarter of 1999 with a resulting reduction in facilities costs
of $1,061,000 in the nine month period ended September 30, 2000, compared to the
same period in 1999. In the nine-months ended September 30, 2000, a reduction in
legal fees and the cost of other outside services of $305,000 was offset by an
increase in compensation expense of $734,000, compared to the same period in
1999.

During the three and nine months ended September 30, 2000, the Company recorded
a gain of $137,000 and expense of $2,558,000, respectively, related to
compensation expense for a variable stock option. In September, 2000, the
Company's Chairman and Chief Executive Officer repaid in full the principal and
interest on a note related to stock options exercised in 1995. These amounts
were accounted for as variable stock options, which could result in significant
increases and decreases in compensation expense subject to the variability of
the Company's stock price. There were no related charges or gains in the
corresponding periods of 1999. Concurrent with the repayment of the note in
September 2000, which amounted to $1,265,000, the Company guaranteed a personal
loan obtained by the Chairman and Chief Executive Officer from a third party,
for a like amount. Any payment made by the Company could be accounted for as a
variable stock option.

Equity in losses of joint ventures were $3,137,000 and $10,392,000 for the three
and nine months ended September 30, 2000, respectively, compared to $4,894,000
and $15,349,000 for the corresponding periods of 1999. These amounts represent
the Company's share of losses of the Dermagraft and NeoCyte Joint Ventures.
During 1999, the Company funded certain manufacturing and distribution costs
associated with the transfer of sales and marketing of TransCyte in the United
States to the Dermagraft Joint Venture, and included such costs as a loss in
equity in Joint Ventures. No such costs were included in the equity in losses
during the three and nine-month periods ended September 30, 2000 as compared to
$1,031,000 and $3,164,000, respectively, during the same periods in 1999. In
addition, the decrease in the 2000 loss reflects increased sales and reductions
in the Dermagraft Joint Venture's cost structure.

Gross results for the Dermagraft and NeoCyte Joint Ventures were as follows. Net
sales increased by 58% and 64% over the same periods in the prior year to
$1,384,000 and $3,112,000 for the three and nine months ended September 30,
2000, respectively. Cost of goods sold for the three and nine months ended
September 30, 2000 were $3,565,000 and $9,920,000, respectively and for the
three and nine months ended September 30, 1999 were $2,740,000 and $10,309,000,
respectively. Increased sales volume and manufacturing process enhancements
contributed to higher cost of goods sold for the three-month period in 2000
compared to 1999, while for the nine-month period cost of goods sold were
$389,000 lower in 2000 than in 1999, due primarily to the achievement of
manufacturing efficiencies. Other costs and expenses for the Dermagraft and
NeoCyte Joint Ventures, which include sales, marketing and general and
administrative expenses, for the three and nine months ended September 30, 2000
were $3,823,000 and $13,280,000, respectively and for the three and nine months
ended September 30, 1999 were $6,542,000 and $18,441,000, respectively. These
decreases reflect reductions in the Dermagraft Joint Venture's cost structure
and the reorganization of the NeoCyte Joint Venture.

The equity in losses of joint ventures includes costs incurred by the Company
and charged to the Dermagraft and NeoCyte Joint Ventures totaling $2,690,000 and
$3,543,000 for the three-month periods ended September 30, 2000 and 1999,
respectively, and $8,399,000 and $11,391,000 for the nine month periods ended
September 30, 2000 and 1999, respectively (see Note 9 to the consolidated
financial statements).

Interest income and other for the Company accounted for a net income of $65,000
and $1,241,000 in the three and nine months ended September 30, 2000,
respectively, as compared to income of $505,000 and $809,000 in the



                                      -15-

<PAGE>


corresponding periods of 1999. Interest income for the three-month period was
below the corresponding period of 1999, primarily as a result of one-time
investment income received in 1999. For the nine-month period endingSeptember,
2000, an increase in other income reflects one-time costs of $541,000 in the
second quarter of 1999 associated with the consolidation of the Company's
operations into two facilities. Interest expense was $308,000 and $1,232,000 in
the three and nine months ended September 30, 2000 as compared to $342,000 and
$1,429,000 in the corresponding period of 1999. The decrease primarily reflects
the repayment of a $10 million loan from Smith & Nephew in June 1999, partially
offset by interest on $3.2 million in additional borrowings from Smith & Nephew
related to the NeoCyte Joint Venture.

