LIFECELL CORP, 10-K/A, 1996-05-29

LIFECELL CORP
10-K/A, 1996-05-29
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 1 to Form 10-K
on
FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-19890

LIFECELL CORPORATION

A DELAWARE IRS EMPLOYER IDENTIFICATION
CORPORATION NO. 76-0172936

3606 RESEARCH FOREST DRIVE
THE WOODLANDS, TEXAS 77381

Telephone Number (713) 367-5368

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, $.001 Par Value

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Aggregate market value of the voting stock (Common Stock) held by non-affiliates
of registrant as of March 25, 1996 $ 10,169,035

Number of shares of registrant's Common Stock outstanding as of
March 25, 1996 4,403,658

TABLE OF CONTENTS

DESCRIPTION

ITEM PAGE
- ---- ----

PART I ................................................................... 1
---
1. BUSINESS....................................................... 1
2. PROPERTIES..................................................... 20
3. LEGAL PROCEEDINGS.............................................. 20
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 20

PART II ................................................................... 22
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................... 22
6. SELECTED FINANCIAL DATA........................................ 23
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 24
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 26
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 26

PART III ................................................................... 27
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 27
11. EXECUTIVE COMPENSATION........................................ 32
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 37
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 39

PART IV ................................................................... 41
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................... 41
GLOSSARY .......................................................... 44
FINANCIAL STATEMENTS........................................................F-1

PART I

THIS ANNUAL REPORT ON FORM 10-K CONTAINS, IN ADDITION TO HISTORICAL
INFORMATION, FORWARDLOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN "BUSINESS", "BUSINESS--RISK FACTORS", "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K.

ITEM 1. BUSINESS

CERTAIN TECHNICAL TERMS USED IN THIS ITEM ARE DESCRIBED OR DEFINED IN
THE GLOSSARY PRESENTED ON PAGE OF THIS ANNUAL REPORT ON FORM 10-K.

GENERAL

LifeCell Corporation ("LifeCell" or the "Company") develops and
commercializes universal tissue grafts and blood cell preservation products.

LifeCell utilizes know-how and its patented core preservation
technology to develop products in two general fields of use, tissue
transplantation and blood cell preservation. The Company's universal tissue
grafts are derived from a patented platform technology for processing and
preserving human (allograft) and animal (xenograft) tissues to preclude
rejection of transplanted foreign tissues by the human body. LifeCell removes
from cells that cause tissue rejection while preserving the extracellular tissue
matrix and its essential biochemical and structural composition. This matrix
does not cause an immune rejection response and has been clinically proven to
function as a natural template or scaffold into which a patient's own cells will
migrate following transplantation for effective tissue engraftment.

The clinical use of a preserved tissue matrix as a natural template for
tissue regeneration has been previously established in the grafting of
processed, freeze-dried allograft bone for orthopedic and periodontal
procedures. LifeCell's expertise is the ability to preserve the more delicate
and sophisticated tissue matrix of soft tissues, which would otherwise be
destroyed by the allograft bone process.

AlloDerm processed universal dermal tissue graft is LifeCell's first
commercial application of its technology. Additional universal tissue products
under development include composite skin graft, XenoDerm processed porcine
dermis, heart valves for replacement surgeries and vascular conduits for bypass
procedures.

Using its core preservation technology, LifeCell is also developing
products and patented formulations to facilitate storage, transportation and
delivery of transfusable blood cells. The Company is developing ThromboSol
platelet storage solution to permit refrigerated storage of transfusable blood
platelets and intends to develop other potential preservation technologies for
red blood cells and other mammalian cells.

LifeCell was organized in 1986 to commercialize its core preservation
technology, a process developed by The University of Texas Health Science Center
in Houston and exclusively licensed from The Board of Regents of the University
of Texas System involving ultra-rapid cooling and ultra-low temperature
freeze-drying of biological cells and tissues.

PRODUCTS

ALLODERM AND OTHER TISSUE PRODUCTS FOR SKIN REPAIR AND SOFT TISSUE
AUGMENTATION

AlloDerm is human donor (allograft) dermis that has been processed
using LifeCell's patented technology. The AlloDerm process removes the cells
from donated human (allograft) skin and preserves the critical structural and
biochemical components of the dermal matrix which are key to the eventual
engraftment of the dermal matrix.

The AlloDerm process preserves an immunologically inert human dermal
matrix which is freeze-dried and packaged for distribution to end-users.
AlloDerm grafts are rehydrated in the operating room in a ten-minute procedure
prior to grafting. The intact human dermal matrix functions as a graft or
implant, permanently integrating and guiding the reconstitution of dermal
tissue.

AlloDerm grafts consist entirely of human dermis. As a result, the
Company believes AlloDerm tissue products are not subject to the lengthy FDA
approval or clearance process associated with medical devices or drugs. See
"--Risk Factors--FDA Regulatory Status of AlloDerm". The sources from which
LifeCell procures human skin screen donors to meet all FDA requirements for
banked human tissue and conduct blood testing recommended by the Centers for
Disease Control and Prevention. Additionally, the AlloDerm process includes
de-cellularization (extraction of living cells from human tissue matrix) and
viral inactivation (the treatment of the tissue with a documented anti-viral
agent). The AlloDerm process has been independently validated to inactivate
concentrated suspensions of HIV, the virus that causes AIDS.

LifeCell procures allograft skin from unaffiliated tissue banks. To
date, the Company has not experienced any material difficulty in procuring
adequate supplies of cadaveric skin. Additionally, LifeCell believes it has
established what it believes to be adequate sources of cadaveric skin at
acceptable costs to satisfy the foreseeable demand for AlloDerm tissue products.

AlloDerm has been clinically accepted and has been demonstrated to be
cost effective (through reduced surgery time, donor site scarring, hospital stay
and outpatient therapy), reduce scarring, increase skin elasticity and minimize
or eliminate donor site trauma. In addition, AlloDerm, under standard
refrigeration, has a shelf life in excess of two years. LifeCell believes
AlloDerm achieves superior results at lower costs, thereby satisfying the
critical needs of not only the patient but also the payor, physician and
hospital.

AlloDerm products address multiple clinical markets including the
treatment of third-degree burns, periodontal surgery and plastic and
reconstructive surgery. Since its commercial introduction, AlloDerm has been
used as a dermal graft or transplant to treat over 1,000 patients. The Company
derived total product revenues of approximately $94,000 and approximately
$742,000 in 1994 and 1995, respectively. For the three months ended March 1996,
the Company expects total product revenues to exceed $400,000. Based on the
annual number of applicable procedures and LifeCell's current pricing, LifeCell
estimates the potential annual worldwide market for AlloDerm exceeds $800
million.

THIRD-DEGREE BURNS. AlloDerm grafts may be used in the treatment of any
and all burns that require skin grafts. Pediatric and elderly patients in
particular benefit from the use of the product as their skin is very thin, and,
therefore, they are more susceptible to increased donor site trauma and
complications. Patients who are burned in areas where mobility may be impaired
by scarring, such as hands, arms and legs, also derive maximum benefit from the
product. The Company estimates that approximately 55,000 people are hospitalized
each year in the United States due to burns. Approximately 20,000 patients are
admitted with major burns. Based on the annual number of applicable procedures
and LifeCell's current pricing, the Company estimates that the potential annual
worldwide market for AlloDerm grafts in burn treatment exceeds $300 million. To
date, AlloDerm grafts have been used to treat third-degree burn patients at
approximately 60 of the 140 burn centers in the United States.

Skin is the body's largest organ and is the first line of defense
against invasion of foreign substances. It contains two functional layers, the
upper surface consisting primarily of cells (epidermis) and an underlying
foundational layer of extracellular matrix proteins and collagen (dermis). The
epidermis functions as a water barrier and maintains hydration. The dermis
provides other important skin properties including tensile strength, durability
and elasticity.

Third-degree burns and other acute full-thickness skin wounds destroy
both the epidermis and the dermis. Destruction of dermis is of particular
concern because the body has lost the framework, I.E., the extracellular matrix,
to guide and support the regrowth of new cells and blood vessels. Like most
organs of the body, the skin can perform some repairs but it cannot regenerate
its basic structure. Instead, damaged or missing dermis is

replaced with scar tissue, which lacks the important elastic and tensile
properties of skin. Scar tissue also is disfiguring and can cause restricted
mobility of limbs and body areas near joints. For this reason, full-thickness
burns are treated with split-thickness skin grafts of the patient's own skin.

Third-degree burns generally are grafted with the patient's own skin
(autograft) taken from an uninjured area of the body. This procedure is painful
and causes an additional wound at the autograft donor site. Autografts that
include the dermal layer generate relatively deep donor sites which can cause
medical complications including infection and hypertrophic scarring. Autografts
that are too thin (containing minimal dermis) typically result in poor wound
healing quality, with scarring and contracture at the wound site. AlloDerm
grafts are used in conjunction with thin autografts to supply an adequate dermal
layer for optimum healing of the wound. The use of AlloDerm reduces the
thickness of split-thickness grafts required from the patient in treating such
wounds, thereby minimizing the substantial donor site trauma associated with
taking such grafts.

The use of AlloDerm tissue grafts to treat third-degree burn wounds
benefits patients by providing reduced donor site trauma, faster donor site
healing and healing at the grafted wound that is equivalent or superior to that
achieved with a thicker autograft. In addition, some surgeons have reported that
in some cases of extensive burns, the use of AlloDerm grafts has allowed certain
patients to leave the hospital sooner than expected with the standard treatment.

Prior to its commercial release, LifeCell subjected AlloDerm grafts to
a non-mandatory 18-month clinical evaluation at ten burn centers in the United
States. The clinical study was approved by the Institutional Review Boards of
each participating hospital and was directed by P. William Curreri, M.D., a past
president of the American Burn Association, consulting Medical Director for
LifeCell and a member of the Company's Board of Directors. Results of this
clinical trial were published in the March/April 1996 issue of the JOURNAL OF
BURN CARE AND REHABILITATION, the official journal of the American Burn
Association, and indicated that the AlloDerm grafts produced a take rate that
was not statistically different from the take rate of the control sites which
received standard thickness autografts, and that the quality of healing with
AlloDerm was either superior to or equivalent to the standard thickness
autografts.

PERIODONTAL SURGERY. LifeCell began marketing AlloDerm to periodontists
in September 1995. LifeCell estimates that there are in excess of 4,000
periodontal surgeons in the United States. Based on the annual number of
applicable procedures and LifeCell's current pricing, the Company estimates the
potential annual worldwide market for AlloDerm grafts in periodontal surgery
exceeds $150 million.

Periodontal surgeons use AlloDerm tissue in free-gingival grafting, a
procedure used to increase the amount of attached gum tissue supporting tooth
roots. This procedure previously required the use of autograft tissue, which was
excised from the roof of the patient's mouth and then transplanted to the gum.
In several clinical case studies, AlloDerm grafts (i) functioned as well or
better than the patient's own (autologous) graft, (ii) spared the patient the
pain and discomfort associated with the excision of the autograft, (iii) reduced
surgical time and (iv) eliminated the cost of the dressing that was needed for
the autograft donor site.

AlloDerm tissue products are also used as barrier membranes in guided
tissue regeneration. In this function, the AlloDerm tissue serves as a barrier
membrane over allograft bone grafts, which are used to restore a degenerated jaw
bone and surrounding gingival tissue. The AlloDerm tissue barrier engrafts over
the bone, preventing the cells of the surrounding soft tissue from extruding the
bone graft during the normal healing process. Jaw bones restored by this
procedure were suitable for supporting artificial tooth implants. AlloDerm
tissue has also been used for periodontal procedures to augment soft tissue loss
in gums.

The benefits of the AlloDerm tissue products in periodontal surgery
include elimination of donor site trauma, improved tissue color match, reduction
of the risk of infection, lack of inflammation, reduction of the cost of surgery
through the reduction of "chair time" (total length of time for the procedure)
and, in some cases, elimination of the need for a second procedure.

PLASTIC AND RECONSTRUCTIVE SURGERY. In November 1995, LifeCell
commenced marketing AlloDerm to plastic and reconstructive surgeons. The Company
estimates that there are approximately 8,000 physicians practicing plastic
surgery in the United States and that, based on the annual number of applicable
procedures and LifeCell's current pricing, the potential annual worldwide market
for the use of AlloDerm in plastic surgery exceeds $375 million. LifeCell also
believes that plastic surgery is an attractive market from the perspective of
reimbursement, since many of the procedures in which AlloDerm may be used are
directly paid by the patient.

Plastic surgeons use AlloDerm tissue as a graft to release contractures
and revise scarring resulting from previously grafted burn wounds, and as an
implant to correct soft tissue (dermal) defects and to revise scars resulting
from trauma or surgical excisions. Physicians have used the product for cosmetic
and aesthetic plastic surgery, including rhinoplasty, rhytidectomy, glabellar
contouring, repair of nasal septal defects and cheiloplasty. The benefits of the
AlloDerm product in plastic surgery include the lack of inflammation and ability
to persist long-term, reducing the need for follow-up procedures.

TEMPORARY WOUND COVERAGE--CRYOPRESERVED ALLOGRAFT SKIN

In April 1995, LifeCell began processing and distributing cryopreserved
allograft skin for use as a temporary or transitional covering for severe burn
wounds. For patients with extensive burns, allograft skin assists in stabilizing
the patient and preparing the wound bed for a permanent graft. Allograft skin is
considered by most burn surgeons to be the most effective temporary covering to
prevent fluid loss, reduce the incidence of infection and stabilize severe
full-thickness burn wounds. Based on the annual number of applicable procedures
and LifeCell's current pricing, the Company estimates the potential annual
worldwide market for its cryopreserved allograft skin exceeds $75 million.

PRODUCT DEVELOPMENT

In addition to AlloDerm tissue products, the Company is developing
composite skin grafts, XenoDerm porcine dermis, universal cardiovascular
products (heart valves and vascular conduits) and blood cell preservation
products. These programs are funded primarily through the Company's corporate
alliance with Medtronic and government grants and contracts pursuant to which
approximately $4.0 million has been received by LifeCell through 1995.

UNIVERSAL TISSUE GRAFTS

LifeCell is utilizing its universal tissue processing and preservation
technology to develop additional tissue graft products, including composite skin
grafts, XenoDerm products, heart valves and vascular conduits.

COMPOSITE SKIN GRAFTS. LifeCell intends to develop a composite,
full-thickness skin replacement tissue product containing an AlloDerm dermal
layer and an epidermis consisting of isolated keratinocytes (epidermal cells)
expanded under cell culture conditions. Successfully developed, a composite skin
graft product would effectively eliminate the requirement for taking an
autologous skin graft from burn patients.

In 1994, LifeCell received and completed an SBIR grant from the
National Science Foundation ("NSF") to assess the feasibility of a co-cultured
composite skin product. In 1995, LifeCell applied for a Phase II SBIR grant from
the NSF to continue the development of and initiate animal studies with this
composite skin graft product. LifeCell expects that the NSF will notify the
Company in 1996 as to whether it will be awarded this Phase II grant.

XENODERM TISSUE PRODUCTS. LifeCell is developing XenoDerm(TM) processed
porcine dermis, which is processed in a manner similar to the AlloDerm process
to remove the targets for immune rejection and preserve the dermal matrix.
Animal studies by LifeCell indicate that XenoDerm tissue does not cause a
significant immune response when transplanted cross-species. Animal studies
conducted by unaffiliated laboratories have shown that XenoDerm tissue is
potentially as effective as AlloDerm tissue in treating full-thickness skin
loss.
4

LifeCell believes that if successfully developed, the XenoDerm tissue
products would have the advantage of a potentially increased raw material supply
base and could facilitate distribution to certain international markets. See
"--Sources of Materials". The Company procures xenograft skin tissue from a
local supplier of laboratory animals. Future plans may include the establishment
and maintenance of a specific animal pool selected for optimum characteristics
for human transplantation. The Company currently plans to begin clinical testing
of XenoDerm tissue products in 1997 and anticipates product availability in
international markets by 1999.

HEART VALVES. LifeCell is applying its universal tissue processing and
preservation technology to porcine heart valves intended for replacement
procedures. The Company estimates that, worldwide, 160,000 heart valve
replacement procedures are performed annually at an estimated cost of $3,000 per
heart valve. In 1994, LifeCell and Medtronic, Inc. ("Medtronic") entered into a
license and development agreement for the potential development and
commercialization of heart valves processed with LifeCell's technology. Since
that time, pursuant to the agreement, LifeCell and Medtronic have been engaged
in a development program for heart valves that is funded fully by Medtronic. See
"--Corporate Alliance".

LifeCell's heart valves are based on its patented universal tissue
processing and preservation technology that the Company uses to process AlloDerm
tissue products. The Company processes heart valves harvested from pigs to
remove the cells that would be recognized by the body as foreign. By making the
transplanted heart valves non-immunogenic, LifeCell believes that the new valve
will last longer, become part of the body and perhaps last the patient's
lifetime.

Tissue heart valves on the market today have life spans of ten to 18
years as a result of progressive calcification. Mechanical heart valves last
longer but lack the blood flow dynamics of tissue valves and require the patient
to remain on anticoagulants for life to prevent strokes. Human donor
(allogeneic) valves are used in a limited number of the procedures, but there is
limited donor availability and, therefore, a limited market.

