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 June 30, 2001

                                       or

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

             For the transition period from __________ to __________

                        Commission File Number: 0-016607

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


                 Delaware                              14-1701513
      ---------------------------------            -------------------
        (State or other jurisdiction                (I.R.S. Employer
      of 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 August 6, 2001 was 64,217,012.



<PAGE>


                         ADVANCED TISSUE SCIENCES, INC.

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


                                      INDEX

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

Item 1 - Financial Statements

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

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

         Consolidated Statements of Operations
           Three and Six Months Ended June 30, 2001 and 2000..........     3

         Consolidated Statements of Cash Flows
           Six Months Ended June 30, 2001 and 2000....................     4

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

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

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

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

   Item 4 - Submission of Matters to a Vote of Security Holders.......     14

   Item 5 - Other Information.........................................   14-21

   Item 6 - Exhibits and Reports on Form 8-K..........................     22

Signatures............................................................     23







<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM 1   - FINANCIAL STATEMENTS


                    INTRODUCTION TO THE FINANCIAL STATEMENTS

     The financial statements have been prepared by Advanced Tissue Sciences,
Inc. without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted under such rules and
regulations. We believe that the disclosures are adequate to make the
information presented not misleading when read together with the financial
statements and the notes included in our annual report on Form 10-K, for the
year ended December 31, 2000. Results for the interim periods are not
necessarily indicative of results to be expected for the full year.

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


                                       1


<PAGE>


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



                                                      June 30,      December 31,
                                                        2001           2000
                                                    -----------     ------------
                                                   (Unaudited)
    ASSETS
Current assets:
   Cash and cash equivalents                         $  10,554       $  24,197
   Short-term investments                                  992           6,854
   Receivable from joint ventures                        1,945           1,474
   Inventories                                           7,585           5,773
   Other current assets                                  2,374           1,814
                                                     ---------       ---------
       Total current assets                             23,450          40,112

Property - net                                          12,487          13,681
Patent costs - net                                       2,435           2,320
Other assets                                             2,532           2,993
                                                     ---------       ---------
       Total assets                                  $  40,904       $  59,106
                                                     =========       =========
    LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                  $     578       $   1,075
   Payable to joint ventures                               210             565
   Accrued expenses                                      5,685           5,391
   Current portion of long-term debt and capital
     lease obligations                                   7,984           7,999
                                                     ---------       ---------
       Total current liabilities                        14,457          15,030

Long-term debt and capital lease obligations             5,120           6,400
Other long-term liabilities                              1,913           1,874
                                                     ---------       ---------
       Total liabilities                                21,490          23,304
                                                     ---------       ---------
Stockholders' Equity:
   Common Stock, $.01 par value; 125,000,000
     shares authorized; 64,217,012 and 64,200,941
     shares issued and outstanding at June 30,
     2001 and December 31, 2000                            642             642
   Additional paid-in capital                          302,254         301,168
   Note received in connection with sale of
     Common Stock and deferred compensation
     applicable to Common Stock                         (1,539)         (1,672)
   Accumulated deficit                                (281,943)       (264,333)
   Accumulated other comprehensive loss                     --              (3)
                                                     ---------       ---------
       Total stockholders' equity                       19,414          35,802
                                                     ---------       ---------
       Total liabilities and stockholders' equity    $  40,904       $  59,106
                                                     =========       =========


        See accompanying notes to the consolidated financial statements.


                                       2


<PAGE>


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

<TABLE>
<CAPTION>

                                                       Three Months Ended June 30,         Six Months Ended June 30,
                                                       ---------------------------         -------------------------
                                                          2001             2000               2001           2000
                                                       ----------       ----------         ----------     ----------
                                                               (Unaudited)                        (Unaudited)
<S>                                                    <C>              <C>                <C>            <C>
Revenues:
   Product sales
     Related parties                                   $   3,526        $   2,996          $   6,828      $   6,618
     Others                                                  438               --                438             --
   Contracts and fees
     Related parties                                       1,122            2,134              2,150          4,888
     Others                                                  298            1,133                949          2,167
                                                       ---------        ---------          ---------      ---------
     Total revenues                                        5,384            6,263             10,365         13,673

Costs and expenses:
   Cost of goods sold                                      4,727            2,996              8,032          6,618
   Research and development                                2,338            3,699              5,412          7,600
   Selling, general and administrative                     4,239            3,564              8,275          8,179
                                                       ---------        ---------          ---------      ---------
     Total costs and expenses                             11,304           10,259             21,719         22,397