Liquidity and Capital Resources
-------------------------------

As of September 30, 2000, the Company had available working capital of $37.3
million, an increase of $26.7 million from December 31, 1999. The $26.7 million
increase over the nine-month period consists most notably of the receipt of $20
million from the sale of Common Stock in September 2000, an additional $7.8
million received from the exercise of warrants and options, the availability of
$5.0 million previously restricted for the redemption of outstanding shares of
Convertible Series B Preferred Stock (see Note 5 to the consolidated financial
statements), $1.3 million from the repayment of a note and accrued interest by
the Company's Chairman and Chief Executive Officer (see Note 7 to the
consolidated financial statements), $5.4 million received as a long-term loan in
September 2000 (the Dermagraft Joint Venture Loan, see Notes 2 and 4 to the
consolidated financial statements), a $5.7 million reduction in the current
portion of long-term debt through the issue to Smith & Nephew of the Company's
Common Stock in repayment of the NeoCyte Loan (see Notes 2 and 4 to the
consolidated financial statements) and $1.6 million of working capital generated
by the Company from a cash contribution made by Smith & Nephew to DermEquip and
used by DermEquip to purchase the Company's manufacturing plant assets (see Note
2 to the consolidated financial statements). These sources of working capital
were partially offset by $5.0 million of expenditure to support operations, a
net investment in the Company's joint ventures with Smith & Nephew of $12.5
million, and a $1.7 million net decrease in other borrowings which primarily
relates to payments on a loan taken out by and payable by DermEquip that is used
to fund manufacturing plant assets (the Chase Loan, see Note 4 to the
consolidated financial statements). Capital expenditures and patent application
costs were $0.8 million and $0.3 million, respectively, during the nine months
ended September 30, 2000.

The Company expects to continue to use working capital as it incurs substantial
research and development expenses, additional costs in support of clinical
trials, general and administrative costs in support of product
commercialization, expenditures for capital equipment and patents, and in
support of the Dermagraft and NeoCyte Joint Ventures and its strategic alliance
with Inamed. These uses of working capital are expected to be only partially
offset by revenues received from the Dermagraft and NeoCyte Joint Ventures with
Smith & Nephew and from the Inamed alliance. If, for any reason, Smith & Nephew
were to terminate the Dermagraft Joint Venture or, to a lesser extent, the
NeoCyte Joint Venture, the Company would experience a substantial increase in
the need for and use of its working capital to support the commercialization and
manufacture of its Dermagraft and TransCyte products or the development of its
orthopedic cartilage products.

The Company's working capital and capital requirements are dependent upon a
number of factors, including the achievement and timing of regulatory approvals
and third-party reimbursement, the timing and expense of the Company's
preclinical and clinical studies, sales and marketing efforts by the Company's
strategic partners, new technological innovations, market acceptance of the
Company's products and the establishment of new strategic alliances. The Company
currently believes it has sufficient funds to support its operations through the
fiscal year 2001.

The further development of the Company's technology and commercialization of its
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. The Company
may also pursue additional public or private offerings of debt or equity
securities. Additional funding could potentially be obtained through new
strategic alliances or other collaborative arrangements, or through the
extension of existing strategic alliances. However, funds from the sources
outlined above may not be available when needed or on terms favorable to the
Company, under existing arrangements or otherwise, and the Company may not be
successful in entering into any other strategic alliances or collaborative
arrangements.



                                      -16-

<PAGE>


The Company continually reviews its product development activities in an effort
to allocate its resources to those products the Company believes have the
greatest commercial potential. Factors considered by the Company in determining
the products to pursue include projected markets and need, potential for
regulatory approval and reimbursement 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 the Company considers relevant, the
Company may from time to time reallocate its resources among its product
development activities. Additions to products under development or changes in
products being pursued can substantially and rapidly change the Company's
funding requirements.