Preliminary animal studies conducted by LifeCell have shown that the
LifeCell heart valves transplanted in the thoracic descending aorta become
populated with the recipient's own cells, I.E., they have not been rejected by
the recipient. Other animal studies conducted by LifeCell have shown that the
valves do not undergo significant calcification. Clinical trials for the product
are scheduled to begin in 1999. Extensive FDA regulatory involvement in both
human and xenograft heart valves may significantly delay product entry into this
market. See "--Government Regulation".

VASCULAR CONDUITS. LifeCell is developing vascular conduit products for
arterial bypass as a treatment for atherosclerosis, a progressive, degenerative
disease characterized by a build-up of fats, cholesterol and other material
within the lining of arterial blood vessels located throughout the body. This
build-up is called plaque, and leads to reduced blood flow through the arteries,
and eventually, may result in serious arterial blockage that can cause tissue
damage and death. Minimally invasive surgical devices are currently available
for opening blocked or occluded arteries, including balloon angioplasty to
mechanically dilate and thereby open the vessel, and atherectomy devices and
lasers that physically remove plaque from the vessel wall. These procedures,
however, are not recommended when the patient displays extensive deposits of
atherosclerotic plaque throughout the length of one or more vessels, which makes
it impractical to attempt the opening of the occluded arteries due to the
procedural time involved. In these cases, a more extreme and invasive surgical
procedure called arterial bypass is indicated, in which one or more of the
patient's own veins (usually the saphenous veins from the legs) are transplanted
to an arterial position to divert blood flow around the blockage. Arterial
bypass is also used when the blockage is in a critical location or when the
surgeon is unable to safely access the blockage.

Arteries may be generally classified as either coronary, which supply
blood to the heart, or peripheral, which supply blood to the abdomen, groin and
legs. Coronary bypass procedures typically use the patient's own veins or
arteries. The trauma endured from the vessel removal is often more extensive
than that of the bypass procedure itself. Even though immune response is not an
issue with these selfderived (autologous) vessels, long-term patency (greater
than five years) is limited due to eventual blockage from progressive wall
thickening and thrombosis.

Repeat arterial bypass procedures may be difficult due to depletion of
the available supply of autologous vessels. The use of synthetic arterial
substitutes has been attempted, but these devices occlude even more rapidly in
the coronary and below-knee positions, which require a small diameter (6
millimeter) graft. The synthetic conduit has been used more successfully in
above-the-knee peripheral procedures, but is still associated with infections,
leaking and blockage.

LifeCell currently is developing vascular conduit products using
allograft blood vessels and plans to extend the technology to xenografts. These
potential products utilize LifeCell's ability to process vascular tissue and
remove cells that would be recognized by the host as foreign and trigger an
immune response. Early preclinical studies conducted by LifeCell with its
vascular conduits show that they become re-populated with new host cells after
grafting and show no sign of rejection.

More than 400,000 vascular bypass procedures are performed each year in
the United States. LifeCell estimates that approximately 60,000 coronary and
peripheral bypass procedures performed each year are repeat procedures in which
a suitable autologous vein or artery is not available. LifeCell believes that
such repeat procedures will constitute its initial market for its universal
conduit products.

As part of the Company's agreements with Medtronic for the development
of heart valves, LifeCell granted Medtronic certain rights of first refusal to
evaluate technology and negotiate license and development agreements for
vascular conduit products utilizing LifeCell's technology. Medtronic has
indicated to the Company that it intends to fund animal studies at the
University of Michigan in 1996 to test the feasibility of the Company's
processed vascular conduits. The Company plans to begin clinical trials in 1997.

BLOOD CELL PRESERVATION PRODUCTS

LifeCell is developing proprietary technology to extend the shelf life
of transfusable platelets, red blood cells and other mammalian cells. This
technology differs from the universal tissue graft applications in that cell
viability is crucial to successful processing.

THROMBOSOL PLATELET STORAGE SOLUTION. LifeCell is developing a
proprietary biochemical formulation called ThromboSol platelet storage solution
to protect transfusable platelets from damage at low temperatures. Platelets are
blood cells that control clotting. Approximately eight million platelet units
are collected and banked in the United States annually for transfusion.
Untreated platelets are sensitive to low temperatures and cannot be effectively
refrigerated. Presently, platelets are stored at room temperature and, due to
the risk of microbial contamination, have a limited shelf life of three to five
days. LifeCell has shown in laboratory tests that the addition of ThromboSol
solution preserves the functional aspects of refrigerated platelets for up to
ten days and frozen platelets for more than six months.

LifeCell currently plans to file an IND application for ThromboSol
platelet storage solution with the FDA in 1997. LifeCell intends to license this
product to a major pharmaceutical or other appropriate company.

The ThromboSol development program has been funded through a Phase I
and II SBIR contract with the United States Army and the Company anticipates
receiving additional contract funding for this program in 1996 from the United
States Navy.

FREEZE-DRIED RED BLOOD CELLS. LifeCell previously has been funded by
the United States Navy to develop directly transfusable freeze-dried red blood
cells. The need for immediately available, screened blood units is of particular
importance to the United States Armed Services because a substantial number of
combat deaths have resulted from hemorrhaging due to the lack of availability of
on-site transfusable blood. In addition, freeze-dried red blood cells
potentially will allow for widespread autologous transfusion, thereby preventing
transfusion related complications, including disease transmission.

The Company estimates that over ten million red blood cell units are
collected and banked annually in the United States. The fear of acquiring
transmittable diseases such as AIDS and hepatitis from donated blood units has
created a growing market for blood recycling units, preservation of autologous
blood, blood cell growth stimulating factors, and blood substitutes.
Freeze-dried blood can eliminate the concern of disease transmission by the
patient donating his or her own blood to be freeze-dried prior to the
anticipated need for transfusable blood.

The Company is seeking additional funds from various government
granting agencies and potential corporate partners to continue this program and
intends to license this technology to third parties at a later stage of
development.

CORPORATE ALLIANCE

In 1994, LifeCell entered into a license and development agreement with
Medtronic, one of the world's leading therapeutic medical device companies with
over $1.7 billion in sales for the year ended April 30, 1995, to develop jointly
the Company's heart valve products.

In addition to paying an initial $1.5 million licensing fee, the
agreement provides that Medtronic will fund all costs of research and
development, including clinical trials, receive the exclusive right to market
any resulting commercial products and pay LifeCell royalties of up to $25
million on sales of products covered by the agreement. Medtronic may terminate
the agreement at any time if in its sole business judgment it deems the
development and commercialization of products thereunder to not be in its best
interests or otherwise to be imprudent. In such event, and if the agreement is
terminated under certain other circumstances, Medtronic has the option to
convert the $1.5 million licensing fee into shares of the Company's Common
Stock, $.001 par value per share (the "Common Stock"), subject to certain
limitations, at the then current market price.

Medtronic also made a $500,000 equity investment in LifeCell by
purchasing approximately 64,000 shares of Common Stock at $7.77 per share in
exchange for rights of first refusal to negotiate licenses to LifeCell universal
vascular conduit products.

MARKETING STRATEGY

LifeCell currently markets AlloDerm grafts and cryopreserved allograft
skin to United States burn treatment centers and other potential customers
through its direct sales force. LifeCell has a sales and marketing staff
consisting of a vice president of business development, a vice president of
sales and marketing, a national sales and marketing manager, a product
development manager, three field technical representatives, three product
specialists and two customer service representatives. The field technical
representatives and product specialists are responsible for interacting with
treatment physicians, primarily burn surgeons and plastic surgeons at burn
treatment centers, and educating them regarding the use and anticipated benefit
of AlloDerm tissue grafts. In addition to its sales and marketing staff,
LifeCell contracts on a month-to-month basis with a telemarketing firm.
Telemarketing activities are focused on periodontal and, more recently, plastic
surgery customers. LifeCell also participates in national and international
conferences and trade shows for burns and wound healing.

The Company has targeted specialty distributors to aid in the marketing
and sales of AlloDerm tissue for plastic surgery indications. The Company
recently reached agreement with three such companies and in the near future
plans to add additional distributors to cover the United States. The Company
also plans in 1996 to increase its field technical representative staff by five
representatives, who will be responsible for promoting the use of AlloDerm
tissue products in plastic and reconstructive surgery and supporting regional
distributors of the product. During 1996, LifeCell also intends to enter into a
distribution agreement for worldwide rights for the distribution of AlloDerm
grafts for periodontal surgery. LifeCell expects the distributor to be a major
worldwide distributor of dental products.

PROCESSING

LifeCell procures human skin and other tissues from unaffiliated tissue
banks. See "--Sources of Materials". LifeCell provides tissue banks and their
procurement agents with specific procurement protocols, which are required for
the optimum removal and transportation of tissues. Tissues are transported to
LifeCell in accordance with standard industry practices and are identified on
delivery to LifeCell with a unique identification number that allows tracing to
a specific donor. This unique identification number accompanies each processed
tissue to its destination. It then becomes the responsibility of the recipient
treatment center, hospital or surgeon to return a self-addressed patient
tracking card (included with all LifeCell tissues) to LifeCell for donor and
recipient tracking.

LifeCell begins aseptic processing of donor tissue within 12 days
post-mortem. Processing includes any required sizing and trimming, treatment to
remove cells from the dermal matrix, which is then preserved by proprietary
cryoprotection, packaging and freeze-drying. Microbiological and other quality
assurance testing is conducted before AlloDerm tissue products are released for
shipment to customers. Customers typically order the AlloDerm product on a
just-in-time basis. The product is shipped at ambient temperature by overnight
delivery services.

Cryopreserved allograft skin is processed by a standard industry
protocol and stored at LifeCell's premises until requisitioned by a customer.
Cryopreserved allograft skin is transported to the customer on dry ice by
overnight delivery.

SOURCES OF MATERIALS

LifeCell procures allograft skin from unaffiliated tissue banks.
LifeCell is expanding its current procurement of skin and other tissues to
include any of approximately 100 major national tissue banks, including
approximately 35 skin banks. Procurement of certain human organs and tissue for
transplantation is subject to the restrictions of the National Organ Transplant
Act ("NOTA"), which prohibits purchase and sale of human organs and related
tissue for "valuable consideration". See "--Government Regulation". LifeCell
pays a procurement fee to the tissue bank, which covers the cost of recovering
the tissue, conducting donor testing for communicable diseases, including AIDS
and hepatitis tests recommended by the Centers for Disease Control and
Prevention.

Pursuant to contractual arrangements, LifeCell reimburses tissue banks
for recovering and delivering to LifeCell cadaveric skin suitable for
transplantation. In procuring such tissues, LifeCell competes with treatment
centers that use cadaveric skin for temporary wound dressings.

LifeCell has negotiated and signed allograft skin procurement service
agreements with certain tissue banks that, prior to these agreements, did not
recover skin from consented tissue donors. As part of these agreements, LifeCell
accepts from these tissue banks all skin tissue that meets LifeCell's allograft
skin procurement specifications, the requirements of the FDA and the procedural
guidelines outlined by the American Association of Tissue Banks. Allograft skin
tissue that is procured in excess of that required to meet the demand for
AlloDerm tissue products is processed by conventional cryopreservation and
distributed to burn treatment centers and hospitals for use as a temporary or
transitional wound dressing. See "--Products--Temporary Wound Coverage--
Cryopreserved Allograft Skin".

The Company has established what it believes to be adequate sources of
cadaveric skin at acceptable costs to satisfy the foreseeable demand for
AlloDerm tissue products. Although to date the Company has not experienced any
material difficulty in procuring adequate supplies of cadaveric skin, there can
be no assurance that the future availability of human skin will be sufficient to
meet LifeCell's demand for such materials. Any supply shortage of available
tissues in the future would have a materially adverse effect on LifeCell's
business.

GOVERNMENT REGULATION

Government regulation, both domestic and foreign, is a significant
factor in the manufacture and marketing of LifeCell's current and developing
products. In the United States, the Company's currently marketed human skin

allograft and AlloDerm products are subject to regulation by the FDA. The
Company's developing products will also be subject to the FDA regulation and may
require regulatory approval prior to commercialization. The Federal Food, Drug,
and Cosmetic Act (the "FDC Act"), the Public Health Service Act (the "PHS Act")
and other federal statutes and regulations govern or influence the testing,
manufacture, labeling, storage, recordkeeping, approval, advertising and
promotion of such products. Noncompliance with applicable requirements can
result in fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, refusal of the government to
authorize the marketing of new products or to allow the Company to enter into
supply contracts and criminal prosecution.

In December 1993, the FDA published an interim rule regulating "banked
human tissue" pursuant to its authority under the PHS Act. The rule is primarily
intended to minimize the risk of disease transmission from human tissue
transplants. The rule defines the term "banked human tissue". One element of the
definition is that the product be human tissue intended for therapeutic
administration to humans which is recovered, processed, stored and distributed
by methods not intended to alter tissue function or characteristics. LifeCell
believes that its skin allograft and AlloDerm products meet this and all other
elements of the definition of "banked human tissue" under the interim rule.
Products that are banked human tissue do not require FDA clearance prior to
commercialization.

In November 1995, following LifeCell's commercial introduction of
AlloDerm for periodontal applications, the Company received a letter from the
FDA's Center for Devices and Radiological Health (the "CDRH"). The letter stated
that the CDRH considered AlloDerm to be a "device" as defined by the FDC Act,
and that a 510(k) premarket notification was required to be submitted and
cleared by the FDA in order to market the product. LifeCell responded to the
CDRH in November 1995, stating the Company's view that AlloDerm is banked human
tissue under the FDA's interim rule and that no 510(k) clearance is required. By
letter dated March 6, 1996, the CDRH indicated that both the CDRH and the FDA's
Center for Biologics Evaluation and Research (the "CBER") remained of the view
that AlloDerm was a device. The letter suggested that the Company contact the
FDA Ombudsman's Office if it disagreed with this view. The Company has requested
a meeting with the Ombudsman's Office, which has the authority to mediate
disputes between companies and the FDA, to discuss the regulatory classification
of AlloDerm. Although the Company believes that AlloDerm falls within the
definition of banked human tissue, there can be no assurance that the FDA will
agree. If the FDA were to conclude definitively that AlloDerm is a device, the
Company would explore the available options, including requesting the FDA's
consent to continue marketing the product while the Company seeks 510(k)
clearance. There is no assurance that the FDA would consent to the continued
marketing of AlloDerm pending the FDA clearance of a 510(k) notice, nor is there
any assurance that 510(k) clearance for AlloDerm ultimately would be obtained or
that the FDA would not take enforcement action against the Company relating to
the continued marketing of this product. The failure to obtain any such consent
or clearance would have a material adverse effect on the Company. See "--Risk
Factors--FDA Regulatory Status of AlloDerm" and "--Risk Factors--Government
Regulation".

The FDA's banked human tissue regulation requires establishments
engaged in the procurement, processing, and distribution of human tissue to
conduct and maintain records of tissue donor screening procedures and blood
testing. In addition, tissue processing establishments are periodically
inspected by the FDA to ensure compliance with these requirements. If at any
time the FDA determines that a banked human tissue product is not procured,
processed or distributed in accordance with these requirements (E.G., there is a
question about the source of the tissue, the adequacy of the testing or the
adequacy of donor selection), the agency may order the recall and destruction of
the product. The failure of a tissue processing establishment to adhere to the
FDA's requirements could subject the establishment and its principals to civil
and criminal prosecution. LifeCell believes that the Company's operations
substantially comply with the requirements of the FDA's interim rule.

LifeCell requires that the tissue banks supplying the Company with
tissue comply with the FDA's banked human tissue regulation. In addition, the
Company requires supplying tissue banks to comply with procedural guidelines
outlined by the American Association of Tissue Banks (the "AATB"). Since 1976,
the AATB has administered a voluntary accreditation system for skin and
orthopedic tissue banks. The AATB evaluates tissue banks for compliance with a
rigorous set of standards through site inspections and document review. The
AATB's standards apply to the procurement, processing, preservation, storage and
labeling of tissue and include requirements

for disease screening through donor testing and review of donor medical
histories. Although the Company requires its supplying tissue banks to comply
with the FDA's requirements and the AATB's standards, there can be no assurance
that these tissue banks are in full compliance with these requirements. The
failure of a tissue bank to comply with regulatory requirements with respect to
tissue provided to the Company could have a material adverse effect on the
Company.

In its interim rule on banked human tissue, the FDA stated that it
would propose additional requirements for such products. Additional requirements
may include registration of tissue banking establishments with the FDA,
donor-recipient tracking, and clinical evaluation of tissues that are determined
to have undergone other than "minimal processing". To date, the FDA has not
proposed additional requirements; however, if significant additional regulatory
requirements were to be established, the Company could incur significant
additional costs in order to comply with such requirements.

LifeCell's proposed human and xenograft heart valve products and its
proposed xenograft tissue transplantation products including XenoDerm tissue and
xenograft vascular conduits are subject to regulation as medical devices.
LifeCell's proposed blood cell additives, including Thrombosol platelet storage
solution, are subject to regulation as biologics. Accordingly, such products
will require the FDA premarket approval or clearance prior to commercialization.
To obtain the FDA approval or clearance for these products, the Company must
submit proof of the safety and efficacy of these products. In most cases, this
entails extensive pre-clinical and clinical testing. Such testing must be
performed in accordance with the FDA's regulations. The testing, preparation of
necessary applications and processing of those applications by the FDA is
expensive and time consuming and will take several years to complete. There is
no assurance that the FDA will act favorably or quickly in making such reviews,
and significant difficulties or costs may be encountered by the Company in its
efforts to obtain the FDA approvals or clearances that could delay or preclude
the Company from marketing any product it may develop. The FDA may also require
post-market testing and surveillance to monitor the effects of approved
products, and may place conditions on approvals that could restrict commercial
applications of such products. Product marketing approvals or clearances may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. In addition, delays imposed by the
governmental approval process may materially reduce the period during which the
Company may have the exclusive right to commercialize patented products.