Loss from operations before equity in losses of
 joint ventures                                           (5,920)          (3,996)           (11,354)        (8,724)

Equity in losses of joint ventures                        (3,370)          (3,542)            (6,329)        (7,255)
                                                       ---------        ---------          ---------      ---------
Loss from operations                                      (9,290)          (7,538)           (17,683)       (15,979)

Other income (expense):
   Interest income and other                                 115              574                489          1,176
   Interest expense                                         (174)            (464)              (416)          (924)
                                                       ---------        ---------          ---------      ---------
Net loss                                                  (9,349)          (7,428)           (17,610)       (15,727)

Dividends on preferred stock                                  --               --                 --            (48)
                                                       ---------        ---------          ---------      ---------
Net loss applicable to common stock                    $  (9,349)       $  (7,428)         $ (17,610)     $ (15,775)
                                                       =========        =========          =========      =========

Basic and diluted loss per common share                $    (.15)       $    (.12)         $    (.27)     $    (.27)
                                                       =========        =========          =========      =========
Weighted average number of common shares used in
the computation of basic and diluted loss per
share                                                     64,203           59,845             64,203         59,014
                                                       =========        =========          =========      =========

</TABLE>


        See accompanying notes to the consolidated financial statements.


                                       3


<PAGE>


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


<TABLE>
<CAPTION>

                                                                                    Six Months Ended June 30,
                                                                                    -------------------------
                                                                                       2001           2000
                                                                                    ----------     ----------
                                                                                           (Unaudited)
<S>                                                                                 <C>            <C>
Operating activities:
   Net loss                                                                         $  (17,610)    $  (15,727)
   Adjustments to reconcile net loss to cash used in operating activities:
      Depreciation and amortization                                                      1,834          1,969
      Compensation for services paid in stock, options or warrants                       1,196          2,973
      Equity in losses of joint ventures                                                 6,329          7,255
      Other adjustments to net loss                                                          4            (13)
      Deferred revenue                                                                      --         (1,798)
      Changes in assets and liabilities:
        Receivables from joint ventures                                                   (471)        (4,513)
        Inventories                                                                     (1,812)         4,112
        Other current assets                                                              (561)           262
        Accounts payable                                                                  (497)          (204)
        Payable to joint ventures                                                         (355)        (3,123)
        Accrued expenses                                                                   294           (242)
                                                                                    ----------     ----------
         Net cash (used in) operating activities                                       (11,649)        (9,049)
                                                                                    ----------     ----------
Investing activities:
   Purchases of short-term investments                                                  (3,462)        (3,000)
   Maturities and sales of short-term investments                                        9,324          7,999
   Acquisition of property                                                                (597)          (588)
   Investment in joint ventures                                                         (6,120)        (8,411)
   Distributions from joint ventures                                                       489          1,364
   Patent application costs                                                               (160)          (177)
   Other long-term assets                                                                 (222)           391
                                                                                    ----------     ----------
         Net cash provided by (used in) investing activities                              (748)        (2,422)
                                                                                    ----------     ----------
Financing activities:
   Proceeds from borrowings                                                                 --          2,000
   Payments of borrowings                                                               (1,295)        (1,292)
   Restricted cash                                                                          --          5,000
   Options and warrants exercised                                                           57          7,598
   Long-term obligations and other                                                          (8)           (48)
                                                                                    ----------     ----------
         Net cash provided by (used in) financing activities                            (1,246)        13,258
                                                                                    ----------     ----------
Net (decrease) increase in cash and cash equivalents                                   (13,643)         1,787

Cash and cash equivalents at beginning of period                                        24,197         16,091
                                                                                    ----------     ----------
Cash and cash equivalents at end of period                                          $   10,554     $   17,878
                                                                                    ==========     ==========

</TABLE>


        See accompanying notes to the consolidated financial statements.


                                       4


<PAGE>



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

NOTE 1 - BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three or six-month periods ended June
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001.

     The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

     For further information, refer to the consolidated financial statements and
footnotes included in our Annual Report on Form 10-K for the year ended December
31, 2000.