Financial Condition
-------------------

Cash, cash equivalents and short-term investments as of September 30, 2000
increased by approximately $12.2 million from December 31, 1999. Major inflows
include $20.0 million in proceeds from a sale of Common Stock in September 2000
(see Note 5 to the consolidated financial statements), $7.8 million received
from the exercise of warrants and options, the availability of $5.0 million
previously restricted for the redemption of outstanding shares of Convertible
Series B Preferred Stock (See Note 5 to the consolidated financial statements),
$7.6 million in additional borrowings including $5.4 million from the Dermagraft
Joint Venture Loan (see Notes 2 and 4 to the consolidated financial statements)
and $1.3 million from the repayment of a note and accrued interest by the
Company's Chairman and Chief Executive Officer (see Note 7 to the consolidated
financial statements). These inflows have been partially offset by the use of
$12.0 million to fund operations, a net investment of $12.5 million to support
the Dermagraft and NeoCyte Joint Ventures, $0.8 million for capital expenditures
and $6.0 million for payment of debt, $4.3 million of which was for partial
payment of the NeoCyte Loan (see Notes 2 and 4 to the consolidated financial
statements). Additionally, an inflow of $1.6 million was generated from a cash
contribution made by Smith & Nephew in September 2000 to DermEquip, which was
recorded as minority interest in the Company's consolidated financial statements
and was used by DermEquip to purchase the Company's manufacturing plant assets
(see Note 2 to the consolidated financial statements).

Receivables from joint ventures from December 31, 1999 to September 30, 2000
decreased by $0.6 million. Inventory increased by $1.4 million, primarily due to
the bulk purchase of $1.1 million of biodegradable scaffold material for the
manufacture of Dermagraft. The current portion of long-term debt at September
30, 2000 has decreased by $7.5 million from December 31, 1999, primarily
reflecting the repayment of the Smith & Nephew NeoCyte Loan (see Notes 2 and 4
to the consolidated financial statements). Payables to joint ventures decreased
by $3.1 million over the same period based on the timing of payments made to the
Dermagraft Joint Venture.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to changes in interest rates primarily from its long-term
debt arrangements and, secondarily, its investments in certain securities. The
Company does not utilize derivative instruments or other market risk sensitive
instruments to manage exposure to interest rate changes. The Company believes
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
the Company's interest sensitive financial instruments at September 30, 2000.


                                      -17-


<PAGE>


                           PART II - OTHER INFORMATION
                           ---------------------------

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

During the three-month period ended September 30, 2000, the Company issued the
following securities:

On September 19, 2000, the Company sold 3,494,365 unregistered shares of its
Common Stock to the State of Wisconsin Investment Board for an aggregate
consideration of $20 million. The Company subsequently registered all of these
shares for resale on a Form S-3 registration statement (No. 333-46508), filed on
September 25, 2000 and declared effective on October 3, 2000.

On September 29, 2000, the Company issued 770,453 shares of Common Stock to
Smith & Nephew in full repayment of outstanding loan and interest charges in the
amount of $5.676 million.

The above issuances of securities are exempt transactions under the Securities
Act by virtue of Section 4(2) and/or Regulation D. Neither transaction involved
a public offering. Appropriate legends were affixed to the stock certificates
issued in such transactions. The Company believes each transferee had adequate
access to information about the Company to make an informed investment decision
and each transferee is an accredited investor within the meaning of Rule 501 of
Regulation D.

ITEM 5 - OTHER INFORMATION

FACTORS THAT MAY AFFECT FUTURE RESULTS

THE FOLLOWING IS A SUMMARY DESCRIPTION OF SOME OF THE MANY RISKS ADVANCED TISSUE
SCIENCES ("WE", "US", AND "OUR") FACES IN OUR BUSINESS. YOU SHOULD CAREFULLY
REVIEW THESE RISKS IN EVALUATING OUR BUSINESS AND THE BUSINESSES OF OUR
SUBSIDIARIES. YOU SHOULD ALSO CONSIDER THE OTHER INFORMATION DESCRIBED IN THIS
REPORT.