The FDA reviews medical devices for marketing approval or clearance
through two different procedures, the 510(k) premarket notification process and
the PMA process. LifeCell will need to pursue one of these routes with respect
to each of its proposed medical device products. The determination of which
process will be required for any particular product will depend in part upon how
the FDA has regulated similar products by the time LifeCell is ready to pursue
its own approvals or clearances.

Under the 510(k) premarket notification procedure, the applicant or
"sponsor" submits an application containing data that demonstrate the
"substantial equivalence" of the product to a device marketed prior to the
enactment of the Medical Device Amendments of 1976 or to a device legally
marketed thereafter pursuant to a 510(k). The FDA may require a 510(k) applicant
to submit additional, and possibly extensive, clinical data establishing the
safety and effectiveness of the product for each proposed medical use. Prior to
conducting the necessary clinical trials, an applicant may be required to submit
an IDE protocol to the FDA for approval. An IDE application typically contains
data from laboratory and animal testing demonstrating that the product is
sufficiently safe for study in humans as well as a description of the proposed
study methods and protocol. Clinical studies must be conducted according to a
written protocol and pursuant to the approval and oversight of one or more
Institutional Review Boards. In addition, clinical investigators must adhere to
good clinical practices. The FDA may order the temporary or permanent
discontinuation of a clinical trial at any time for non-compliance with its
regulations, because of safety issues or for other reasons. The collection of
data and preparation of a 510(k) application can be costly and time consuming,
and a 510(k) applicant may not market the product until a favorable decision is
received from the FDA. The FDA review of a 510(k) premarket notification can
take anywhere from a few months to several years. There can be no assurance that
marketing clearance ultimately will be obtained for any of LifeCell's products
that are the subject of 510(k) premarket notifications.

The PMA process is significantly more complex, costly and time
consuming than the 510(k) clearance procedure. To obtain premarket approval, the
applicant is required to submit extensive preclinical and clinical data to the
FDA. An IDE may be required to conduct the clinical trials. Upon completion and
analysis of clinical studies, the applicant assembles and submits a PMA
application setting forth the preclinical, clinical, manufacturing and other
data. Typically, the FDA will also inspect the manufacturing facility for
compliance with Good Manufacturing Practice ("GMP") regulations. The FDA review
and approval of a PMA can take several years. There can be no assurance that PMA
approvals will be obtained for any of LifeCell's proposed products.

With respect to LifeCell's proposed biological products, the Company
must obtain both a product license and an establishment license from the FDA
prior to marketing. A PLA and ELA must be submitted supported by extensive data,
including preclinical and clinical data which demonstrates that the manufactured
product meets prescribed standards of safety and efficacy. Before conducting the
required clinical testing of a biological product, an applicant must submit an
IND application to the FDA. Similar to the IDE for testing of devices, the IND
application must contain preclinical data demonstrating the safety of the
product for human investigational use, information about the manufacturing
processes and procedures, and the proposed clinical protocol. Clinical trials of
biological products are typically conducted in three sequential phases, but may
overlap. Phase I trials test the product in a small number of healthy subjects,
primarily to determine its safety and tolerance at one or more doses. In Phase
II, in addition to safety, the efficacy, optimal dose and side effects of the
product are evaluated in a patient population somewhat larger than the Phase I
trial. Phase III involves further safety and efficacy testing on an expanded
patient population at geographically dispersed test sites. All clinical studies
must be conducted in accordance with FDA approved protocol and are subject to
the approval and monitoring of one or more Institutional Review Boards. In
addition, clinical investigators must adhere to good clinical practices.
Completion of all three phases of clinical studies may take several years, and
the FDA may temporarily or permanently suspend a clinical study at any time.
Upon completion and analysis of clinical trials, the applicant assembles and
submits a PLA and an ELA. The ELA contains a complete description of the
manufacturing process. Before the licenses can be granted, the company must
undergo a successful establishment inspection. The FDA review and approval of a
biological product can take several years. There can be no assurance that
LifeCell will obtain the required approvals for any of its proposed biological
products.

Recently, the FDA proposed revisions to certain of its requirements for
biological product approval. One proposed change is the elimination of the ELA
for certain types of biological products. It is impossible to predict with any
certainty whether or how the Company's ability to obtain the FDA approval for
its proposed biological products will be affected by such changes.

All products marketed by LifeCell pursuant to the above-described
approvals and clearances will be subject to pervasive and continuing regulation
by the FDA. Products must be manufactured in registered establishments and must
be produced in accordance with GMP regulations. There are post-marketing
surveillance and reporting requirements. Manufacturing facilities and processes
are subject to periodic FDA inspection. Labeling and promotional activities are
also subject to FDA scrutiny and, in certain instances, by the Federal Trade
Commission. The export of devices and biologics is also subject to regulation
and may require prior FDA clearance. From time to time, the FDA may modify such
regulations and impose additional or different requirements. It is impossible to
predict how such revisions would affect the Company's operations. Failure to
comply with any applicable FDA requirements could result in civil and criminal
enforcement actions and penalties.

Sales of medical device and biological products outside the United
States are subject to foreign regulatory requirements that vary widely from
country to country. Approval of a product by comparable regulatory authorities
of foreign countries must be obtained prior to commercialization of the product
in those countries. The time required to obtain such foreign approval may be
longer or shorter than that required for FDA approval and there can be no
assurance that approvals would be obtained for any of the Company's products.

In addition, the NOTA prohibits the acquisition, receipt or transfer of
certain human organs, including skin and heart valves and vascular conduits for
"valuable consideration", but permits the payment of reasonable expenses
associated with the removal, transportation, processing, preservation, quality
control and storage of human tissue and skin. Assuming that NOTA applies to
LifeCell's products, it may be interpreted to limit the prices that LifeCell

may charge for processing and transporting such human tissue products. LifeCell
includes in its AlloDerm pricing structure certain of its educational costs
associated with the processing and transportation of human tissue. Although
LifeCell believes that recovery of educational costs is permitted under NOTA, a
future inability of LifeCell to pass these costs on to purchasers of its
products could adversely affect LifeCell's business and prospects. Assuming that
NOTA applies to LifeCell's products, LifeCell intends to comply with NOTA, but
there can be no assurance that the government will not adopt interpretations of
NOTA that would adversely affect LifeCell's pricing structure or otherwise call
into question one or more aspects of LifeCell's method of operation.

LifeCell is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, and the use, handling and
disposal of hazardous or potentially hazardous substances used and produced in
connection with LifeCell's research and development work. See "--Environmental
Matters". Although LifeCell believes it is in compliance in all material
respects with these laws and regulations, there can be no assurance that the
Company will not incur significant additional costs to comply with environmental
laws or regulations in the future.

RESEARCH AND DEVELOPMENT

LifeCell plans to continue to develop its non-AlloDerm technology
through an ongoing research and product development program. To date, its
research has been funded primarily through the SBIR grant program and the
proceeds from various offerings of its equity securities. LifeCell's research
and development costs in 1994 and 1995 were approximately $2.1 million and $2.2
million, respectively. The development of LifeCell heart valves is currently
being funded by Medtronic. The 1995 funding of this program was approximately
$825,000. See "--Corporate Alliance".

The SBIR grant program provides funding for two phases of awards. Phase
I is to evaluate the scientific and technical merit and feasibility of an idea.
Awards are up to $100,000 with a period of performance normally not to exceed
six months. Phase II is to expand on the results of and pursue the development
of Phase I. Awards are up to $750,000, with a period of performance normally not
to exceed two years. To date, LifeCell has been awarded and received
approximately $2.6 million through 11 approved SBIR contracts and awards.

LifeCell intends to continue to seek funding through the SBIR programs,
as well as to pursue additional government grant and contract programs.
Generally, LifeCell has the right to patent any technologies developed from SBIR
funding, subject to the United States government's right to receive a
royalty-free license for federal government use and to require licensing to
others in certain circumstances.

In February 1993 and May 1993, LifeCell began feasibility animal
studies for processed vascular grafts and processed heart valves, respectively.
Initial in-vitro stress testing has been conducted in collaboration with the
Department of Surgery, Baylor College of Medicine, Houston, Texas. The animal
studies also are being conducted at Baylor College of Medicine.

LifeCell initiated toxicity studies for ThromboSol platelet storage
solution in late 1994 and began preclinical animal studies in 1995.

PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS

LifeCell considers the proprietary nature of its technologies to be
important to its business. LifeCell pursues a policy of applying for patent
protection in both the United States and selected foreign countries for its
inventions, including but not limited to its proprietary formulations
(solutions), instrumentation and processing methods.

LifeCell currently has exclusive rights to eight United States patents
and related foreign patents and pending patent applications through a license
agreement entered into in 1986 with The Board of Regents of The University of
Texas System. These patents were issued between 1985 and 1992. Additionally,
LifeCell has been issued three

patents and has five pending United States patent applications. See "--Risk
Factors--Patents and Proprietary Rights".

LifeCell believes that its future success does not depend solely upon
patents, but rather depends, to a significant extent, upon the technical
competence, experience and technological skills of its personnel. LifeCell
believes that it owns or has the right to use all knowledge necessary to
manufacture and market its planned products. It does not believe that any of its
proprietary methods or products infringe upon any existing patent or proprietary
rights of others such that it would be liable for damages or prevented from
manufacturing or marketing its planned products.

LifeCell may decide for business reasons to retain certain knowledge
that it considers proprietary as trade secrets. In that event, or if patent
protection is unattainable, LifeCell must rely upon trade secrets, know-how and
continuing technological innovation to maintain its competitive position.
Employees and consultants of LifeCell who have access to proprietary information
have signed confidentiality agreements with LifeCell. It is LifeCell's policy to
require any new employee to sign similar confidentiality agreements.

LifeCell has federal trademark or service mark registrations that it
currently uses for LifeCell(R) and LifeCell Process(R), which cover processing
and preserving tissue samples, and AlloDerm(R), which covers LifeCell's
commercial dermal skin graft product.

COMPETITION

UNIVERSAL TISSUE GRAFTS

LifeCell anticipates direct competition for AlloDerm tissue products
and all of its proposed transplantable tissue products, as well as indirect
competition from advances in therapeutic agents, such as growth factors now used
to enhance wound healing. LifeCell believes that therapeutic growth factors may
be used in conjunction with its proposed products and may potentially enhance
the products' efficacy. LifeCell is not aware of any person or entity currently
marketing transplantable tissue products with features similar to AlloDerm and
LifeCell's other proposed transplantable products. There can be no assurance,
however, that LifeCell will be able to compete effectively with other
commercially available products or that development of other technologies will
not detrimentally affect LifeCell's commercial opportunities or competitive
advantage.

ALLODERM TISSUE PRODUCTS--BURNS. LifeCell believes that the AlloDerm
process is the only technology that consistently and effectively eliminates the
targets of rejection and permits permanent transplantation of human dermal
tissue. Competitive commercial products are currently in clinical trials that
claim to provide permanent full-thickness wound coverage. In most cases, these
products contain a "dermal equivalent", which is usually a processed animal
collagen gel or a bioabsorbable synthetic material in which human cells that
produce collagen (fibroblasts) are usually seeded. The fibroblasts secrete
dermal-like proteins and are intended to support a split-skin graft. In
comparison to these products, LifeCell has focused its product development on
the extracellular matrix, and not the cell population of dermis.

Advanced Tissue Sciences, Inc. ("Advanced Tissue") (Nasdaq: ATIS) is
developing a product called "Dermagraft-Burns", consisting of polyglycolic acid
(absorbable) suture material, woven into a three-dimensional mesh, in which
human neonatal foreskin fibroblast cells are cultured, that is intended to be
applied to a third-degree burn wound bed and overlaid with an ultra-thin
split-thickness autograft from an uninjured area of the patient's skin. Advanced
Tissue also is developing a product, called "Dermagraft-TC", a temporary
covering, that LifeCell believes does not compete directly in the same market as
AlloDerm, a permanent graft.

Organogenesis, Inc. (AMEX: ORG) has developed a "skin equivalent"
product called "Graftskin", that consists of a layer of processed bovine
collagen gel, in which neonatal foreskin fibroblasts are cultured. The gel also
contains a layer of cultured keratinocytes on its surface. The product is
currently undergoing clinical evaluations as a treatment for chronic skin
ulcers.

LifeCell believes that these "dermal equivalent products" lack
important dermal components and will encounter difficulty in adequately
anchoring the vital surface epithelial cells. LifeCell's primary objectives in
processing AlloDerm tissue include the preservation of important dermal
components, including a basement membrane complex. The Company believes this
structure not only is essential for sufficient anchoring of epidermal cells, but
also determines the degree of differentiation of these cells, an aspect that has
direct bearing on the skin's vital water barrier function. LifeCell has
demonstrated by electron microscopy that its processing technology has produced
preserved dermis with an intact basement membrane complex. LifeCell has further
demonstrated that a human epidermal cell population (keratinocytes) will attach
and differentiate into the stratified layers typical of normal skin, on both
human and porcine processed dermis. The AlloDerm process also preserves the
basement membrane of the vascular channels and capillaries within the dermal
matrix. LifeCell has demonstrated in animal studies that these vascular channels
become repopulated with host cells that normally line blood vessels and
ultimately restore a normal blood supply to the tissue graft. LifeCell believes
this aspect of its technology is fundamental to the ability of the transplanted
tissue to engraft permanently (integrate) into host tissue and that it is its
principal competitive advantage.

Integra LifeSciences Corporation ("Integra LifeSciences") (Nasdaq:
IART) recently has received a PMA from the FDA to market two-layer wound
dressings that include a biosynthetic dermal equivalent and a silicone membrane
called "Integra". Integra is restricted to treatment of life-threatening burns
in cases where autologous tissue is not available. This treatment requires that
the patient's autograft be applied in a subsequent surgery approximately two
weeks later.

LifeCell believes that AlloDerm grafts will effectively compete with
Integra in the treatment of burns based on superior product performance and
because AlloDerm grafts can be applied simultaneously with the patient's
autograft in a single procedure as opposed to an additional subsequent
procedure, thereby reducing surgical costs.

ALLODERM TISSUE PRODUCTS--PERIODONTAL SURGERY. AlloDerm grafts used in
free-gingival graft procedures compete with procedures using the patient's own
tissue, removed from the roof of the mouth or from another area of the patient's
skin, such as the leg, and freeze-dried allograft skin, procured from tissue
banks. LifeCell believes it competes with procedures using the patient's own
tissue by eliminating the need for a donor site and the resulting trauma. The
Company believes it competes with freeze-dried allograft skin because of
AlloDerm's higher biocompatability and reduced immune response.

AlloDerm grafts used as barrier membranes for guided tissue
regeneration compete with several commercial products, including "Gore-Tex",
manufactured by W.L. Gore & Associates, Inc. Gore-Tex is nonabsorbable and must
be removed by the periodontist several weeks following the initial surgery.
LifeCell believes that AlloDerm grafts compete with Gore-Tex by eliminating the
need for a second surgical procedure for removal of the membrane. The Company is
aware of other barrier membrane products that are absorbed by the body and,
therefore, do not have to be removed, including "Guidor", manufactured by
Guidor, and "Biomend", manufactured by Integra LifeSciences. LifeCell believes
that AlloDerm grafts will compete with absorbable membrane products through more
effective performance and versatility of use.

ALLODERM TISSUE PRODUCTS--PLASTIC AND RECONSTRUCTIVE SURGERY. When used
as a graft to release burn wound contractures, AlloDerm competes with the
patient's own tissue and potentially with the products described above intended
for burn wound grafting.

When used as an implant to augment soft tissue loss, AlloDerm competes
with the patient's own tissue and with several commercial products. As with
burns and periodontal surgery, use of the patient's own tissue causes donor site
trauma at the site of tissue removal. In soft tissue augmentation procedures,
fat or dermis is sometimes removed from one area of the body and implanted at
the site of the tissue deficit. There transplanted tissues are absorbed over a
period of months, requiring repeat surgery to recorrect the soft tissue deficit.
LifeCell believes that AlloDerm grafts compete with the patient's own tissue by
eliminating the need for a donor site and, because AlloDerm integrates into the
patient's tissue, by reducing the need for repeat surgical procedures.

COMPOSITE SKIN GRAFT. Genzyme Tissue Repair (Nasdaq: GNZL) has
developed technology for culturing autologous keratinocytes (epidermal) cells
for commercial distribution. LifeCell believes that these cultured epidermal
cell sheets called "Epicel" alone are not optimum as a permanent skin
replacement for full-thickness skin injury. This product does not contain a
dermal layer, and in some clinical cases this type of treatment for a
full-thickness wound has resulted in fragility with severe blistering and loss
of grafts. The fragile nature of the product usually requires that it be
hand-carried to the hospital. In some cases, this product has been used by burn
surgeons in conjunction with AlloDerm grafts in an attempt to improve the
quality of healing with these cultured cell sheets.