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

NOTE 2 - SMITH & Nephew Joint Ventures

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

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

     The results of operations of the joint ventures for the three and six-month
periods ended June 30, 2001 and 2000 are as follows (in thousands):

<TABLE>
<CAPTION>


                                            Three Months Ended June 30,         Six Months Ended June 30,
                                            ---------------------------         -------------------------
                                               2001             2000               2001           2000
                                            ----------       ----------         ----------     ----------
<S>                                          <C>              <C>                <C>            <C>
Dermagraft Joint Venture
------------------------
         Net sales                           $    906         $    996           $  1,810       $  1,728
         Cost of goods sold                     4,010            3,431              7,227          6,355
         Other costs and expenses               3,128            3,228              6,252          6,777
         Net loss                              (6,232)          (5,663)           (11,669)       (11,404)

NeoCyte Joint Venture
---------------------
         Costs and expenses                  $    248         $  1,238           $    525       $  2,681
         Net loss                                (248)          (1,238)              (525)        (2,681)

</TABLE>


                                       5


<PAGE>


NOTE 3 - INVENTORIES

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

                                                June 30,        December 31,
                                                  2001              2000
                                            ----------------   --------------

        Raw materials and supplies            $   5,115          $   5,021
        Work-in-process                           1,014                683
        Finished goods                            1,456                 69
                                              ---------          ---------
                                              $   7,585          $   5,773
                                              =========          =========

NOTE 4 - CAPITAL STOCK

     In May 1999, our Chairman and Chief Executive Officer exercised an employee
stock option. The purchase price was paid through the issuance of an
interest-bearing, full recourse promissory note. In July 1999, we extended the
repayment terms on the note. As a result of the extension, the stock options
exercised through the issuance of the note were accounted for as variable stock
options, which could result in significant increases and decreases in
compensation expense subject to variability in our stock price. In September
2000, the outstanding principal and interest of $1,265,000 was repaid by our
Chairman and Chief Executive Officer and we guaranteed a personal loan obtained
by the Chairman and Chief Executive Officer from a third party, for a like
amount. The third-party loan was collateralized by the shares obtained through
the exercise of the stock options, and maintenance of the loan was dependent
upon our share price maintaining a certain value. Following a decline in our
share price, in October 2000 we honored our guarantee to the third party and
re-established a note from our Chairman and Chief Executive Officer. Specified
terms of the note, including its maximum value, were amended in May 2001. The
note receivable and accrued interest of approximately $1.4 million at June 30,
2001 and approximately $1.3 million at December 31, 2000 are included in
stockholders' equity in the accompanying balance sheets.

NOTE 5 - BASIC AND DILUTED LOSS PER SHARE

     Basic earnings per share are determined based on the weighted-average
number of shares outstanding during the period. Diluted earnings per share
include the weighted-average number of shares outstanding and give effect to
potentially dilutive common shares such as options and warrants outstanding.
Both the basic and diluted loss per common share for the three and six-month
periods ended June 30, 2001 and June 30, 2000 are based on the weighted-average
number of shares of our common stock outstanding during these periods.
Potentially dilutive securities include options and warrants outstanding,
however such securities have not been included in the calculation of the diluted
loss per share as their effect is antidilutive. Since such securities are
antidilutive, there is no difference between basic and diluted loss per share
for any of the periods presented. The net loss applicable to common stock used
in the calculation of basic and diluted loss per common share for the six month
period ended June 30, 2000 includes dividends of $48,000 accrued on our
Convertible Series B Preferred Stock during the period. There were no such
dividends accrued or paid in the three-month period ended June 30, 2000 or in
the six months ended June 30, 2001.

NOTE 6 - RELATED PARTY TRANSACTIONS

     During the three and six-month periods ended June 30, 2001 and June 30,
2000, we performed services for the Dermagraft and NeoCyte Joint Ventures, and
manufactured products for the Dermagraft Joint Venture, to sell to customers or
for use in clinical trials as described below. We have a 50% interest in each of
the Dermagraft and NeoCyte Joint Ventures.


                                       6


<PAGE>


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

     Product sales to related parties include products sold to the Dermagraft
Joint Venture. In addition, we recognize amounts in contract revenues for
research and development, marketing and other activities performed for the joint
venture. During the three and six-month periods ended June 30, 2001 and June 30,
2000, such amounts totaled (in thousands):

<TABLE>
<CAPTION>

                                                       Three Months Ended June 30,       Six Months Ended June 30,
                                                       ---------------------------       -------------------------
                                                          2001             2000             2001           2000
                                                       ----------       ----------       ----------     ----------
<S>                                                     <C>              <C>              <C>            <C>
Products sold to the Dermagraft Joint Venture           $  3,526         $  2,996         $  6,828       $  6,618
Contract revenues for activities performed              $  1,013         $  1,282         $  1,900       $  3,074