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

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

To date, we have experienced significant operating losses in funding the
research, development, testing and marketing of our products and expect to
continue to incur substantial operating losses. To September 30, 2000, we had
incurred cumulative net operating losses of $261 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. We may never achieve
a profitable level of operations or even if we achieve profitability, we may not
be able to sustain it on an ongoing basis.

IF OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, IT COULD MATERIALLY ADVERSELY
AFFECT YOUR INVESTMENT AND OUR ABILITY TO RAISE ADDITIONAL CAPITAL.

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

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

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

Early in 1998, an FDA Advisory Panel recommended the FDA approve Dermagraft for
marketing in the United States for the treatment of diabetic foot ulcers. The
Advisory Panel's recommendation included certain conditions we would have needed
to satisfy after the commercial introduction of Dermagraft. However, in June
1998, the FDA requested we complete an additional controlled clinical trial to
support our application for approval to market


                                      -18-

<PAGE>


Dermagraft for the treatment of diabetic foot ulcers. The clinical trial began
in late 1998 and the results of a planned interim analysis of data from this
trial were announced in December 1999. These data showed that, although
statistical significance was not achieved at the interim analysis, Dermagraft
was healing more ulcers than the control treatment in those diabetic foot ulcers
having a duration of greater than six weeks. In February 2000, the FDA approved
an application for an amendment to the Investigational Device Exemption (IDE)
for the clinical trial of Dermagraft in the treatment of diabetic foot ulcers.
Based on the data presented to the FDA in December 1999, the IDE has been
amended to revise the enrollment criteria and the statistical plan for data
analysis. Enrollment in this additional clinical trial has been completed and we
submitted our PMA application for approval of Dermagraft for the treatment of
diabetic foot ulcers to the FDA in August 2000. Commercial introduction within
the United States is subject to FDA approval. We cannot predict with any
certainty that the FDA will accept our PMA application filing or that the FDA
will ever approve any such application.

Despite promising clinical studies to date, Dermagraft may not be successful in
future clinical trials. Current or future clinical studies of Dermagraft or our
other products may be delayed or halted for various reasons, including:

     o   the product is not effective, or physicians think that it is not
         effective;
     o   patients experience severe side effects during treatment;
     o   patients do not enroll in the study at the rate we expect; or
     o   product supplies are not sufficient to treat the patients in the study.

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

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

The further development of our technology and products as well as any further
development of manufacturing capabilities or the establishment of additional
sales, marketing and distribution capabilities will require the commitment of
substantial funds. Our existing working capital will not be sufficient to meet
our needs. Potential sources of additional funds include payments from our
alliances with Smith & Nephew and Inamed Corporation. If, for any reason, Smith
& Nephew were to terminate the Dermagraft Joint Venture or, to a lesser extent,
the NeoCyte Joint Venture, we would experience a substantial increase in the
need for and use of our working capital to support the commercialization and
manufacture of our Dermagraft and TransCyte products or the development of our
orthopedic cartilage products. We may pursue additional public or private
offerings of debt or equity securities or other means to obtain funds. We could
also acquire additional funding through collaborative arrangements or the
extension of existing arrangements, which could require the issuance of
additional equity interests in us.

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

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

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

Our products are based on new and innovative technologies and the medical
community or the general population may not broadly purchase or use our products
as alternatives to existing methods of treatment. Sales of our products may be
adversely affected by:

     o   their respective cost;
     o   concerns related to efficacy;
     o   the effectiveness of alternative methods of treatment; and
     o   the insufficiency of third-party reimbursement.



                                      -19-

<PAGE>


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

Additionally, TransCyte, has been marketed and sold in the United States since
1997. To date it has not achieved widespread commercial acceptance in the United
States. Similarly, Dermagraft has only been sold internationally and may never
achieve commercial acceptance in the United States even if it receives FDA
approval.

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 particularly dependent on Smith & Nephew with respect to the Dermagraft
Joint Venture and NeoCyte Joint Venture. The amount and timing of resources to
be devoted by Smith & Nephew is not within our control. 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. We are relying on Smith &
Nephew 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. We cannot control the amount
and timing of resources that Smith & Nephew or others may devote to marketing
and selling our products. Smith & Nephew may not perform its obligations under
the Dermagraft Joint Venture as expected. Our failure to achieve broad use of
Dermagraft for the treatment of diabetic foot ulcers and, to a lesser extent,
TransCyte for burn care, would hurt our ability to generate revenues and any
future profits.