LifeCell believes that its composite skin product will compete
effectively with currently available cultured cell sheets because it will
contain a dermal layer, which should improve the take rate and reduce the
fragility currently associated with these products.

CRYOPRESERVED ALLOGRAFT SKIN (TEMPORARY WOUND COVERAGE). LifeCell
competes with regional tissue banks for the distribution of cryopreserved
allograft skin for temporary wound coverage. The Company believes that it can
compete successfully with these tissue banks by offering customized products and
services, such as pre-meshing of the grafts, which save time in the operating
room reducing surgery costs.

Advanced Tissue is developing a biosynthetic wound dressing,
Dermagraft-TC, consisting of a commercially available dressing in which human
neonatal fibroblasts are cultured and then covered with a thin synthetic
covering to prevent fluid loss. Advanced Tissue has reported that this product
is in clinical studies and expects to submit a PMA application for the product
to the FDA during the first half of 1996.

LifeCell believes that its cryopreserved allograft skin product will
compete successfully with Dermagraft-TC because cryopreserved allograft skin is
considered and widely published as the clinically preferred procedure for
temporary wound coverage and LifeCell's product is currently priced
approximately 75% less than the reported projected price for Dermagraft-TC.

HEART VALVES. Three current types of replacement heart valves are
commercially available, mechanical valves, chemically processed animal valves
and human allograft valves. Mechanical valves require the patient to be
maintained on lifelong anticoagulant therapy to prevent blood clotting and
subsequent complications of stroke. There also are published reports of sudden
catastrophic failure of these valves, resulting in patient death. Animal valves
calcify or harden over time and usually require replacement within ten to 18
years. Human allograft valves are in short supply. Major manufacturers and
suppliers of mechanical and animal heart valve products include Medtronic, St.
Jude Medical, Inc. and the Edwards Division of Baxter Healthcare Corporation.
Human tissue valves are procured and processed and distributed by Cryolife, Inc.
and non-profit tissue banks, including the American Red Cross.

LifeCell's preclinical data has indicated that its processed porcine
valve tissue undergoes reduced calcification compared to chemically processed
porcine valves and reduced immune response compared to fresh or cryopreserved
heart valve tissue. LifeCell believes that its processed heart valve, currently
under development with Medtronic, will minimize complications associated with
commercially available valves. See "--Corporate Alliance".

VASCULAR CONDUITS. Medical treatment for cardiovascular disease,
including atherosclerosis, constitutes a sizable industry, which is highly
competitive. Significant technological progress has been made with respect to
the development of minimally invasive devices for dilation of blocked vessels
and devices for physically removing the plaque from the vessel wall.
Additionally, drugs are being developed to prevent or reverse atherosclerosis.
Bypass surgery, however, is generally performed when the patient displays
extensive deposits of plaque throughout the length of one or more vessels, when
the blockage is in a critical position or when the blockage site cannot be
safely accessed. See "--Product Development--Vascular Conduits".

The two current preferred methods for coronary arterial bypass
procedure are transposing available arteries and using an autologous vein from
another area in the patient's body. The second procedure induces trauma to the

area of vein harvest and has shown evidence of failure or occlusion after five
to ten years. There are commercially available synthetic vascular conduit
substitutes, but these products also show evidence of occlusion and the
increased potential for leaking and infection. LifeCell believes that its
processing technology will reduce the causes and, accordingly, the potential for
vessel occlusion, leakage and infection. See "--Product Development--Vascular
Conduits".

BLOOD CELL PRESERVATION PRODUCTS

LifeCell currently is not aware of any product or developing product
that it anticipates will compete with the products it is developing for blood
cell preservation; however, technological competition in the blood banking field
is intense. Several companies with significantly greater financial resources
than LifeCell are developing blood substitute products. Additionally, several
commercially available blood recycling units are currently used in some surgical
procedures, and growth factors are being developed that are intended to increase
the body's capacity for producing blood cells. LifeCell believes that its
planned freeze-dried blood products and mammalian cells will successfully
compete with these technologies on the basis of cost and convenience.

ENVIRONMENTAL MATTERS

LifeCell's research and development and processing techniques generate
waste that is classified as hazardous by the United States Environmental
Protection Agency and the Texas Natural Resources Commission. LifeCell
segregates such waste and disposes of it through a licensed hazardous waste
transporter. Although LifeCell believes it is currently in compliance in all
material respects with applicable environmental regulations, its failure to
comply fully with any such regulations could result in the imposition of
penalties, fines or sanctions that could have an adverse effect on LifeCell's
business.

EMPLOYEES

At March 25, 1996, the Company had 53 full-time and one part-time
employee of which 23 were employed in laboratory operations and support, 12 in
sales and marketing, ten in research and development and nine in administration
and accounting.

RISK FACTORS

AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. ACCORDINGLY, PROSPECTIVE INVESTORS AND STOCKHOLDERS SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION
CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K.

NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL

The Company anticipates that its current financial resources will be
adequate to maintain its current and planned operations into the third quarter
of 1996. In the event the Company is unable to obtain additional financing by
the beginning of the third quarter of 1996, the Company intends to reduce its
current operations and delay certain planned expenditures in order to conserve
its resources and be able to continue its operations through the end of 1996.
The report of Arthur Andersen LLP, the Company's independent public accountants,
on LifeCell's financial statements for the year ended December 31, 1995,
includes an emphasis paragraph with respect to the Company's need for future
financing to fund the manufacturing and development of markets for its products.
The Company's future capital requirements will depend on many factors, including
successful expansion of sales of AlloDerm, continued scientific progress with
its research and development programs and expansion of such programs and
progress of preclinical and clinical assessment of products under development.
There can be no assurance that the Company will be successful in obtaining
additional capital in amounts sufficient to continue to fund its operations and
product development.

HISTORY OF OPERATING LOSSES

The Company has incurred substantial losses since inception in January
1986, including losses of approximately $3.4 million, $3.7 million and $3.9
million in 1993, 1994 and 1995, respectively, and had an accumulated deficit of
approximately $24.8 million at December 31, 1995. There can be no assurance that
the Company will ever become profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

FDA REGULATORY STATUS OF ALLODERM

In November 1995, following LifeCell's commercial introduction of
AlloDerm for periodontal applications, the Company received a letter from the
CDRH. The letter stated that the CDRH considered AlloDerm to be a "device" as
defined by the FDC Act, and that a 510(k) premarket notification was required to
be submitted and cleared by the FDA in order to market the product. LifeCell
responded to the CDRH in November 1995 stating the Company's view that AlloDerm
is banked human tissue under an interim rule published by the FDA in 1993 and
that no 510(k) clearance is required. By letter dated March 6, 1996, the CDRH
indicated that both the CDRH and the CBER remained of the view that AlloDerm was
a device. The letter suggested that the Company contact the FDA Ombudsman's
Office if it disagreed with this view. The Company has requested a meeting with
the Ombudsman's Office, which has the authority to mediate disputes between
companies and the FDA, to discuss the regulatory classification of AlloDerm.
Although the Company believes that AlloDerm falls within the definition of
banked human tissue, there can be no assurance that the FDA will agree. If the
FDA were to conclude definitively that AlloDerm is a device, the Company would
explore the available options, including requesting the FDA's consent to
continue marketing the product while the Company seeks 510(k) clearance. There
is no assurance that the FDA would consent to the continued marketing of
AlloDerm pending the FDA clearance of a 510(k) notice, nor is there any
assurance that 510(k) clearance for AlloDerm ultimately would be obtained or
that the FDA would not take enforcement action against the Company related to
the continued marketing of this product. The failure to obtain any such consent
or clearance would have a material adverse effect on the Company. See
"--Government Regulation".

GOVERNMENT REGULATION

Many if not all of LifeCell's developing products will require
regulatory approval or clearance prior to commercialization. Human therapeutic
products are subject to rigorous preclinical and clinical testing as a condition
of approval by the FDA and by similar regulatory authorities in foreign
countries. The lengthy process of obtaining these approvals and clearances and
the ongoing process of compliance with applicable federal statutes and
regulations will require the expenditure of substantial resources, and there can
be no assurance that the FDA or foreign approvals will be obtained for any of
the Company's products. See "--Government Regulation".

The FDA has promulgated an interim regulation on "banked human tissue"
intended to minimize the risk of disease transmission from human tissue
transplants. The interim rule defines "banked human tissue" in part as human
tissue intended for therapeutic administration to humans which is recovered,
processed, stored and distributed by methods not intended to alter tissue
function or characteristics. LifeCell believes that its skin allograft and
AlloDerm products currently are covered by this definition and do not require
premarket clearance. It is possible, however, that the FDA may ultimately
classify LifeCell's AlloDerm product as a medical device requiring FDA
clearance. In that case, the Company could be required to cease marketing the
AlloDerm product pending FDA clearance, and there can be no assurance that such
clearance ultimately would be obtained or that the FDA will allow the product to
be marketed while clearance is being sought. Failure to obtain such clearance or
allowance would have a material adverse effect on the Company. See "--Government
Regulation".

LifeCell's proposed human and xenograft heart valve products and its
proposed xenograft tissue transplantation products are subject to regulation as
medical devices. The Company's proposed blood cell additives are subject to
regulation as biologics. Such products require FDA premarket clearance prior to
commercialization. To obtain FDA clearance for these products, the Company must
submit proof of their safety and efficacy. Testing, preparation of necessary
applications and processing of those applications by the FDA is expensive and
time consuming. There can be no assurance that the FDA will act favorably or
quickly in making such reviews, and significant difficulties or costs may be
encountered by the Company in its efforts to obtain FDA clearances that

could delay or preclude the Company from marketing any product it may develop.
The FDA may also place conditions on clearances that could restrict commercial
applications of such products. Product marketing approvals or clearances may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. Delays imposed by the governmental
clearance process may materially reduce the period during which the Company has
the exclusive right to commercialize patented products.

Products marketed by LifeCell pursuant to FDA or foreign approval will
be subject to pervasive and continuing regulation. In the United States, devices
and biologics must be manufactured in registered establishments and must be
produced in accordance with GMP regulations. Manufacturing facilities and
processes are subject to periodic FDA inspection. Labeling and promotional
activities are also subject to scrutiny by the FDA and, in certain instances, by
the Federal Trade Commission. The export of devices and biologics is also
subject to regulation and may require FDA approval. From time to time, the FDA
may modify such requirements, imposing additional or different requirements.
Failure to comply with any applicable FDA requirements could result in civil and
criminal enforcement actions and other penalties. In addition, there can be no
assurance that the various states and foreign countries in which LifeCell's
products are sold will not impose additional regulatory requirements or
marketing impediments. See "--Government Regulation".

NOTA prohibits the acquisition, receipt or transfer of certain human
organs, including skin, heart valves and vascular conduits, for "valuable
consideration". NOTA permits the payment of reasonable expenses associated with
the removal, transportation, processing, preservation, quality control and
storage of human tissue and skin. NOTA may be interpreted to limit the prices
that LifeCell may charge for processing and transporting its human tissue
products. This could result in limited revenues which could adversely affect
LifeCell's business and prospects. See "--Government Regulation".

DEPENDENCE OF KEY MANAGEMENT AND PERSONNEL

The success of LifeCell will be dependent largely on the efforts of
Paul M. Frison, Chairman of the Board, President and Chief Executive Officer of
the Company, and Stephen A. Livesey, M.D., Ph.D., Executive Vice President,
Chief Scientific Officer and a director of the Company. The loss of either
person's services would have a material adverse effect on LifeCell's business
and prospects. Dr. Livesey, a citizen of Australia, has an "H-1B" visa to work
in the United States that currently expires in June 1996. He is in the process
of applying for an extension of his current visa to 1998 and intends to apply
for permanent residence status in the United States, but there can be no
assurance that he will be able to obtain such extension or status. Further, the
success of LifeCell is also dependent upon its ability to hire and retain
suitable operating, marketing and technical personnel. The competition for
qualified personnel in the biomedical industry is intense and, accordingly,
there can be no assurance that LifeCell will be able to hire or retain necessary
personnel.

TECHNOLOGICAL CHANGE AND COMPETITION

The biomedical field is undergoing rapid and significant technological
change. LifeCell's success depends upon its ability to develop and commercialize
its technology. There are many companies and academic institutions that are
capable of developing products based on similar technology, and that have
developed and are capable of developing products based on other technologies,
which are or may be competitive with LifeCell's products. Many of those
companies and academic institutions are well-established, have substantially
greater financial and other resources than LifeCell and have established
reputations for success in the development, sale and service of products. These
companies and academic institutions may succeed in developing competing products
that are more effective than LifeCell's products or that receive government
approvals more quickly than LifeCell's products. See "--Competition".

AVAILABILITY OF MATERIALS

The Company's business will be dependent on the availability of human
cadaveric skin and cardiovascular tissue to the extent that LifeCell is unable
successfully to develop products using animal tissue. A limited supply of
donated skin is available. Although the Company has established what it believes
to be an adequate source of

cadaveric skin to satisfy the expected demand for AlloDerm, there can be no
assurance that the availability of human skin and cardiovascular tissue will be
sufficient to meet LifeCell's demand for such materials. See "--Sources of
Materials".

UNCERTAINTY OF MARKET ACCEPTANCE

Achieving broad market acceptance for AlloDerm and LifeCell's proposed
products will require substantial additional marketing efforts. There can be no
assurance that AlloDerm or any of LifeCell's proposed products ultimately will
achieve widespread commercial acceptance.

PATENTS AND PROPRIETARY RIGHTS

LifeCell's ability to compete effectively with other companies is
materially dependent upon the proprietary nature of its technologies. LifeCell
relies primarily on patents and trade secrets to protect its technologies.
LifeCell currently has the exclusive right to eight patents through a license
agreement with the Board of Regents of the University of Texas System. In
addition, LifeCell has been issued three patents and has five pending United
States patent applications. There can be no assurance that LifeCell will obtain
any additional key patents or other protection, that the patents currently
applied for will be granted, that existing patents or proprietary rights owned
by or licensed to LifeCell will not be invalidated, that patents will provide
significant commercial benefits or that LifeCell will not be required to resort
to costly litigation to protect its patents or other proprietary rights. The
invalidation of key patents or proprietary rights owned by or licensed to
LifeCell could have a material adverse effect on LifeCell and on its business
prospects.

LifeCell has also applied for patent protection in several foreign
countries. Because of the differences in patent laws and laws concerning
proprietary rights, the extent of protection provided by United States patents
or proprietary rights owned by or licensed to LifeCell may differ from that of
their foreign counterparts. Although LifeCell does not believe that its products
or processes infringe the patent rights or proprietary rights of others, there
can be no assurance in this regard.

LIMITED THIRD-PARTY REIMBURSEMENT

Generally, hospitals, physicians and other health care providers
purchase products, such as the products being sold or developed by LifeCell, for
use in providing care to their patients. These parties typically rely on
third-party payors, including Medicare, Medicaid, private health insurance and
managed care plans, to reimburse all or part of the costs of acquiring those
products and costs associated with the medical procedures performed with those
products. Cost control measures adopted by third-party payors in recent years
have had and may continue to have a significant effect on the purchasing
practices of many health care providers, generally causing them to be more
selective in the purchase of medical products. These and future changes in
third-party payor reimbursement practices regarding the procedures performed
with LifeCell's products may adversely affect LifeCell's business.

PRODUCT LIABILITY AND INSURANCE

The Company's business will expose it to potential product liability
risks which are inherent in the testing, manufacturing and marketing of medical
products. Although the Company has product liability insurance coverage with an
aggregate limit of $2 million, there can be no assurance that such insurance
will provide adequate coverage against potential liabilities or that adequate
product liability insurance will continue to be available in the future or that
it can be maintained on acceptable terms.

LIMITED PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF
SECURITIES PRICES

Historically, the Common Stock has experienced low trading volumes. The
market price of LifeCell's Common Stock also has been highly volatile and it may
continue to be highly volatile as has been the case with the securities of other
public biotechnology companies. Factors such as announcements by LifeCell or its
competitors concerning technological innovations, new commercial products or
rocedures, proposed government regulations

and developments or disputes relating to patents or proprietary rights may
substantially affect the market price of LifeCell's securities. Changes in the
market price of LifeCell's Common Stock may bear no relation to LifeCell's
actual operational or financial results.

SHARES ELIGIBLE FOR FUTURE SALE

Substantially all of the outstanding Common Stock is available for sale
in the public marketplace. There are also outstanding stock options and warrants
to purchase an aggregate of 1,088,261 shares of Common Stock at various exercise
prices per share. The Company has an effective registration statement on Form
S-3 covering the public sale of 2,759,617 shares of Common Stock issuable upon
the conversion of and as dividends on shares of preferred stock and the exercise
of warrants issued by the Company in a private placement completed during 1994.
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of such shares for sale will have on the market
prices prevailing from time to time. The possibility that substantial amounts of
Common Stock may be sold in the public market may adversely affect prevailing
market prices for the Common Stock, and could impair the Company's ability to
raise capital through the sale of its equity securities.