</TABLE>

     As a purpose of the Dermagraft Joint Venture is to share the costs of
manufacturing Dermagraft and TransCyte, product sales to the Dermagraft Joint
Venture reflect our cost of goods sold for such products, including period
costs. Period costs reflect overhead costs related to excess production capacity
and include rent, depreciation, quality control, facilities, supplies and other
such costs to support, or which are related to, the excess production capacity.
Due to such costs related to excess production capacity, the Dermagraft Joint
Venture immediately writes the inventory down to estimated market value at the
date of purchase, which is the net realizable value at which the joint venture
believes it will be able to sell the products to its customers. During the three
and six-month periods ended June 30, 2001 and June 30, 2000, such write-downs by
the Dermagraft Joint Venture totaled (in thousands):

<TABLE>
<CAPTION>

                                                        Three Months Ended June 30,      Six Months Ended June 30,
                                                        ---------------------------      -------------------------
                                                           2001             2000            2001           2000
                                                        ----------       ----------      ----------     ----------
<S>                                                      <C>              <C>             <C>            <C>
Dermagraft Joint Venture inventory write-downs           $  2,896         $  3,005        $  5,405       $  5,133

</TABLE>


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

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

<TABLE>
<CAPTION>

                                                        Three Months Ended June 30,      Six Months Ended June 30,
                                                        ---------------------------      -------------------------
                                                           2001             2000            2001           2000
                                                        ----------       ----------      ----------     ----------
<S>                                                      <C>              <C>             <C>            <C>
Contract revenues for activities performed               $    109         $    852        $    250       $  1,814

</TABLE>


     Our share of the costs incurred by us and charged to the Dermagraft and
NeoCyte Joint Ventures are reflected in the equity in losses of joint ventures
in the accompanying statement of operations. For the three and six-month periods
ended June 30, 2001 and June 30, 2000, such costs charged totaled (in
thousands):

<TABLE>
<CAPTION>

                                                        Three Months Ended June 30,      Six Months Ended June 30,
                                                        ---------------------------      -------------------------
                                                           2001             2000            2001           2000
                                                        ----------       ----------      ----------     ----------
<S>                                                      <C>              <C>             <C>            <C>
Charged to Dermagraft and NeoCyte Joint Ventures         $  2,612         $  2,825        $  4,798       $ 5,709

</TABLE>


                                       7


<PAGE>



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

     This report may contain predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties, some of which are
discussed in Part II - Item 5 of this report. This outlook represents our
current judgment on the future direction of our business. Such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested below. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date of this report.

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

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

     Dermagraft for the treatment of diabetic foot ulcers was approved for sale
in Canada and was introduced by the Dermagraft Joint Venture in the United
Kingdom and several other European countries in 1997 after receipt of the
required regulatory approvals. Dermagraft was approved for sale in Canada in
2001 for the treatment of venous ulcers and pressure ulcers. We also submitted a
Pre-market Approval, or PMA, application to the FDA for approval to market
Dermagraft for the treatment of diabetic foot ulcers in the United States. In
1998, the FDA decided the PMA application was not approvable without supportive
data from an additional controlled clinical trial. The additional clinical trial
began in late 1998, and in February 2000, the FDA approved an application for an
amendment to the Investigational Device Exemption, or IDE, for the trial. Based
on the data from the interim analysis, which we announced in December 1999, the
IDE was amended to revise the enrollment criteria and the statistical plan for
data analysis. The amended IDE allowed for the modification of the study
inclusion criteria to limit future enrollment to patients with ulcers of greater
than six weeks duration. In addition, the amended statistical plan allowed us to
integrate the interim analysis data from the clinical trial with additional data
generated subsequently from patients with ulcer duration of greater than six
weeks.

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


                                       8

<PAGE>


     As a result of delays in the commercial introduction of Dermagraft in the
United States, in 2000 we agreed with Smith & Nephew to restructure specified
payments associated with the Dermagraft Joint Venture. The FDA's request for an
additional clinical trial substantially increased the partners' investments
necessitating the restructuring. The objective of the restructuring was to defer
the potential payment of specified milestones by Smith & Nephew while providing
us a royalty stream and an opportunity to increase our long-term return from the
venture.

     In addition to the Dermagraft Joint Venture, since 1994 we have shared in a
separate joint venture with Smith & Nephew, the NeoCyte Joint Venture, for the
worldwide development, manufacture and marketing of human tissue engineered
cartilage for orthopedic applications. We are sharing equally with Smith &
Nephew in the expenses of the joint venture. During 2000, an IDE was submitted
to the FDA requesting approval to begin pilot human clinical studies of human
tissue engineered cartilage. The FDA raised agency jurisdictional issues as to
whether or not this product should be regulated as a medical device or biologic,
as well as questions about the preclinical studies. We continue to work with the
FDA to address these issues.