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

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

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

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

     o   applications may not result in issued patents;
     o   current or future issued or licensed patents, trade secrets or
         know-how may not afford protection against competitors with similar
         technologies or processes;
     o   any patents issued may be infringed upon or be designed around by
         others, or be challenged and invalidated;
     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



                                      -20-
<PAGE>


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 our Dermagraft and
TransCyte products are available from more than one supplier, changes in certain
critical components could cause the FDA to require us to prove equivalency of
the materials or potentially to modify or perform additional clinical trials for
our Dermagraft and TransCyte products, which could have the effect of
restricting our ability to commercialize our products.

The mesh framework used by us in the manufacture of Dermagraft is available from
only one FDA-qualified manufacturing source. Similarly, the synthetic mesh
framework used by us in the manufacture of TransCyte is available from only one
FDA-qualified manufacturing source. Because the FDA approval process requires
manufacturers to specify their proposed suppliers of active ingredients and
certain component parts and packaging materials in their applications, FDA
approval of a new supplier would be required if these materials become
unavailable from the current suppliers.

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

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

We have products that are in an early stage of development. To date, only
TransCyte has been approved for commercial sale and only Dermagraft has advanced
to clinical trials in the United States. However, Dermagraft still requires
further marketing approvals from the FDA, and all of our other products are at
earlier stages of research, development and testing. These products, including
additional indications for Dermagraft and TransCyte, will require significant
additional research and development, as well as extensive preclinical and
clinical testing.

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

     o   any or all of these products will be found to be unsafe or ineffective
         or otherwise fail to receive necessary regulatory approvals;
     o   our products are uneconomical to market;
     o   third parties may hold legal rights that preclude us from marketing
         such products; or
     o   our products fail to achieve market acceptance because of competing
         technologies and products.

RISKS RELATED TO OUR INDUSTRY
-----------------------------

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

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


                                      -21-

<PAGE>


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.

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

In addition, although the FDA has classified TransCyte as a medical device, the
state of California and the state of New York have notified us that we must
register as a tissue bank to manufacture or distribute TransCyte in those
states. Although some states do not regulate tissue banks, there are certain
other states besides California and New York that do. Such states could take a
position similar to California and New York with regard to the regulatory status
of TransCyte. In June 1997, we submitted a petition to the FDA requesting an
advisory opinion that the FDA's federal regulation of this product as a medical
device preempts conflicting New York laws from regulating the product as banked
human tissue. In January 2000, the FDA denied our petition to preempt applicable
New York laws. In view of the FDA's decision, the Company has initiated
discussions at the individual state level, beginning with the state of
California in an attempt to resolve this matter. Unless the outcome of these
discussions concludes otherwise, we and our customers will be subjected to a
costly new layer of regulation. In addition, under the laws of some states that
regulate tissue, including New York and Florida, the sale of human tissues for
valuable consideration is prohibited. We are currently distributing TransCyte in
California and New York under tissue banking licenses. Due to the similarities
of our products, regulations applicable to TransCyte are also expected to apply
to our Dermagraft product and potentially to our NeoCyte product as well.

In 2000, an IDE was submitted to the FDA requesting approval to begin pilot
human clinical studies using tissue-engineered cartilage for articular
resurfacing of the knee joint, under the NeoCyte Joint Venture.  The FDA
raised agency jurisdictional issues as to whether or not this product should
be regulated as a medical device or biologic, as well as questions about the
preclinical studies.

After regulatory approval is obtained, our product, its manufacture and related
manufacturing facilities will be subject to continual review and periodic
inspections. Any subsequent discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market. For example,
after inspecting the manufacturing facility early in 1998 in conjunction with
our application for the approval of Dermagraft for the treatment of diabetic
foot ulcers, the FDA notified us of numerous objectionable conditions under a
Form FDA 483 list of observations. These observations concerned our
manufacturing processes and systems for Dermagraft and TransCyte. In March 1998,
the FDA issued a warning letter requiring us to investigate and correct the
conditions identified by the FDA. In September 1998, we successfully completed a
re-inspection by the FDA of our manufacturing facility and quality systems.
However, we must continue to pass future facility inspections by the FDA and
foreign regulatory authorities.