LIMITATION ON THE USE OF NET OPERATING LOSSES AND RESEARCH AND
DEVELOPMENT TAX CREDITS

As of December 31, 1995, LifeCell had accumulated net operating loss
("NOL") carryforwards for federal income tax purposes of approximately $22
million and research and development tax credits of approximately $365,000 since
its inception, and may continue to incur NOL carryforwards. United States tax
laws provide for an annual limitation on the use of NOL carryforwards following
certain ownership changes and also limit the time during which NOL and tax
credit carryforwards may be applied against future taxable income and tax
liabilities. Accordingly, LifeCell may not be able to take full advantage of its
NOL carryforwards and tax credits for federal income tax purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

POSSIBLE ANTI-TAKEOVER EFFECTS

LifeCell's Restated Certificate of Incorporation and By-laws include a
number of provisions that may have the effect of encouraging persons considering
unsolicited tender offers and other unilateral takeover proposals to negotiate
with the Board of Directors rather than pursue non-negotiated takeover attempts.
These provisions include authorized blank check preferred stock and the denial
of cumulative voting.

DISPOSAL OF HAZARDOUS MATERIALS

ITEM 2. PROPERTIES

LifeCell leases approximately 20,000 square feet of laboratory, office
and warehouse space at its facilities in The Woodlands, Texas, under lease
agreements that expire in January 2001. The Company's monthly rental obligation
for its facilities is approximately $16,000.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is listed on the Nasdaq SmallCap Market under
the symbol "LIFC". The table below sets forth the high and low sales prices of
the Common Stock for each quarter of 1994 and 1995 and for the period from
January 1, 1996, to March 25, 1996, as reported by The Nasdaq Stock Market. The
quotations reflect inter-dealer prices, without retail mark-down or commission,
and may not represent actual transactions.

<TABLE>
<CAPTION>
1994 1995 1996
Price Range Price Range Price Range(1)
------------------------------- ------------------------------- -----------------------------
High Low High Low High Low
------------------------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $9 3/4 $4 3/4 $4 $1 5/8 $6 $2 1/4
Second Quarter 6 1/2 1 3/4 5 1/2 2 1/8
Third Quarter 5 2 7/8 4 3/4 3 3/8
Fourth Quarter 3 1/4 1 3/8 4 2
</TABLE>
- --------------------
(1) Through March 25, 1996.

As of March 25, 1996, the last sales price per share of LifeCell's Common
Stock, as reported by The Nasdaq Stock Market, was $4 1/4.

At March 25, 1996, the Company's 4,403,658 shares of Common Stock
outstanding were held by 195 stockholders of record and approximately 1,700
beneficial owners, and the Company's 264,500 shares of Series A Preferred Stock,
$.001 par value per share ("Series A Preferred Stock") outstanding were held by
13 stockholders of record. Each share of Series A Preferred Stock is convertible
into 6.69 shares of Common Stock, subject to adjustment in certain events.

LifeCell has not paid a cash dividend to its holders of Common Stock and
does not anticipate paying cash dividends to the holders of its Common Stock in
the foreseeable future. On November 9, 1995, the Company paid a per share
dividend of $1.20 in shares of Common Stock to the holders of the Series A
Preferred Stock. The Series A Preferred Stock bears dividends at the annual rate
of $1.60 per share for the year ending November 8, 1996, and $2.00 per share for
the year ending November 8, 1997, respectively. The dividends may be paid, at
the Company's option, in cash or shares of Common Stock (valued at the greater
of the then current market price of the Common Stock per share and $2.00) or in
a combination of cash and shares of Common Stock. The dividends will accrue
quarterly and the value of the Common Stock for which the Company may elect to
pay such dividends will be calculated on a quarterly basis. Under the General
Corporation Law of the State of Delaware, a corporation's board of directors may
declare and pay dividends only out of surplus or current net profits.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data of LifeCell
for each of the years in the five-year period ended December 31, 1995, derived
from the Company's audited financial statements. The Company's independent
public accountants have included an emphasis paragraph in their report on the
Company's financial statements as of December 31, 1994 and 1995, to the effect
that in order to manufacture and develop markets for its products, additional
financing will be required. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included elsewhere in
this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
Year Ended December 31,

1991 1992 1993 1994 1995
---------------- --------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:

Revenues:

Product sales.................. $ -- $ -- $ 20,737 $ 93,940 $ 742,238

Contract research and
development.................... 888,303 239,102 377,057 722,675 1,064,337

Equipment sales and
processing services(1)...... 536,318 -- -- -- --
---------------- --------------- ---------------- --------------- --------------

Total revenues.............. 1,424,621 239,102 397,794 816,615 1,806,575
---------------- --------------- ---------------- --------------- ---------------

Costs and expenses:

Cost of goods sold............. 453,594 -- 207,398 515,500 925,174

Contract research and
development.................... 888,303 239,102 377,057 722,675 1,064,337

Proprietary research and
development.................... 414,702 1,354,941 1,718,799 1,363,176 1,105,427

General and administrative..... 1,006,306 1,165,662 1,479,327 1,381,470 1,422,588

Selling and marketing.......... 114,088 205,108 268,618 727,615 1,475,296
---------------- --------------- ---------------- --------------- ---------------

Total costs and expenses.... 2,876,993 2,964,813 4,051,199 4,710,436 5,992,822
---------------- --------------- ---------------- --------------- ---------------

Loss from operations.............. $ (1,452,372) $ (2,725,711) $ (3,653,405) $ (3,893,821) $ (4,186,247)
---------------- --------------- ---------------- --------------- ----------------

Interest income and other...... 25,456 161,443 223,973 167,300 280,843
---------------- --------------- ---------------- --------------- ---------------

Net loss.......................... $ (1,426,916) $ (2,564,268) $ (3,429,432) $ (3,726,521) $ (3,905,404)
================ =============== ================ =============== ================

Loss per share(2)................. $ (0.56) $ (0.70) $ (0.80) $ (0.90) $ (1.10)
================ =============== ================ =============== ================

Shares used in computing loss
per share......................... 2,539,222 3,643,333 4,277,171 4,294,179 4,313,366
================ =============== ================ =============== ===============

At December 31,

1991 1992 1993 1994 1995
---------------- --------------- ---------------- --------------- -----------

BALANCE SHEET DATA:

Cash and cash equivalents......... $ 98,683 $ 3,938,598 $ 426,104 $ 1,877,295 $ 3,015,332

Short-term investments............ -- 2,589,493 3,016,511 5,154,824 --

Working capital (deficit)......... (325,770) 6,770,195 3,433,008 6,613,304 2,888,048

Total assets...................... 1,149,965 7,413,401 4,260,079 7,997,404 4,376,039

Long-term obligations ............ 49,011 -- -- 1,500,000 1,500,000

Accumulated deficit............... (10,624,935) (13,189,203) (16,618,635) (20,678,402) (24,774,753)

Total stockholders' equity........ 299,626 7,152,253 4,045,661 5,743,127 2,093,906
</TABLE>
- --------------------

(1) LifeCell sold its equipment inventory and licensed its equipment business in
June 1991.

(2) Includes effect of accounting treatment of preferred stock of $0.03 and
$0.19 in 1994 and 1995, respectively.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS
ANNUAL REPORT ON FORM 10-K.

GENERAL AND BACKGROUND

LifeCell was organized in 1986 and since inception has been financed
through the public and private sale of equity securities to individuals, venture
capital firms and corporations, product sales, its corporate alliance with
Medtronic and the receipt of government contracts and grants.

In December 1993, LifeCell began commercial distribution of AlloDerm
human dermal grafts. The initial AlloDerm product was used as a dermal
replacement in the grafting of third-degree burns. LifeCell commenced commercial
sales of AlloDerm for periodontal surgery in September 1995 and for plastic and
reconstructive surgery uses in June 1995.

The Company derived total product revenues of approximately $94,000 and
approximately $742,000 in 1994 and 1995, respectively. For the three months
ended March 1996, the Company expects total product revenues to exceed $400,000.

In 1994, LifeCell entered into agreements with Medtronic pursuant to
which Medtronic agreed (subject to certain rights to terminate at Medtronic's
discretion) to fund the development of LifeCell's proprietary tissue processing
technology in the field of heart valves.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1995 AND 1994

Total revenues for 1995 were approximately $1.8 million compared to
approximately $817,000 for 1994. This increase was primarily due to increased
product sales and increased activities in the corporate alliance with Medtronic.
Product sales increased to approximately $742,000 in 1995 from approximately
$94,000 in 1994, due to greater market acceptance and additional sales efforts.
The corporate alliance revenues increased to approximately $825,000 in 1995 from
approximately $358,000 in 1994 due to a full year of activity in 1995 and
increased heart valve development activities. The corporate alliance revenues
are recorded based on the costs of the work performed under the agreement. In
1995, revenues included amounts recorded from one SBIR contract of approximately
$239,000, compared to approximately $364,000 from two SBIR contracts in 1994.
During 1995, research and development contracts and grants revenue consisted of
approximately $239,000 pursuant to the second year of a 1993 award of a Phase II
$740,000 SBIR contract from the United States Army for the prolonged storage of
platelets. Interest income increased to approximately $281,000 in 1995 from
approximately $167,000 in 1994 due to an increase in average funds available for
investment in 1995 as compared to 1994.

Cost of goods sold for product sales increased $409,000 while revenues
increased $648,000 during 1995 as compared to 1994. During 1994, the "start up"
phase of manufacturing was still underway and the Company had excess capacity.
This resulted in higher amounts of unabsorbed overhead costs in 1994 than in
1995.

Contract research and development expense is equal to the revenue
recorded for the research and development contracts and grants and the corporate
alliance, as they are cost reimbursement type contracts.

Proprietary research and development expense decreased to approximately
$1.1 million in 1995 from approximately $1.4 million in 1994 primarily as a
result of the transfer of AlloDerm related activities from proprietary research
and development to manufacturing (cost of goods sold). These costs previously
were recorded in research and development expense.

General and administrative expenses remained relatively consistent with
the prior year. Selling and marketing expenses increased to approximately $1.5
million in 1995 from approximately $728,000 in 1994 primarily due to the
addition of sales personnel, increased promotional activities related to
AlloDerm marketing activities and commercial introduction of the AlloDerm graft
in the periodontal surgery market.

YEARS ENDED DECEMBER 31, 1994 AND 1993

Total revenues for 1994 were approximately $817,000 compared to
approximately $398,000 for 1993. This increase was due to the corporate alliance
with Medtronic entered into in 1994 and an increase in product sales. In 1994,
revenues included amounts recorded from a research and development contract and
a research and development grant totalling approximately $364,000, compared to
approximately $377,000 from a research and development contract and a research
and development grant in 1993. During 1994, research and development contracts
and grants revenue consisted of approximately $299,000 pursuant to the first
year of a 1993 award of a Phase II $740,000 SBIR contract from the United States
Army for the prolonged storage of platelets and approximately $65,000 pursuant
to a 1994 award of a six-month Phase I $65,000 SBIR grant from the National
Science Foundation for the culturing of epidermis on top of AlloDerm. Interest
income decreased to approximately $167,000 in 1994 from approximately $224,000
in 1993 due to a decrease in average funds available for investment in 1994 as
compared to 1993.

Costs of goods sold for 1994 were approximately $516,000 compared to
approximately $207,000 for 1993. This increase was due to manufacturing
occurring during all of 1994 versus a few months in 1993. The start-up phase of
the Company's manufacturing resulted in excess capacity and therefore higher
amounts of unabsorbed overhead costs.

Cost of contract research and development is equal to the revenue
recorded for research and development contracts and grants and the corporate
alliance, as they are cost reimbursement type contracts.

Proprietary research and development expense decreased to approximately
$1.4 million in 1994 from approximately $1.7 million in 1993 primarily as a
result of the transfer of the costs of the heart valve development and AlloDerm
related activities from proprietary research and development to contract
research and development and manufacturing (cost of goods sold). These costs
previously were recorded in proprietary research and development expense.

General and administrative expenses decreased to approximately $1.4
million in 1994 from approximately $1.5 million in 1993 primarily due to the
Company's one-time payment in 1993 of $150,000 in connection with the
termination of a financial advisory agreement which was partially offset by the
hiring in 1994 of additional financial reporting and information systems
personnel.

Selling and marketing expenses increased to approximately $728,000 in
1994 from approximately $269,000 in 1993 primarily due to the addition of sales
personnel and promotional activities related to AlloDerm marketing activities.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, LifeCell's principal sources of funds have been
equity offerings, product sales, a corporate alliance, government contracts and
grants and interest on investments.

LifeCell funds research and development activities with external funds
from its corporate alliance and government grants. LifeCell's strategy is to use
existing funds and funds raised from financings to fund a marketing and
distribution effort for AlloDerm.

In 1994, LifeCell entered into agreements with Medtronic pursuant to
which Medtronic paid LifeCell a license fee of $1.5 million and agreed, subject
to certain rights to terminate at Medtronic's discretion, to fund the
development of LifeCell's proprietary tissue processing technology in the field
of heart valves. To date, LifeCell

has received approximately $1.36 million in development funding for this
program. See "Business--Corporate Alliance".

LifeCell expects to incur substantial expenses related to AlloDerm,
including costs of clinical studies, production, sales and marketing, product
introduction, technical seminars, supporting ongoing administrative activities
and research and development activities, including regulatory and quality
assurance programs and continuing applications for patent protection for the
proprietary aspects of its technology.

The Company anticipates that its current financial resources will be
adequate to maintain its current and planned operations into the third quarter
of 1996. The Company's independent public accountants have included an emphasis
paragraph in their report on the Company's financial statements as of December
31, 1994 and 1995, to the effect that in order to manufacture and develop
markets for its products, additional financing will be required. If the Company
does not obtain additional financing by the beginning of the third quarter of
1996, LifeCell intends to reduce its current operations and delay certain
planned expenditures in order to conserve its resources and maintain its
operations through the end of 1996. Thereafter, LifeCell expects that it will
require additional financing to continue its operations and to improve, complete
the development of, obtain regulatory approvals for and manufacture or market
products. There can be no assurance that LifeCell will be able to obtain
requisite financing when needed on acceptable terms. See "Business--Risk
Factors--No Assurance of Additional Necessary Capital".

LifeCell has had losses since inception and therefore has not been
subject to federal income taxes. As of December 31, 1995, LifeCell had net
operating loss ("NOL") and research and development tax credit carryforwards for
income tax purposes of approximately $22 million and $365,000, respectively,
available to reduce future income tax and tax liabilities. The Tax Reform Act of
1986 (the "Tax Act") provides for a limitation on the use of NOL and tax credit
carryforwards following certain ownership changes that could limit LifeCell's
ability to use its NOL and tax credit carryforwards. A recapitalization effected
by LifeCell in 1992, the issuance of additional capital stock pursuant to its
initial public offering in 1992 and its sale of equity securities in 1994 may
cause a "more than 50 percent change in ownership" as defined by the Tax Act.
Accordingly, LifeCell's ability to use its NOL and tax credit carryforwards to
reduce future taxable income may be restricted. See note 8 of the notes to the
Financial Statements appearing elsewhere herein.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary financial information required
to be filed under this Item are presented on pages through of this Annual Report
on Form 10-K, and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.
25

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of LifeCell are as follows:

NAME AGE POSITION
- ---- --- --------
Paul M. Frison....................... 59 Chairman of the Board, President,
Chief Executive Officer and
Director

Stephen A. Livesey, M.D., Ph.D....... 43 Executive Vice President, Chief
Scientific Officer and Director

Anthony A. Brown..................... 31 Vice President, Chief Financial
Officer and Secretary

John R. Harper, Ph.D................. 43 Vice President, Research and
Development

Jane Lea Hicks....................... 45 Vice President, Business
Development

Ronald J. Schwartz................... 36 Vice President, Sales and
Marketing

Michael E. Cahr...................... 55 Director

P. William Curreri, M.D.............. 59 Director

James G. Foster ..................... 49 Director

Christopher C. Kraft, Jr., Ph.D...... 72 Director

Thomas G. Ricks...................... 43 Director

Martin P. Sutter..................... 40 Director

BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS

PAUL M. FRISON. Mr. Frison is Chairman of the Board, President, and Chief
Executive Officer of LifeCell. His background includes over 30 years of
experience in the health care industry. He spent 13 years with American Hospital
Supply Corporation, where he was responsible for all corporate activities in
Western Europe and Latin America. From 1975 to 1984, he was president, chief
operating officer and a director of LifeMark Corporation, a Houston-based
hospital management corporation. He joined LifeMark in September 1975 and
remained until its merger with American Medical International in 1984. Prior to
joining LifeCell in 1986, Mr. Frison was chairman of the board, president and
chief executive officer of ComputerCraft, Inc. Mr. Frison received his
bachelor's degree in 1958 from Occidental College in Los Angeles.

STEPHEN A. LIVESEY, M.D., PH.D. Dr. Livesey has served as Executive Vice
President, Chief Scientific Officer and as a director of the Company since March
1993. He served as Executive Vice President, Scientific Development of the
Company from June 1991 until March 1993. He is also a co-developer of the
Company's initial technology and was involved in the formation of the Company
and the licensing of such technology to the Company from The University of Texas
Health Science Center in Houston. Dr. Livesey served as a consultant to the
Company from its inception until June 1991, when he became a full-time employee.
He holds an adjunct instructorship at Baylor College of Medicine, Houston,
Texas. Dr. Livesey received his medical degree from the

University of Melbourne, Australia in 1977 and a Ph.D. in biological chemistry
in 1985 from the University of Melbourne, Australia.

ANTHONY A. BROWN. Mr. Brown was elected Vice President and Secretary of
LifeCell in March 1992 and Chief Financial Officer in September 1994. From March
1992 to September 1994 he also served as Controller of the Company. From June
1987 through March 1992, Mr. Brown served in various positions with Arthur
Andersen LLP, independent public accountants. Mr. Brown received his bachelor's
degree in Business Administration from the University of St. Thomas in Houston
and is a Certified Public Accountant.