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

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

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

     In October 2000, we signed a license and supply agreement with SkinMedica,
Inc. Under this agreement, we granted a license to use and will sell NouriCel to
SkinMedica, to be used in SkinMedica's branded skin care products sold through a
network of dermatologists and plastic surgeons. We will be entitled to a selling
price for sales of NouriCel to SkinMedica and to specified milestone payments
and future royalties on sales of SkinMedica's products in the skin care
marketplace. We were also granted warrants to purchase SkinMedica common stock
at specified prices in future time periods. In May 2001, the agreement was
amended to change specified commencement and termination provisions.

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

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


                                       9

<PAGE>


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

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

     Product sales were $3,964,000 for the three months ended June 30, 2001,
compared to sales of $2,996,000 in the corresponding period of 2000. For the six
months ended June 30, 2001, product sales of $7,266,000 represent an increase of
$648,000 from sales of $6,618,000 in the same period of the prior year. These
increases primarily reflect $438,000 of collagen sales to Inamed in the second
quarter of 2001, while there were no collagen sales during the same period of
2000. Other product sales reflect sales of Dermagraft and TransCyte to the
Dermagraft Joint Venture at cost.

     Revenues from contracts and fees were $1,420,000 for the three months ended
June 30, 2001, compared to $3,267,000 for the same period in 2000. For the six
months ended June 30, 2001, such revenues decreased to $3,099,000, from
$7,055,000 in the corresponding period in the prior year. The decrease is
partially due to a $5 million licensing payment received from Inamed in 1999,
$899,000 of which was recognized in each of the first two quarters of 2000. No
such licensing payments were recognized in 2001. Other contract and fee
revenues, principally for research and development activities performed for the
Dermagraft and NeoCyte Joint Ventures, decreased from the prior year by
$1,012,000 in the second quarter of 2001, and $2,738,000 for the six months
ended June 30, 2001. This decrease is primarily due to the completion of the
additional clinical trial of Dermagraft in the treatment of diabetic foot ulcers
in 2000, and reduced spending in the NeoCyte Joint Venture. These revenue
reductions were partially offset by an increase in grant revenue of $64,000 in
the second quarter of 2001, and $580,000 for the six months ended June 30, 2001,
compared to the prior year.

     Cost of goods sold of $4,727,000 for the three months ended June 30, 2001
represents an increase from $2,996,000 in the corresponding period of 2000;
while for the six months ended June 30, 2001 cost of goods sold increased to
$8,032,000, from $6,618,000 in the same period in 2000. These increases
primarily reflect $1,201,000 in production costs for collagen in the second
quarter of 2001, while there were no comparable collagen costs in 2000. The
remaining cost of goods sold primarily represents the cost of TransCyte and
Dermagraft sold to the Dermagraft Joint Venture. As a result of the FDA's
decision to require additional clinical data for Dermagraft in the treatment of
diabetic foot ulcers, we are continuing to incur significant costs associated
with excess production capacity within our manufacturing facility. The
Dermagraft Joint Venture immediately writes the inventory down to estimated
market value at the date of purchase, which is the net realizable value at which
the joint venture believes it will be able to sell the products to its
customers. For the three-month period ended June 30, 2001 such write-downs were
$2,896,000, compared to $3,005,000 in the corresponding period of 2000. For the
six-month period ended June 30, 2001 such write-downs were $5,405,000, compared
to $5,133,000 in the same period of 2000. To the extent that we do not sell such
products to the Dermagraft Joint Venture, we would be required to write such
inventories down to net realizable value.

     Research and development expenditures decreased to $2,338,000 in the three
months ended June 30, 2001, from $3,699,000 in the prior year; and to $5,412,000
in the six months ended June 30, 2001 from $7,600,000 in the corresponding
period of 2000. Of these reductions, the completion of the additional clinical
trial of Dermagraft in the treatment of diabetic foot ulcers in 2000 accounts
for $543,000 in the second quarter and $1,306,000 for the first six months of
2001, compared to 2000. In addition, compared to 2000, there were reductions of
$604,000 in the second quarter and $1,506,000 for the first six months of 2001,
in research and development expenditures for the NeoCyte Joint Venture.
Additionally, collagen product development costs included in research and
development decreased by $648,000 for the three-month period and $298,000 for
the six-month period ended June 30, 2001, as our collagen product was moved from
product development into manufacturing. These reductions are partially offset


                                       10

<PAGE>


by an increase, over the prior year, of $264,000 for the second quarter of 2001
and $591,000 for the six months ended June 30, 2001, in research and development
costs related to the development of NouriCel.