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

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

Our ability to commercialize products successfully will depend in part on the
extent to which reimbursement for the costs of such products and related
treatments will be available from government health administration authorities,

                                      -22-

<PAGE>


private health insurers and other organizations. In the United States,
government and other third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new products. In some cases, such payors may refuse to provide any coverage for
uses of approved products for indications that the FDA has not granted marketing
approval. Initiatives to reform healthcare delivery are increasing these cost
containment efforts. As managed care organizations continue to expand as a means
of containing healthcare costs, we believe there may be attempts by such
organizations to restrict the use of, delay authorization to use, or limit
coverage and the level of reimbursement for, new products, such as those being
developed and commercialized by us, pending completion of cost/benefit analyses
of such products by those managed care organizations. Internationally, where
national healthcare systems are prevalent, little if any funding may be
available for new products, and cost containment and cost reduction efforts can
be more pronounced than in the United States.

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

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

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

Other factors such as our ability to secure regulatory approval for our
products, to implement production and marketing plans, and to secure adequate
capital resources will also impact our competitive position. We may not have the
resources to compete successfully.

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

Our success will depend in large part upon our ability to attract and retain
qualified scientific, administrative and management personnel as well as the
continued contributions of our existing senior management and scientific and
technical personnel. We face strong competition for such personnel and we may be
unable to attract or retain such individuals. In particular, if we lose the
services of either Arthur J. Benvenuto, our Chairman and Chief Executive
Officer, or Dr. Gail K. Naughton, our President, it will limit our ability to
achieve our business objectives and could make it difficult to raise additional
funds or to attract partners.

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

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


                                -23-

<PAGE>


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.

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
October 2000, 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 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   the approval and commercialization of products;
     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.


                                      -24-

<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,        Incorporated by Reference to Exhibit 1 to the
                1995, between the Company and Chemical          Company's Current Report on Form 8-K dated
                Trust Company of California, including the      January 5, 1995
                Certificate of 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     Incorporated by Reference to Exhibit 1 to the
                into as of November 8, 1999, between            Company's Form 8-A, as amended, dated November
                ChaseMellon Shareholder Services, L.L.C.        10, 1999
                and Advanced Tissue Sciences, Inc.

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

    10.1        Stock Purchase Agreement dated as of            Filed Herewith
                September 19, 2000, between the State of
                Wisconsin Investment Board and the Company

    10.2        License and Supply Agreement effective as of    Filed Herewith +
                September 25, 2000, between the Company and
                Biozhem Cosmeceuticals Inc.

    10.3       Term Sheet restructuring certain terms of        Filed Herewith +
               the Dermagraft Joint Venture, as amended and
               effective as of September 2000 between the
               Company and Smith & Nephew plc.

    27          Financial Data Schedule                         Filed With Electronic Copy Only

</TABLE>

+ Certain confidential portions of the exhibits were omitted by means of marking
such portions with an asterisk (the "Mark"). This exhibit has been filed
separately with the Secretary of the Securities and Exchange Commission ("SEC")
without the Mark pursuant to the Company's Application Requesting Confidential
Treatment under SEC Rule 24b-2.

(b)   Reports on Form 8-K

The Company filed a current report on Form 8-K on September 20, 2000 regarding
its public announcement of the completion of a $20 million private placement
covering the sale of 3,494,365 shares of unregistered common stock to the State
of Wisconsin Investment Board.


                                      -25-

<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 7, 2000                 /s/  Arthur J. Benvenuto
         --------------------------          -------------------------------
                                             Arthur J. Benvenuto
                                             Chairman of the Board and
                                             Chief Executive Officer

Date:         November 7, 2000                /s/ Nikhil A. Mehta
         --------------------------          -------------------------------
                                             Nikhil A. Mehta
                                             Senior Vice President, Finance and
                                             Chief Financial Officer