JOHN R. HARPER, PH.D. Dr. Harper joined LifeCell in November 1994 as Vice
President of Research and Development. He is responsible for directing
LifeCell's research programs and leading the Company's research and development
efforts into new product areas. Prior to joining LifeCell, Dr. Harper was
director of Fibrosis Research at Telios Pharmaceuticals, La Jolla, California,
from 1989 to 1994. He was an assistant professor at the Scripps Clinic and
Research Foundation, La Jolla, California from 1986 to 1989. Dr. Harper received
his Ph.D. in Biomedical Sciences from the Graduate School of Biomedical Sciences
at the University of Texas, Health Science Center in Houston, Texas in 1981 and
completed post-doctoral studies at Scripps Clinic and Research Foundation and
the National Cancer Institute.

JANE LEA HICKS. As Vice President, Business Development, Ms. Hicks is
responsible for the development of corporate partnerships and strategic
alliances for LifeCell. Prior to becoming Vice President, Business Development
in March 1992, Ms. Hicks served LifeCell as Director of Business Development
since 1991. Ms. Hicks joined LifeCell in 1986 as Technical Marketing Manager
responsible for the development and implementation of sales and marketing
programs and the ultimate sublicensing of LifeCell's electron microscopy
equipment business. Prior to joining LifeCell, Ms. Hicks spent five years in
sales and marketing management with Warner Lambert Company, two years in medical
supply sales, and eight years in clinical laboratory management. Ms. Hicks
received her bachelor's degree in 1972 from the University of North Carolina at
Greensboro.

RONALD J. SCHWARTZ. Mr. Schwartz was elected Vice President, Sales and
Marketing of the Company in April 1995 and is responsible for the direction of
the sales and marketing activities for LifeCell. Prior to joining LifeCell, from
August 1984 to March 1995, Mr. Schwartz held various positions with Sherwood
Medical (a division of American Home Products), most recently as group marketing
manager, where he was responsible for the sales and marketing programs for
Sherwood Medical's wound care product line. Mr. Schwartz received his bachelor's
degree in business administration from the University of South Florida in Tampa,
Florida in 1981.

MICHAEL E. CAHR. Mr. Cahr has been a director of the Company since July
1991. Mr. Cahr has been the president and chief executive officer of Allscrips
Pharmaceuticals, Inc., a pharmaceutical distributor, since June 1994. From 1987
to June 1994, he was the venture group manager in the Venture Capital Division
of the Investment Department of Allstate Insurance Company, a principal
stockholder of the Company. Mr. Cahr is a director of Optek Technologies, Inc.,
an optoelectronic company and Triton Group, Ltd., a diversified holding company.

P. WILLIAM CURRERI, M.D. Dr. Curreri was elected a director of the Company
in October 1992. He has also served as the Company's Consulting Director of
Clinical Affairs since March 1992. Dr. Curreri is past president of the American
Burn Association. Dr. Curreri has been the president of Strategem of Alabama,
Inc., a private consultant service for clinical assessment of wound care
products, since 1988. From 1984 to 1988, he served as senior scientist with the
Cancer Center of the University of South Alabama. From 1981 to 1988, he served
as professor and chairman of the Department of Surgery at the University of
South Alabama, Mobile, Alabama.

JAMES G. FOSTER. Mr. Foster was elected a director of the Company in March
1995. Mr. Foster has been vice president and general manager of Medtronic Heart
Valves, a division of Medtronic, since December 1994. From February 1984 to
December 1994, Mr. Foster held various officer positions with Medtronic. Mr.
Foster was named to the Board of Directors pursuant to Medtronic's right under
its investment agreement with LifeCell to designate one member of the Company's
Board of Directors.

CHRISTOPHER C. KRAFT, JR., PH.D. Dr. Kraft has been a director of the
Company since January 1987. From January 1972 to August 1982, he was the
director of the Johnson Space Center of the National Aeronautics & Space
Administration ("NASA"). Since August 1982, he has served as an aerospace
consultant for NASA and a number of aerospace companies, including Rockwell
International Corporation and International Business Machines Corporation. He is
a director of TechSym Corporation, an electronics company involved in the design
and construction of defense and commercial products. Dr. Kraft is a member of
the National Academy of Engineering and has received honorary Ph.D. degrees from
Indiana State University, St. Louis University and Villanova University.

THOMAS G. RICKS. Mr. Ricks has been a director of the Company since June
1989. Since March 1996, he has served as president and chief executive officer
of The University of Texas Investment Management Company, a non-profit
corporation engaged in providing investment management services to the Board of
Regents of The University of Texas System. From 1987 to March 1996, Mr. Ricks
held various financial positions at the University of Texas System. Mr. Ricks
also is a director of Newfield Exploration Company, an oil and gas exploration
and production company, DTM Corporation, an equipment manufacturing company, and
BDM International, Inc., a diversified professional and technical services
company.

MARTIN P. SUTTER. Mr. Sutter has been a director of the Company since June
1986. He has been the managing general partner of The Woodlands Venture
Partners, L.P., the general partner of The Woodlands Venture Fund, L.P., a
venture capital firm and a principal stockholder of the Company, since July
1988. He has also been the general partner of The Woodlands-Essex Venture
Partners, L.P., a venture capital firm, since September 1994. He is chairman of
the board of Aronex Pharmaceuticals, Inc., a biopharmaceutical development
company, and Zonagen, Inc., a biotechnology company.

All directors of the Company hold office until the next annual meeting of
stockholders or until their respective successors are duly elected and qualified
or their earlier resignation or removal. All executive officers of the Company
hold office until the regular meeting of directors following the annual meeting
of stockholders or until their respective successors are duly elected and
qualified or their earlier resignation or removal.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an Audit Committee and a
Compensation Committee. Dr. Curreri, Dr. Kraft and Mr. Ricks are the current
members of the Audit Committee, which recommends the independent public
accountants appointed by the Board of Directors to audit the Company's financial
statements. The Audit Committee also reviews issues raised by such accountants
as to the scope of their audits and report thereon, including any questions and
recommendations that may arise relating to such audit and report or the
Company's internal accounting and auditing procedures.

Mr. Cahr, Mr. Foster and Dr. Kraft, none of whom is an employee of the
Company, are the current members of the Compensation Committee, which reviews,
approves and makes recommendations to the Board of Directors on matters
regarding the compensation of the Company's officers, directors, employees and
agents and administers certain of the Company's benefit plans. See "Executive
Compensation--Benefit Plans".

BACKGROUND OF PRODUCT DEVELOPMENT PERSONNEL

YVELLE ATKINSON, PH.D. - PRODUCT MANAGER. Dr. Atkinson serves as AlloDerm
Product Manager responsible for developing market opportunities for AlloDerm
products. She currently is focusing on plastic and reconstructive surgery
applications. Prior to joining LifeCell in 1993, she was a post-doctoral fellow
at Texas A&M University. Dr. Atkinson received her Ph.D. in Human Immunology
from the University of Adelaide in Adelaide, Australia in 1990.

THOMAS CALL, PH.D. - CLINICAL RESEARCH ANALYST. Since September 1995, Dr.
Call has been responsible for monitoring clinical studies. From February 1993 to
September 1995, Dr. Call was working on various projects

related to AlloDerm and XenoDerm as well as heart valves and vascular conduits.
Prior to joining LifeCell in February 1993, Dr. Call was a post-doctoral fellow
in the Department of Ophthalmology, Baylor College of Medicine from 1989 to
1993. His areas of expertise are the corneal and the retinal epithelium. He
received his Ph.D. in Medical Anatomy from the Medical College of Ohio at
Toledo in 1986. Prior to coming to Houston, Dr. Call completed a corneal
fellowship in the Department of Ophthalmology at the Harvard School of Medicine.

CHRIS COLEMAN, M.D. - PROJECT MANAGER, HEART VALVES AND VASCULAR CONDUITS.
Dr. Coleman has served as Project Manager for LifeCell's heart valve and
vascular conduit projects since June 1991. He is responsible for developing
processing techniques that will allow allogeneic or xenogeneic tissue
transplantation of these tissues. Prior to joining LifeCell, Dr. Coleman was a
research associate to George P. Noon, M.D., a cardiovascular surgeon at Baylor
College of Medicine in Houston, Texas. At that time, he worked on the
development of a centrifugal heart assist pump and studied artificial vascular
conduits. Dr. Coleman has also worked as a process engineer for E.I. DuPont de
Nemours Co., a chemical company. Dr. Coleman received his B.S.M.E. from the
University of Texas in 1979 and his M.D. from Baylor College of Medicine in
1987.

JEROME CONNOR, PH.D. - PROJECT MANAGER, BLOOD CELL PRODUCTS. Dr. Connor has
served as LifeCell's Manager of Blood Cell Products since May 1993. He oversees
the scientific development of LifeCell's freeze-dried red blood cell project. In
addition, Dr. Connor is responsible for the development of products to extend
platelet storage, including cryopreservation and freeze-drying. From February
1988 to April 1993, Dr. Connor was a research assistant professor in the
Department of Cell Biology at the University of Texas, M.D. Anderson Cancer
Center. He was a post-doctoral fellow in the same department from February 1986
to February 1988. Dr. Connor received his Ph.D. in Biochemistry from the
University of Tennessee in February 1986.

MITCHELL J. FRUITSTONE, PH.D. - CLINICAL AFFAIRS MANAGER. Dr. Fruitstone
has served as LifeCell's Clinical Affairs Manager since January 1995. From June
1992 to December 1994, he served as the Company's Tissue Processing Manager
where he was responsible for directing the processing of AlloDerm processed
allograft dermis from human donor skin. Prior to joining LifeCell, Dr.
Fruitstone was vice president-general manager of Fairleigh Dickinson
Laboratories in Abilene, Texas where he was responsible for plant operations,
research and development, and manufacturing of immunodiagnostic test kits. His
experience with four companies prior to joining LifeCell includes approximately
15 years in research and development and five years in the manufacturing of both
unlicensed and FDA licensed immunodiagnostic products, encompassing the areas of
blood banking, infectious diseases and autoimmune diseases. He received his
Ph.D. in Immunology and Medical Microbiology from the University of Florida in
Gainesville in 1971.

GLENN GREENLEAF - DIRECTOR, TISSUE BANKING SERVICES, TISSUE PROCESSING
MANAGER. Mr. Greenleaf has served as the Director, Tissue Banking Services since
September 1994 and the Tissue Processing Manager since December 1994. He is
responsible for establishing and developing procurement sources for allograft
skin. He also is responsible for directing the processing of AlloDerm grafts and
cryopreserved allograft skin. Prior to joining LifeCell, Mr. Greenleaf was the
director of the regional tissue bank at the University of California, San Diego,
and a research associate for the Department of Surgery at the University of
California, San Diego. He is a certified tissue bank specialist with the
American Association of Tissue Banks. He received his B.A. in Biology from the
University of California, San Diego in 1979.

EDWARD S. GRIFFEY, PH.D. - PROJECT MANAGER, KERATINOCYTES. Dr. Griffey is
developing new applications for AlloDerm in combination with human
keratinocytes. Dr. Griffey has served LifeCell in various positions since
February 1988. Dr. Griffey received his Ph.D. in Cell Biology from Baylor
College of Medicine in 1995 based on his research involving composite skin
reconstitution using AlloDerm.

ABHIJIT NAG, PH.D. - PROJECT MANAGER, DERMIS RESEARCH AND DEVELOPMENT. Dr.
Nag has served as project manager, Dermis Research and Development of LifeCell
since July 1991. He is responsible for establishing and developing tissue
processing for transplantation. From October 1987 to July 1991, he served as
project science manager for LifeCell and supervised various projects. From
September 1981 to October 1987, Dr. Nag was employed by Baylor College of
Medicine in Houston as a research associate investigating areas of cell growth
and
29

differentiation and hormone response mechanism. Dr. Nag received his Ph.D. in
cell biology from the University of Illinois in 1981.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF COMPENSATION

The following table summarizes compensation information concerning the
Chief Executive Officer and each of the Company's most highly compensated
executive officers as to whom the total annual salary and bonus for the fiscal
year ended December 31, 1995, exceeded $100,000.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------------------------- ----------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS COMPENSATION
POSITION YEAR ($) ($) ($) (#)(2) ($)
- ------------------------- ----------- ------------- ------------ ------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>

Paul M. Frison, 1995 210,417 27,500 6,000(1) 75,000(6) 3,672(3)
Chairman of the 1994 195,625 31,000 6,000(1) 38,319 3,307(3)
Board, President 1993 180,625 49,500 6,000(1) 75,000(5) 2,977(3)
and Chief
Executive
Officer

Stephen A. Livesey, 1995 150,625 20,000 -- 50,000(6) 200(4)
M.D., Ph.D., 1994 130,833 21,000 -- 25,000 200(4)
Executive Vice 1993 115,625 35,000 -- 50,000(5) --
President and
Chief
Scientific Officer

Jane Lea Hicks, 1995 105,208 10,000 3,600(1) 30,000(6) 200(4)
Vice President, 1994 95,417 12,000 3,600(1) 40,000 200(4)
Business 1993 85,417 20,000 3,600(1) 30,000(5) --
Development

John R. Harper, 1995 100,208 5,000 -- -- 200
Ph.D. 1994(7) 15,176 -- -- 15,000 --
Vice President, 1993(7) -- -- -- -- --
Research and
Development
</TABLE>
- ------------------

(1) Represents amounts paid for automobile allowance.
(2) Represents shares issuable pursuant to stock options granted under the 1992
Stock Option Plan.
(3) Represents the aggregate amount of premiums paid by the Company on a life
insurance policy in an aggregate amount of $700,000 and one accidental
death policy in the amount of $700,000 for Mr. Frison for which his family
trust is the beneficiary and contributions in each of 1994 and 1995 of $200
by the Company under the Company's 401(k) plan.
(4) Represents contributions by the Company under the Company's 401(k) plan.
(5) Represents options granted in 1993 but surrendered in 1995 (see note (6)
to this table).
(6) Represents options granted in 1995 in exchange for 1993 options
surrendered.
(7) Employment began November 7, 1994.

OPTION GRANTS AND EXERCISES

The following table sets forth information concerning individual grants of
stock options made during the year ended December 31, 1995, to each of the
executive officers named in the Summary Compensation Table.

<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1995

POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ---------------------------------------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- -------------------- ------------------ ----------------- --------------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>

Paul M. Frison 75,000 28.2 2.50 December 2005 117,918 298,827

Stephen A. 50,000 18.8 2.50 December 2005 78,612 199,218
Livesey, M.D.,
Ph.D.

Jane Lea Hicks 30,000 11.3 2.50 December 2005 47,167 119,531

John R. -- -- -- -- -- --
Harper, Ph.D.
</TABLE>
- ------------------

(1) Represents shares issuable pursuant to an incentive stock option granted
under the 1992 Stock Option Plan. Options are 50% vested and vest in 25%
annual increments beginning June 4, 1996.

The following table sets forth information concerning the value of
unexercised options held by each of the executive officers named in the Summary
Compensation Table at December 31, 1995. None of such executive officers
exercised any stock options during the year ended December 31, 1995.

<TABLE>
<CAPTION>
OPTION VALUES AT DECEMBER 31, 1995

NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED OPTIONS VALUE OF UNEXERCISED
AT DECEMBER 31, 1995 IN-THE-MONEY OPTIONS AT
(# SHARES) DECEMBER 31, 1995 ($)
-------------------------------------- ------------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ---------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Paul M. Frison 47,079 66,240 -- --

Stephen A. Livesey, M.D., Ph.D. 31,250 43,750 -- --

Jane Lea Hicks 25,541(1) 45,000 1,047 --

John R. Harper, Ph.D. 3,750 11,250 -- --
</TABLE>
- ------------------

(l) Includes op ions for 541 shares issuable pursuant to stock option granted
under the 1992 Stock Option Plan in substitution for options previously
granted under a terminated stock option plan.

COMPENSATION OF DIRECTORS

Directors of the Company, other than employees of the Company, receive
directors' fees of $500 per meeting attended. Directors of the Company who are
employees receive no directors' fees. No additional amounts are paid to members
of the Board of Director committees for their services as such.

Each of the non-employee directors is entitled to receive annually options
to purchase 2,500 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of grant pursuant to the Amended
and Restated 1993 Non-Employee Director Stock Option Plan (the "Director Stock
Option Plan"). The Board of Directors has adopted, subject to the approval of
the Company's stockholders at the 1996 Annual Meeting of Stockholders, the
Second Amended and Restated 1993 Non-Employee Director Stock Option Plan to
amend the existing Director Stock Option Plan to grant options to purchase
50,000 shares of Common Stock to each existing director and to increase the
number of shares underlying the annual grants to 10,000 shares of Common Stock.
See "--Benefit Plans--Non-Employee Director Stock Option Plan".