     Selling, general and administrative costs were $4,239,000 for the three
months ended June 30, 2001 compared to $3,564,000 in the corresponding period of
2000; and $8,275,000 for the six months ended June 30, 2001 compared to
$8,179,000 in the same period of 2000. Compensation expense for a variable stock
option was $585,000 for the three-month period ended June 30, 2001 compared to
$704,000 in 2000, while for the six-month period ended June 30, 2001 such
expense was $1,029,000 compared to $2,695,000 in the same period of 2000. These
amounts are non-cash transactions and relate to stock options exercised in 1995
by our Chairman and Chief Executive Officer for which we issued a loan that is
being accounted for as a variable stock option. This accounting treatment can
result in significant increases and decreases in compensation expense subject to
the variability of our stock price.

     The decrease in non-cash expense is offset by an increase in other selling,
general and administrative costs of $794,000 for the three-month period, and an
increase of $1,762,000 for the six-month period ended June 30, 2001, compared to
the same period in 2000. Salary and benefits expenses increased by $318,000 for
the second quarter compared to 2000, largely as a result of senior management
additions that were made in the fourth quarter of 2000 and the first quarter of
2001. Salary and benefits expenses for the six months ended June 30, 2001
increased by $876,000 over the prior year, including $491,000 of recruitment
related costs. Outside service costs for consultants and professional services
increased by $192,000 for the second quarter and by $525,000 for the six months
ended June 30, 2001 over prior year, as a result of planning and business
development initiatives that were undertaken in the first quarter of 2001. These
initiatives and their related costs are expected to continue for the balance of
2001. The balance of the increase over 2000 is related to the building of
infrastructure in support of anticipated product launches.

     Equity in losses of joint ventures were $3,370,000 for the three-month
period ended June 30, 2001 and $3,542,000 for the corresponding period in 2000;
and 6,329,000 for the six-month period ended June 30, 2001 compared to
$7,255,000 for the same period in 2000. These amounts represent our share of
losses of the Dermagraft and NeoCyte Joint Ventures. Joint venture losses were
reduced in 2001 primarily as a result of reductions in research and development
expenditures. During the three-month period ended June 30, 2001 research and
development costs decreased by $1,290,000 from the comparable period in 2000,
and in the six-month period ended June 30, 2001 decreased by $3,183,000, largely
due to the completion of the additional clinical trial of Dermagraft in the
treatment of diabetic foot ulcers in 2000, and decreased spending in the NeoCyte
Joint Venture.

     Dermagraft Joint Venture sales of TransCyte for the three months ended June
30, 2001 decreased over the same quarter of 2000 by $0.1 million, to $0.8
million, primarily as a result of a reduction in manufacturing yields, limiting
our ability to fill orders in the first part of the 2001 quarter. Corrective
steps to increase yields and production have been put in place. For the first
six months of the fiscal year, joint venture TransCyte sales increased by $0.1
million over 2000, to $1.6 million.

     The equity in losses of joint ventures includes costs incurred by us and
charged to the Dermagraft and NeoCyte Joint Ventures totaling $2,612,000 for the
three-month period ended June 30, 2001 and $2,825,000 for the three-month period
ended June 30, 2000; and $4,798,000 for the six-month period ended June 30, 2001
compared to $5,709,000 for the six-month period ended June 30, 2000.

     Interest income and other was $115,000 in the three months ended June 30,
2001 compared to $574,000 in the corresponding period of 2000; and $489,000 in
the six months ended June 30, 2001 compared to $1,176,000 in the same period of
2000. The decrease primarily results from the reduction of interest earning
assets reflected in the consolidated balance sheets.

     Interest expense was $174,000 in the three months ended June 30, 2001
compared to $464,000 in the corresponding period of 2000; and $416,000 in the
six months ended June 30, 2001 compared to $924,000 in the same period of 2000.
The decrease in interest expense primarily reflects the repayment of a $10
million loan from Smith & Nephew in September 2000, partially offset by $5.4
million of borrowings from the Dermagraft Joint Venture, associated with the
restructuring of the Dermagraft Joint Venture.


                                       11

<PAGE>


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

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

     Cash and cash equivalents at June 30, 2001 decreased by $13,643,000 from
December 31, 2000. Major outflows included the use of $11,649,000 to fund
operations, a net investment of $5,631,000 to support the Dermagraft and NeoCyte
Joint Ventures, $1,295,000 for payment of debt and $597,000 for capital
expenditures. These outflows have been partially offset by $5,862,000 in net
proceeds from short-term investments.