EMPLOYMENT AGREEMENTS

Mr. Frison and Dr. Livesey entered into employment agreements with the
Company in January 1992. Under the terms of such agreements, Mr. Frison will
serve as the Company's Chairman, President and Chief Executive Officer for an
annual base salary in 1996 of $220,000, and Dr. Livesey will serve as the
Company's Executive Vice President and Chief Scientific Officer for an annual
base salary in 1996 of $165,000. These base salaries are subject to annual
increase at the discretion of the Board of Directors. The term of each agreement
is five years, except that the Company may terminate employment upon giving the
employee notice thereof; if the employment is terminated without cause (as that
term is defined in each agreement), the Company must pay the terminated employee
an amount equal to his current year's salary and continue to provide him with
other employee benefits in effect at the time of such termination for one year.
The agreements also provide that each employee may receive a bonus of up to 25%
of base salary (as adjusted by the Board of Directors), if certain performance
goals as determined by the Company's Board of Directors are met. Each agreement
provides the employee with the right to participate in employee benefit plans
generally provided to the Company's executives.

BENEFIT PLANS

THE 1992 STOCK OPTION PLAN

The LifeCell Corporation Second Amended and Restated 1992 Stock Option Plan
(the "1992 Stock Option Plan") was adopted by the Board of Directors and
approved by the stockholders in January 1992. The 1992 Stock Option Plan
authorizes a committee of the Board of Directors to issue options intended to
qualify as incentive stock options ("ISOs"), as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and stock options that
are not intended to conform to the requirements of Section 422 of the Code
("Non-ISOs"). Under the terms of the 1992 Stock Option Plan, the exercise price
of each ISO cannot be less than 100% of the fair market value of the Common
Stock at the time of grant, and, in the case of a grant to a 10% stockholder,
the exercise price may not be less than 110% of the fair market value on the
date of the grant. The exercise price of each Non-ISO may not be less than the
fair market value of the Common Stock on the date of grant. Options granted
under the 1992 Stock Option Plan may not be exercised after the tenth
anniversary (or the fifth anniversary in the case of an option granted to a 10%
stockholder) of their grant. Payments by option holders upon exercise of an
option may be made by delivering cash, shares of stock or a combination of cash
and stock. The 1992 Stock Option Plan currently authorizes: (1) options to
acquire an aggregate of 530,254 shares of Common Stock to be granted; (2) grants
of ISOs to eligible employees and grants of Non-ISOs to any individual with
substantial responsibility for the Company's management and growth, as
determined by a committee of the Board of Directors; (3) adjustments to the
number and class of shares outstanding pursuant to granted options and reserved
under the 1992 Stock Option Plan in the event of a capital adjustment; (4) an
opportunity for outstanding options to be exercised subsequent to a merger or
disposition of all of the Company's assets and for the optionee to receive
shares to which he would have been entitled prior to such merger or disposition;
and (5) grant of options in substitution for options held by

employees of other corporations who are about to become Company employees or
whose employer is about to become a parent or subsidiary of the Company.

The Board of Directors has adopted, subject to the approval of the
stockholders at the 1996 Annual Meeting of Stockholders, an amendment to the
1992 Stock Option Plan that would increase the aggregate number of shares of
Common Stock for which options may be granted under the 1992 Stock Option Plan
to 1,000,000.

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

The Board of Directors adopted the Director Stock Option Plan, which was
approved by the stockholders of the Company at the 1994 Annual Meeting of
Stockholders. The Director Stock Option Plan provides for the automatic grant of
stock options to non-employee directors. The purposes of the Director Stock
Option Plan are to retract and retain the services of experienced, knowledgeable
non-employee directors of the Company and to provide an incentive for such
directors to increase their proprietary interests in the Company's long-term
success and progress. A committee designated by the Board of Directors is the
administrator of the Director Stock Option Plan.

Under the Director Stock Option Plan, an aggregate of 200,000 shares of
Common Stock have been authorized and reserved for issuance to non-employee
directors. The aggregate number of shares of Common Stock for which options may
be granted under the Director Stock Option Plan may be adjusted based on certain
anti-dilution provisions contained in the Director Stock Option Plan. Each
person who was a non-employee director on July 22, 1993 was granted an option to
purchase 10,000 shares of Common Stock at $11.00 per share, the fair market
value of such stock on that date. On the date of election of any new
non-employee director, such new non-employee director will be granted an option
to purchase 10,000 shares of Common Stock at the fair market value of such stock
on the date of the grant. Additionally, on June 1 of each year, beginning June
1, 1996, each non-employee director on such date will be granted an option to
purchase 2,500 shares of Common Stock at the fair market value of such stock on
the date that the option is granted. The aggregate number of shares of Common
Stock for which options may be granted under the Director Stock Option Plan may
not exceed an amount which when added to all prior options or awards relating to
the Securities of the Company granted to such non-employee director during the
lifetime of his service as director to the Company equals 25,000 shares. Each
stock option granted to a non-employee director will have a ten-year term and
will be fully vested and exercisable on the first anniversary of the date of
grant, assuming continued service on Board of Directors. See "--Compensation of
Directors".

The Board of Directors has adopted, subject to the approval of the
Company's stockholders at the 1996 Annual Meeting of Stockholders, the Second
Amended and Restated 1993 Non-Employee Director Stock Option Plan to amend the
Director Stock Option Plan to: (i) grant options to purchase 50,000 shares of
Common Stock to each existing director, (ii) grant options to purchase 25,000
shares of Common Stock to any new non-employee director on the date of his or
her election, (iii) grant options annually to purchase 10,000 shares of Common
Stock to each non-employee director on June 1 of each year, (iv) increase the
aggregate number of shares of Common Stock for which options may be granted
under the Director Stock Option Plan to 750,000 and (v) eliminate certain
limitations on the maximum number of shares that could be subject to options
granted to a director under the Director Stock Option Plan.

EMPLOYEE STOCK PURCHASE PLAN

The Company has established an Employee Stock Purchase Plan (the "Stock
Purchase Plan") in which substantially all employees are eligible to
participate. The Stock Purchase Plan provides eligible employees of the Company
and its subsidiaries an opportunity to purchase shares of Common Stock through
after-tax payroll deductions. The Company matches contributions in an amount
equal to 10% of each participant's contribution up to a maximum of $2.50 per
employee per pay period. The Stock Purchase Plan is administered by an
independent administrator that purchases shares of Common Stock on the open
market with the amounts contributed by the participants and the matching
contributions made by the Company.

401(K) PLAN

Effective February 1, 1993 the Company adopted a 401(k) Plan (the "401(k)
Plan") under which all full-time employees are eligible to participate. The
401(k) Plan permits eligible employees to contribute up to a percentage of their
annual compensation up to a maximum dollar amount established in accordance with
Section 401(k) of the Internal Revenue Code of 1986, as amended. The Company may
make matching contributions at its discretion. During the fiscal years ended
December 31, 1994 and 1995, the Company made matching contributions in an
aggregate amount of $1,000 and $1,200, respectively, for its executive officers.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of March 25, 1995, with
respect to (i) persons known to the Company to be beneficial holders of five
percent or more of either the outstanding shares of Common Stock or the
outstanding shares of Series A Preferred Stock, (ii) named executive officers
and directors of the Company and (iii) all executive officers and directors of
the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(2)
---------------------------------------------------------
SERIES A
COMMON PREFERRED
NAME AND ADDRESS OF BENEFICIAL OWNER(1) STOCK % STOCK %
- --------------------------------------- ------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Allstate Insurance Company(3) 2,299,307 38.7 200,000 75.6
Allstate Plaza South G5D
Northbrook, Illinois 60062

The Woodlands Venture Capital Company(4) 597,418 13.2 15,000 5.7
2201 Timberloch Place
The Woodlands, Texas 77380

Technology Funding Partners III, L.P.(5) 353,954 7.9 12,500 4.7
2000 Alameda de las Pulgas
San Mateo, California 94403

Medtronic, Inc.(6) 330,376 7.2 25,000 9.5
Corporate Center
7000 Central Avenue N.E.
Minneapolis, Minnesota 55432

Martin P. Sutter(7) 238,928 5.4 1,250 *
2170 Buckthorne Place, Suite 350
The Woodlands, Texas 77380

Paul M. Frison(8) 222,187 5.0 -- --
3606 Research Forest Drive
The Woodlands, Texas 77381

Michael E. Cahr 12,950 * -- --
Director(9)

P. William Curreri, M.D. 24,100 * 1,250 *
Director(10)

James G. Foster -- -- -- --
Director(11)

Christopher C. Kraft, Jr., Ph.D. 34,709 * 1,250 *
Director(12)

Thomas G. Ricks -- -- -- --
Director(13)

Stephen A. Livesey, M.D., Ph.D.(14) 131,779 3.0 -- --
Executive Vice President, Chief Scientific
Officer and Director

John R. Harper, Ph.D.(15) 3,750 * -- --
Vice President,
Research and Development

Jane Lea Hicks(16) 37,843 * -- --
Vice President, Business Development

All executive officers, directors and nominees 721,546 15.8 3,750 1.4
as a group (12 persons)(17)
</TABLE>
- ------------------

* Less than 1%.

(l) Each beneficial owner's percentage ownership is determined by assuming
that options, warrants and other convertible securities that are held by
such person (but not those held by any other person) and that are
exercisable or convertible within 60 days have been exercised or
converted.

(2) Unless otherwise noted, the Company believes that all persons named in
the above table have sole voting and investment power with respect to all
shares of Common Stock beneficially owned by them.

(3) Total number of shares of Common Stock includes 1,538,000 shares of
Common Stock issuable upon conversion of shares of Series A Preferred
Stock and exercise of a warrant. Information with respect to such
stockholders was obtained from Amendment No. 5 to their report on
Schedule 13G dated February 12, 1996, as received by the Company.

(4) Total number of shares of Common Stock includes 115,350 shares of Common
Stock issuable upon conversion of shares of Series A Preferred Stock and
exercise of a warrant. The Woodlands Venture Capital Company is a wholly
owned subsidiary of Mitchell Energy & Development Corp. George P.
Mitchell owns the majority of the issued and outstanding shares of
Mitchell Energy & Development Corp. Because of these relationships,
Mitchell Energy & Development Corp. and George P. Mitchell may be deemed
to be the beneficial owners of the 597,418 shares of Common Stock held
directly or indirectly by The Woodlands Venture Capital Company.
Information with respect to the ownership of such stockholders was
obtained from Amendment No. 2 to their joint report on Schedule 13G dated
February 12, 1996, as received by the Company.

(5) Total number of shares of Common Stock includes 96,125 shares of Common
Stock issuable upon conversion of shares of Series A Preferred Stock and
exercise of a warrant. Technology Funding Inc. ("TFI") and Technology
Funding Ltd. ("TFL") are the co-managing general partners of Technology
Funding Partners III, L.P. Charles R. Kokesh and Frank R. Pope own 41%
and 22% of the shares of TFI, respectively, and as such may be deemed to
be parents of TFI. Mr. Kokesh, due to his voting percentage, may be
deemed to be the parent of TFL. Peter F. Bernardoni, Gregory T. George
and Thomas J. Toy are officers of TFI. Because of these relationships,
Messrs. Kokesh, Pope, Quadros, George, Bernardoni and Toy, TFI and TFL
may be deemed to be the beneficial owners of the 353,954 shares of Common
Stock, and 12,500 shares of Preferred Stock held by Technology Funding
Partners III, L.P. Information with respect to the ownership of such
stockholders was obtained from Amendment No. 2 to their joint report on
Schedule 13G dated February 13, 1996, as received by the Company.

(6) Total number of shares of Common Stock includes 192,250 shares of Common
Stock issuable upon conversion of shares of Series A Preferred Stock and
exercise of a warrant. John G. Foster, a director of the Company, is the
Vice President/General Manager of Medtronic Heart Valves, a division of
Medtronic.

(7) Total number of shares of Common Stock includes 988 shares of Common
Stock held directly, 9,612 shares of Common Stock issuable upon
conversion of shares of Series A Preferred Stock and exercise of a
warrant, 12,500 shares of Common Stock underlying options granted under
the 1993 Non-Employee Director Stock Option Plan and 215,828 shares of
Common Stock held directly by The Woodlands Venture Fund, L.P. The
Woodlands Venture Partners, L.P. is the general partner of The Woodlands
Venture Fund L.P. (the "Fund"). Martin P. Sutter and Don E. Spyrison are
the general partners of The Woodlands Venture Partners, L.P. Because of
these relationships, The Woodlands Venture Partners, L.P., Martin P.
Sutter and Don E. Spyrison may be deemed to be the beneficial owners of
the 215,828 shares of Common Stock held by the Fund. Messrs. Sutter and
Spyrison disclaim such beneficial ownership.

(8) Total number of shares of Common Stock includes 47,079 shares underlying
options granted under the 1992 Stock Option Plan.

(9) Total number of shares of Common Stock includes 12,500 shares underlying
options granted under the Non-Employee Director Stock Option Plan.

(10) Total number of shares of Common Stock includes 12,500 shares underlying
options granted under the Non-Employee Director Stock Option Plan and
8,362 shares of Common Stock issuable upon conversion of shares of Series
A Preferred Stock and exercise of a warrant.

(11) Mr. Foster is the Vice President/General Manager of Medtronic Heart
Valves, a division of Medtronic, and because of such position may be
deemed the beneficial owner of the 128,312 shares of Common Stock held by
Medtronic. Mr. Foster disclaims any such beneficial ownership.

(12) Total number of shares of Common Stock includes 12,500 shares underlying
options granted under the Non-Employee Director Stock Option Plan and
9,612 shares of Common Stock issuable upon conversion of shares of Series
A Preferred Stock and exercise of a warrant.

(13) Mr. Ricks is Vice Chancellor for Asset Management of The University of
Texas System and because of such position may be deemed the beneficial
owner of the 108,103 shares of Common Stock held by the Board of Regents
of The University of Texas System. Mr. Ricks disclaims any such
beneficial ownership.

(14) Total number of shares of Common Stock includes 31,250 shares underlying
options granted under the 1992 Stock Option Plan.

(15) Total number of shares of Common Stock includes 3,750 shares underlying
option granted under the 1992 Stock Option Plan.

(16) Total number of shares of Common Stock includes 25,000 shares underlying
options granted under the 1992 Stock Option Plan and 541 shares
underlying options granted under the 1992 Stock Option Plan in
substitution for options previously granted under a terminated stock
option plan.

(17) See notes (7) through (16).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company and Strategem of Alabama, Inc. ("SAI"), an affiliate of P.
William Curreri, M.D., a director of the Company, entered into a consulting
agreement in March 1992 for product development and regulatory matters pursuant
to which the Company paid SAI monthly consulting fees and expenses totaling
$74,000, $96,000 and $91,000 in 1993, 1994 and 1995, respectively.

In February 1994, to enable Paul M. Frison and Stephen A. Livesey,
executive officers and directors of the Company, to satisfy their respective
federal income tax liabilities incurred in connection with awards of Common
Stock granted to them pursuant to an employee benefit plan, the Company
purchased 21,929 shares and 21,144 shares of Common Stock from Mr. Frison and
Dr. Livesey, respectively, at a per share purchase price of $7.00, the fair
market value of such shares on the date of purchase. In February 1995, the
Company loaned $29,000, $29,100 and $12,600 to Mr. Frison, Dr. Livesey and Jane
Lea Hicks, also an executive officer of the Company, respectively, to enable
them to satisfy their respective federal income tax liability in connection with
awards of Common Stock granted to them pursuant to an employee benefit plan. The
loans were due December 29, 1995 and bore interest at an annual rate of 9%. The
Company extended the due date of such loans to Mr. Frison, Dr. Livesey and Ms.
Hicks to December 31, 1996. Dr. Livesey repaid the loan to him in full in
January 1996. In February 1996, the Company loaned approximately $27,600,
$20,150 and $2,240 to Mr. Frison, Dr. Livesey and Ms. Hicks, respectively, to
enable them to satisfy their respective federal income tax liabilities in
connection with awards of Common Stock granted to them pursuant to an employee
benefit plan. The loans are due December 31, 1996, and bear interest, payable
quarterly, at an annual rate of 8.25%.

The Company leases its facilities pursuant to a lease agreement from an
affiliate of The Woodlands Venture Capital Company, a principal stockholder of
the Company, and paid an aggregate of approximately $141,000, $139,000 and
$129,000 in rent during 1993, 1994 and 1995, respectively, thereunder. The
Company believes that
37

the terms of the lease are no less favorable to the Company than those that
could be obtained from unaffiliated third parties. See "Properties".

In 1994, the Company entered into a license and development agreement
with Medtronic, a principal stockholder of the Company, to develop jointly the
Company's heart valve product. Pursuant to the license agreement, Medtronic paid
LifeCell a $1.5 million licensing fee, will fund all costs of research and
development, including clinical trials, and will pay royalties of up to $25
million on sales of products covered by the license agreement. In 1994 and 1995,
LifeCell recorded revenue of approximately $358,000 and $825,000, respectively,
received from Medtronic to fund research and development costs pursuant to the
license agreement. If the license agreement is terminated under certain
circumstances, including Medtronic's right to terminate at any time if in its
sole business judgment it deems the development and commercialization of
products thereunder not to be in its best interests or otherwise imprudent,
Medtronic has the option to convert the $1.5 million licensing fee into shares
of Common Stock, subject to certain limitations, at the then current market
price. At the same time, Medtronic made a $500,000 equity investment in LifeCell
by purchasing approximately 64,000 shares of Common Stock at $7.77 per share in
exchange for rights of first refusal to negotiate licenses to universal vascular
conduit products. Under the terms of an investment agreement between Medtronic
and the Company, Medtronic has the right to designate one member of the
Company's Board of Directors. Pursuant to the investment agreement, James G.
Foster currently is serving as a director of the Company.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) DOCUMENTS INCLUDED IN THIS REPORT:

1. FINANCIAL STATEMENTS PAGE

Report of Independent Public Accountants............................ F-2

Balance Sheets as of December 31, 1994 and 1995..................... F-3

Statements of Operations for the years ended
December 31, 1993, 1994 and 1995.................................... F-4

Statements of Stockholders' Equity for the years ended
December 31, 1994 and 1995.......................................... F-5

Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995.................................... F-6

Notes to Financial Statements....................................... F-7

(B) REPORTS ON FORM 8-K:

No reports on Form 8-K were filed during the quarter ended December 31,
1995.