     Receivables from joint ventures increased by $471,000 from December 31,
2000 to June 30, 2001, primarily as a result of the timing of receipts.
Inventory increased by $1,812,000 during the same period, largely as a result of
collagen production in 2001. Long-term debt at June 30, 2001 decreased by
$1,295,000 from December 31, 2000, primarily reflecting payments made under the
loan used by DermEquip to purchase manufacturing assets. The timing of payments
made to the Dermagraft Joint Venture reduced payables to joint ventures by
$355,000 during the six months ended June 30, 2001.

     We expect to continue to expend cash as we incur substantial research and
development expenses, additional costs in support of clinical trials, general
and administrative costs in support of product commercialization, and
expenditures for capital equipment and patents. In addition, under the terms of
our agreements with Smith & Nephew, we have agreed to fund our share of the
costs of the Dermagraft and NeoCyte Joint Ventures. We have also agreed to fund
specified costs to develop products, and related manufacturing processes, which
will be marketed by Inamed under the terms of our licensing agreement. In
addition, we are incurring costs to develop NouriCel. These uses of cash are
expected to be only partially offset by revenues received from the Dermagraft
and NeoCyte Joint Ventures with Smith & Nephew, from the Inamed alliance and
from other potential revenue sources such as our licensing agreements for
NouriCel. If, for any reason, Smith & Nephew were to terminate the Dermagraft
Joint Venture or, to a lesser extent, the NeoCyte Joint Venture, we would
experience a substantial increase in the need for and use of our cash to support
the commercialization and manufacture of Dermagraft and TransCyte, or the
development of orthopedic cartilage products.

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

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

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


                                       12


<PAGE>


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We are exposed to changes in interest rates primarily from our
long-term debt arrangements and, secondarily, our investments in interest-rate
sensitive securities. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes. We believe
that a hypothetical 100 basis point adverse move in interest rates along the
entire interest rate yield curve would not materially affect the fair value of
our interest sensitive financial instruments at June 30, 2001.


                                       13


<PAGE>


                           PART II - OTHER INFORMATION

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company's annual meeting of stockholders was held on May 22, 2001.
During the annual meeting, the stockholders elected the following nominees to
the Company's board of directors to serve for the term of one year or until
their successors have been elected and qualified. The votes of the stockholders
for each of the director nominees was as follows :


             Nominee                  In Favor          Withheld      Abstained
       --------------------------    -----------      ------------   -----------

       Arthur J. Benvenuto           57,000,505        3,095,296         --
       Dr. Gail K. Naughton          57,743,951        2,351,850         --
       Jerome E. Groopman, M.D.      58,142,386        1,953,415         --
       Jack L. Heckel                59,635,784          460,017         --
       Ronald L. Nelson              59,686,194          409,607         --
       Dayton Ogden                  59,661,569          434,232         --
       David S. Tappan, Jr.          59,616,819          478,982         --
       Dr. Gail R. Wilensky          47,354,209       12,741,592         --

     In addition, the stockholders ratified the appointment of Ernst & Young LLP
as independent auditors for the fiscal year ending December 31, 2001 with
59,825,168 shares in favor of the proposal, 182,281 shares opposed and 88,352
shares abstaining. Broker non-voting did not occur with regard to the election
of directors or the appointment of Ernst & Young.

ITEM 5 - OTHER INFORMATION

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

     To date, we have experienced significant operating losses in funding the
research, development, testing and marketing of our products and expect to
continue to incur substantial operating losses. Through June 30, 2001, we had
incurred cumulative net operating losses of $281.9 million. Our ability to
achieve profitability depends in part upon our ability to successfully
manufacture and market Dermagraft and TransCyte for skin ulcers and burns, and
to manufacture collagen and our nutrient solution for aesthetic applications. We
may never achieve a profitable level of operations or even if we achieve
profitability, we may not be able to sustain it on an ongoing basis.

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

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

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

     To sell our products that are under development, and our existing products
for additional applications, we, or our partners, must receive regulatory
approvals. To obtain approvals for new products, we, or our partners, must
conduct clinical studies demonstrating that the respective products are safe and
effective, which can be expensive


                                       14


<PAGE>


and time-consuming. Similar clinical studies may also be required to obtain
approval for additional applications of our existing products. We, or our
partners, may be unable to obtain regulatory approval on a timely basis, if at
all. If regulatory approval cannot be obtained for a regulated product or any
additional application of such a product, that product cannot be sold and
revenues will never materialize.

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

     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 clinical trials are completed.

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

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

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

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


                                       15

<PAGE>


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

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

     o  their respective cost;

     o  concerns related to efficacy;

     o  the effectiveness of alternative methods of treatment;

     o  the insufficiency of third-party reimbursement; and

     o  reports of adverse reactions.

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

     Additionally, TransCyte, has been marketed and sold in the United States
since 1997. To date, it has not achieved widespread commercial acceptance in the
United States. Similarly, Dermagraft 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 relying on Smith & Nephew, Inamed and others to market our products
both domestically and internationally. Our success in generating market
acceptance of Dermagraft and TransCyte will depend on the marketing efforts of
Smith & Nephew. Market acceptance of human-based collagen will depend in part on
the regulatory and marketing efforts of Inamed. We cannot control the amount and
timing of resources that Smith & Nephew, Inamed or others may devote to
marketing and selling our products, or their ability to continue investment in
such activities. In addition, the Dermagraft and NeoCyte Joint Venture
agreements provide that they may be terminated before their expiration under
certain circumstances that are outside our control. If Smith & Nephew does not
perform its obligations as expected or if Smith & Nephew has a strategic shift
in its business focus, it would be difficult for us to successfully complete the
development efforts of the Dermagraft Joint Venture and NeoCyte Joint Venture.
Our failure to achieve broad use of Dermagraft for the treatment of diabetic
foot ulcers and, to a lesser extent, TransCyte for burn care and human-based
collagen for aesthetic applications, would hurt our ability to generate revenues
and any future profits.

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

IF WE 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.


                                       16


<PAGE>


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

     o  applications may not result in issued patents;

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

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

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

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

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

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

     Although most of the raw materials used in the manufacture of our
Dermagraft, TransCyte and human-based collagen 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 such products, which could have the
effect of restricting our ability to commercialize our products.

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

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

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

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


                                       17

<PAGE>


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

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

     o  our products are uneconomical to market;

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

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

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

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

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

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

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

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

     After regulatory approval is obtained, our products, their manufacture and
related manufacturing facilities will be subject to continual review and
periodic inspections. Any subsequent discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on the
product or manufacturer, including withdrawal of the product from the market.
For example, after inspecting the manufacturing facility early


                                       18

<PAGE>


in 1998 in conjunction with our application for the approval of Dermagraft for
the treatment of diabetic foot ulcers, the FDA notified us of numerous
objectionable conditions under a Form FDA 483 list of observations. These
observations concerned our manufacturing processes and systems for Dermagraft
and TransCyte. In September 1998, we successfully completed a re-inspection by
the FDA of our manufacturing facility and quality systems. However, we must
continue to pass future facility inspections by the FDA and foreign regulatory
authorities.

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

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

     Our ability to commercialize products successfully will depend in part on
the extent to which reimbursement for the costs of such products and related
treatments will be available from government health administration authorities,
private health insurers and other organizations. In the United States,
government and other third-party payors are increasingly attempting to contain
healthcare costs by limiting both coverage and the level of reimbursement for
new products. In some cases, such payors may refuse to provide any coverage for
uses of approved products for indications that the FDA has not granted marketing
approval. Initiatives to reform healthcare delivery are increasing these cost
containment efforts. As managed care organizations continue to 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


                                       19

<PAGE>


and Chief Executive Officer, or Dr. Gail K. Naughton, our President, it will
limit our ability to achieve our business objectives and could make it difficult
to raise additional funds or to attract partners.

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

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

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

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

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
June 2001, our common stock has closed as high as $12.13 per share and as low as
$1.97 per share. Factors contributing to this volatility have included:

     o  the timing of approval and commercialization of products;

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

     o  progress or the results of preclinical and clinical trials;

     o  new technological innovations;

     o  developments concerning technology rights;

     o  litigation and related developments; and

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

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

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

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


                                       20

<PAGE>


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.


                                       21


<PAGE>


ITEM 6 - Exhibits and Reports on Form 8-K

(a)   Exhibits

<TABLE>
<CAPTION>

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

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

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

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

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

    10.1*      First Amendment to Development, License and        Filed Herewith
               Supply Agreement, as of May 21, 2001, between
               Advanced Tissue Sciences , Inc. and SkinMedica,
               Inc.

   10.2        Amended and Restated Promissory Note dated         Filed Herewith
               September 13, 2000 between the Company and
               Arthur J. Benvenuto

</TABLE>

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


(b)   Reports on Form 8-K

         None


                                       22


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


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


                                       23