Exhibits designated by the symbol * were filed previously with this
Annual Report on Form 10-K. Exhibits designated by the symbol ** are
filed herewith. All exhibits not so designated are incorporated by
reference to a prior filing as indicated.

Exhibits designated by the symbol + are management contracts or
compensatory plans or arrangements that are required to be filed with
this report pursuant to this Item 14.

EXHIBIT NO. DESCRIPTION
----------- -----------

LifeCell undertakes to furnish to any stockholder so requesting a copy of
any of the following exhibits upon payment to the Company of the reasonable
costs incurred by Company in furnishing any such exhibit.

3.1 Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1995).

3.2 Amended and Restated By-laws, adopted June 8, 1994 (incorporated by
reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1994).

10.1 Employment Agreement and accompanying Confidentiality, Inventions and
Discoveries and Non-Competition Agreement dated January 28, 1992, by
and between the Registrant and Paul M. Frison (incorporated by
reference to Exhibit 10.19 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-44969, filed
with the Commission on February 10, 1992).+

10.2 Employment Agreement and accompanying Confidentiality, Inventions and
Discoveries and Non-Competition Agreement dated January 28, 1992, by
and between the Registrant and Stephen A. Livesey (incorporated by
reference to Exhibit 10.20 to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-44969, filed
with the Commission on February 10, 1992).+

10.3 LifeCell Corporation Second Amended and Restated 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30,
1994).+

10.4 LifeCell Corporation Amended and Restated 1993 Non-Employee Director
Stock Option Plan (incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1994).+

10.5 Form of Confidentiality/Non-Compete Agreement (incorporated by
reference to Exhibit 10.28 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-44969, filed with the Commission on
January 9, 1992).

10.6 Exclusive License Agreement dated June 6, 1986, between the
Registrant and The Board of Regents of The University of Texas System
(incorporated by reference to Exhibit 10.29 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-44969, filed
with the Commission on January 9, 1992).

10.7 1992 Restricted Stock Plan (incorporated by reference to Exhibit
10.31 to Amendment No. 2 to the Registrant's Registration Statement
on Form S-1, Registration No. 33-44969, filed with the Commission on
February 10, 1992).+

10.8 Amended and Restated Registration Rights Agreement dated
February 26, 1992, by and between the Registrant and the stockholders
named therein (incorporated by reference to Exhibit 10.40 to
Amendment No. 3 to the Registrant's Registration Statement on Form
S-1, Registration No. 33-44969, filed with the Commission on February
27, 1992).+

10.9 Underwriter's Warrant Agreement dated March 6, 1992, between the
Registrant and Robert Todd Financial Corporation, and First Amendment
to Underwriter's Warrant Agreement dated January 26, 1993, between
the Registrant and Robert Todd Financial Corporation (incorporated by
reference to Exhibit 10.18 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992).

10.10 Lease Agreement dated December 10, 1986, between the Registrant
and The Woodlands Corporation, Modification and Ratification of Lease
Agreement dated April 11, 1988, between the Registrant and The
Woodlands Corporation and Modification, Extension and Ratification of
Lease dated March 5, 1993, between the Registrant and The Woodlands
Corporation (incorporated by reference to Exhibit 10.21 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).

10.11 Lease Agreement dated September 1, 1988, between the Registrant
and The Woodlands Corporation, and Modification of Lease Agreement
dated March 5, 1993, between the Registrant and The Woodlands
Corporation (incorporated by reference to Exhibit 10.22 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).

10.12 Consultation Agreement dated effective March 1, 1993, between the
Registrant and Strategem of Alabama, Inc., and First Amendment to
Consultation Agreement dated January 13, 1993, between the Registrant
and Strategem of Alabama, Inc. (incorporated by reference to Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).

10.13 Warrant Certificates dated January 27, 1992, issued to Robert Todd
Financial Corporation (incorporated by reference to Exhibit 10.24 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).

10.14 Stock Purchase Warrant dated January 26, 1993, issued to Strategem
of Alabama, Inc. (incorporated by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992).

10.15 License and Development Agreement dated March 3, 1994, between the
Registrant and Medtronic, Inc. (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K dated March 3,
1994).

10.16 Investment Agreement dated March 3, 1994, between the Registrant
and Medtronic, Inc. (incorporated by reference to Exhibit 10.2 to
Registrant's Current Report on Form 8-K dated March 3, 1994).

10.17 Form of Subscription Agreement dated November 1994, executed by
each of the Subscribers named on Schedule 10.24 thereto (incorporated
by reference to Exhibit 10.24 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).

10.18 Form of Stock Purchase Warrant dated November 1994, issued to each
of the warrant holders named on Schedule 10.25 thereto (incorporated
by reference to Exhibit 10.25 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).

10.19 Lease Agreement between LifeCell Corporation and Unichem, dated
August 1, 1994 (incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1994).

10.20 Stock Purchase Warrant dated November 9, 1994, issued to Harris
Webb & Garrison, Inc. (incorporated by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).

10.21 Stock Purchase Warrant dated November 30, 1994, issued to Harris
Webb & Garrison, Inc. (incorporated by reference to Exhibit 10.28 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).

11.1 Statement Regarding Computation of Per Share Earnings.*

23.1 Consent of Arthur Andersen LLP.**

GLOSSARY

THE FOLLOWING GLOSSARY IS INTENDED TO PROVIDE THE READER WITH AN
EXPLANATION OF CERTAIN TECHNICAL TERMS USED IN CERTAIN SECTIONS OF THIS ANNUAL
REPORT ON FORM 10-K:

<S> <C>
ALLOGRAFT......................... Graft derived from one individual and transplanted to another of the
same species (E.G., human to human).

ANCHORING FIBRIL.................. A specialized collagen thread that attaches to both epidermal cells of
skin and to the dermal basement membrane complex, bonding them
together.

ASEPTIC PROCESSING................ Processing in a sterile work environment using special procedures to
keep the tissue free from exposure to infectious material.

AUTOGRAFT......................... Graft derived from one part of an individual's body and transplanted to
another location in the same individual.

BASEMENT MEMBRANE
COMPLEX.......................... A highly specialized surface structure of dermis that separates and
anchors a layer of epithelial cells to the underlying dermis.

CALCIFICATION..................... Abnormal deposition of calcium salts within a tissue, leading to
hardening.

CELL CULTURE...................... The maintenance and growth of living cells outside of the body, typically
in glass or plastic containers containing nutrients and other supportive
substances.

CHEILOPLASTY...................... Surgical lip augmentation.

CLINICAL TRIAL.................... An evaluation or experiment to test safety and therapeutic value of a
device or substance in humans.

COLLAGEN.......................... A specialized group of proteins which form fibers and comprise the
structural support for numerous tissues of the body (including dermis,
blood vessels, heart valves, ligaments, and tendons).

CONTRACTURE RELEASE............... A surgical procedure to remove scar tissue that is preventing free
movement of muscles, tendons or joints.

CORONARY BYPASS................... A surgically established shunt of blood flow from the aorta (main artery)
to the blood vessels of the heart (coronary arteries), bypassing an
obstruction in the coronary artery.

CRYOPRESERVATION.................. The preservation of a biological cell or tissue by the use of freezing and
low temperature storage.

CRYOPROTECTION.................... The use of chemical substances that reduce ice crystal damage
associated with freezing.

DERMIS............................ The inner layer of skin, composed of extracellular protein matrix,
collagen and fibroblasts, which provides strength and durability.

DIFFERENTIATION................... The developmental process whereby an immature primary cell divides
and acquires properties required for its specialized function.

ELA............................... Establishment License Application; filed with the FDA Center for
Biologic Evaluation and Research to obtain approval to manufacture a
biological product at a facility.

ENDOTHELIAL CELLS................. Thin flattened cells that line body cavities, including the inside surface
of blood vessels.

EPIDERMIS......................... The outermost superficial layer of skin composed of epithelial cells
(keratinocytes) and pigment cells, which overlies the dermis and is
responsible for water barrier function and pigmentation.

EPITHELIAL CELLS.................. Sheets of cells that cover exposed surfaces of the body (including skin)
and serve especially to close and protect other parts of the body.

EXTRACELLULAR MATRIX.............. A proteinaceous substance of lattice, secreted by cells, which forms
connective tissue and serves as structural support for certain tissues or
organs of the body. (See Dermis).

FIBROBLAST........................ A cell that secretes collagen and other proteins involved in the formation
of connective tissue.

FREEZE-DRY........................ To dry a sample in a frozen state under high vacuum especially for
preservation.

FULL-THICKNESS WOUND.............. A skin injury that results in the loss of all skin components, including
epidermis and dermis (E.G., third-degree burn).

GLABELLAR CONTOURING.............. A surgical procedure to restore the smooth appearance of the forehead
between the eyebrows by filling in the depression created by frown lines.

GRAFT............................. To surgically bond tissues that are normally separate, or the tissue used
in a grafting procedure.

HEMORRHAGE........................ To undergo heavy or uncontrolled bleeding.

HOMOLOGOUS CELLS.................. Cells from another person which, when transplanted, can be recognized
by the body as foreign and thus provoke an immune response.

IDE APPLICATION................... Investigational Device Exemption allows a company to conduct clinical
studies with an investigational medical device.

IMMUNE RESPONSE................... An inflammatory reaction of the body's immune cells to a transplanted
tissue or organ, leading to its destruction.

IMMUNOSUPPRESSIVE................. That which suppresses the body's natural immune response, preventing
the destruction or rejection of a transplanted tissue or organ.

IND............................... An Investigational New Drug application (IND) is usually the first step
in the process of obtaining FDA approval to commercially distribute a
new drug. Under an IND, a sponsor can use the drug with human
subjects during and in connection with clinical investigations.

The clinical trials generally consist of three Phases.

Phase I, involves the study of a drug's safety in a small number
of normal healthy volunteers.

Phase II, involves the assessment of a drug's effectiveness
(efficacy) in a larger group of volunteer patients with the
condition for which the drug is directed.

Phase III, involves close monitoring of a larger number of
patients with the condition for which the drug is directed in
order to ascertain the drug's effectiveness and to identify any
adverse reactions.

IN-VITRO.......................... A biological process conducted outside of the body, as in a laboratory
flask.

KERATINOCYTE...................... Primary epithelial cells of the skin which have the ability to differentiate
to full-thickness when associated with a dermal basement membrane
complex.

MOLECULAR DISTILLATION DRY....... To dry a sample containing unstable frozen water under conditions of vacuum
and temperature such that ice crystallization and subsequent damage to the
sample does not occur.

NASAL SEPTAL DEFECT............... An imperfection of the membrane inside the nose that separates the
nostrils.

NDA............................... A New Drug Approval application is an application to the FDA for
approval to market a drug.

ORTHOPEDIC........................ Pertaining to the restoration of function following injury to, and the
correction of deformities of, the skeletal system, its joints and associated
structures.

PERIPHERAL BYPASS................. An arterial bypass procedure in an area away from the heart, usually in
a limb.

PLA............................... A Product License Application (PLA) is an application to the FDA for
approval to market a biological product.

PMA............................... A Pre-market Approval Application (PMA) is an application to the FDA
for approval to market a medical device for human therapeutic use.

PORCINE........................... Derived from pigs.

PRECLINICAL TRIALS................ Trials related to experimentation to test safety and therapeutic value of
a device or product in living animals, prior to testing in humans.

PREMARKET APPROVAL................ An approved premarket approval application (PMA) is required for new
types of Class III medical devices prior to commercialization.

REJECTION......................... Destruction of a transplanted tissue or organ by the host's immune cells.

RHINOPLASTY....................... Plastic surgical operation on the nose.

RHYTIDECTOMY...................... Removal of skin to eliminate wrinkles.

SAPHENOUS VEIN.................... Either of the two chief superficial veins of the legs, commonly used for
coronary bypass procedures.

SPLIT-SKIN GRAFT.................. Skin containing both epidermis and dermis which is excised from
healthy sites and transplanted to a full-thickness wound on some other
area of the body.

TAKE RATE......................... The percentage of the total graft area in which the graft has adhered
and vascularized.

THIRD-DEGREE BURN................. Full-thickness injury of the skin, with loss of both the epidermal and
dermal components.

VASCULAR CONDUIT.................. A tubular structure through which blood flows (i.e., blood vessel, artery
or vein).

VENOUS STASIS ULCERS.............. Skin ulcers resulting from the slowing or stoppage of normal blood flow
because of deteriorating valves in the veins.

XENOGRAFT......................... A tissue graft derived from one species and transplanted to a different
species (e.g., animal to human).

510(K) (REVIEW)................... A process which enables a manufacturer to demonstrate to the FDA that
a proposed product is "substantially equivalent" to another product that
was in commercial distribution in the United States before May 28,
1976, or has subsequently been cleared by a 510(k).
</TABLE>
45

FINANCIAL STATEMENTS
PAGE
AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants.......................... F-2
Balance Sheets as of December 31, 1994 and 1995................... F-3
Statements of Operations for the years ended
December 31, 1993, 1994 and 1995............................ F-4
Statements of Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995...................... F-5
Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995............................ F-6
Notes to Financial Statements..................................... F-7

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To LifeCell Corporation:

We have audited the accompanying balance sheets of LifeCell Corporation (a
Delaware corporation) as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, prior to 1995 the
Company was in the development stage and was primarily involved in research,
product and market development, establishing a distribution network and sales of
its equipment. In order to manufacture and develop markets for its products,
additional financing will be required. Management's projections indicate that
the Company can conserve its resources to maintain the Company's operations
through 1996. Management's plans in regard to these matters are also described
in Note 1.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LifeCell Corporation as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
March 15, 1996

F-2

LIFECELL CORPORATION

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
------------ ------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 1,877,295 $ 3,015,332
Short-term investments ....................................... 5,154,824 --
Accounts and other receivables ............................... 164,495 251,509
Inventories .................................................. 107,782 351,502
Prepayments and other ........................................ 63,185 51,838
Total current assets ............................... 7,367,581 3,670,181
FURNITURE AND EQUIPMENT, net ...................................... 350,197 415,563
INTANGIBLE ASSETS, net ............................................ 279,626 290,295
------------ ------------
Total assets ....................................... $ 7,997,404 $ 4,376,039
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable ............................................. $ 312,455 $ 384,780
Accrued liabilities .......................................... 172,182 218,351
Deferred revenues ............................................ 269,640 179,002
------------ ------------
Total current liabilities .......................... 754,277 782,133

Deferred credit .............................................. 1,500,000 1,500,000

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Series A preferred stock, $.001 par value, 300,000 shares
authorized, 264,500 issued and outstanding ................ 5,279,909 5,496,793
Common Stock, $.001 par value, 7,500,000 and 12,500,000
shares authorized, respectively, 4,297,592 and
4,403,658 shares issued and outstanding, respectively ...... 4,298 4,404
Warrants outstanding to purchase 515,316 and 574,066 shares of
Common Stock, respectively ................................ 227,060 226,560
Additional paid-in capital ................................... 21,179,374 21,160,808
Unearned portion of restricted stock compensation and warrants (269,112) (19,906)
Accumulated deficit .......................................... (20,678,402) (24,774,753)
------------ ------------
Total stockholders' equity ......................... 5,743,127 2,093,906
------------ ------------
Total liabilities and stockholders' equity ......... $ 7,997,404 $ 4,376,039
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3

LIFECELL CORPORATION

STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:

Product sales .......................... $ 20,737 $ 93,940 $ 742,238
Corporate alliance ..................... -- 358,331 825,221
Research and development contracts
and grants ......................... 377,057 364,344 239,116
----------- ----------- -----------
Total revenues ...................... 397,794 816,615 1,806,575
----------- ----------- -----------

COSTS AND EXPENSES:

Costs of goods sold .................... 207,398 515,500 925,174
Contract research and development ...... 377,057 722,675 1,064,337
Proprietary research and development ... 1,718,799 1,363,176 1,105,427
General and administrative ............. 1,479,327 1,381,470 1,422,588
Selling and marketing .................. 268,618 727,615 1,475,296
----------- ----------- -----------
Total costs and expenses ............ 4,051,199 4,710,436 5,992,822
----------- ----------- -----------
LOSS FROM OPERATIONS ........................ (3,653,405) (3,893,821) (4,186,247)
----------- ----------- -----------

Interest income ........................ 223,973 167,300 280,843
----------- ----------- -----------

NET LOSS .................................... $(3,429,432) $(3,726,521) $(3,905,404)
=========== =========== ===========

Loss per share before preferred dividends and
accretion of preferred stock ........... $ (0.80) $ (0.87) $ (0.91)
Effect of preferred dividends and
accretion of preferred stock ........... $ 0.00 $ (0.03) $ (0.19)
----------- ----------- -----------
LOSS PER SHARE .............................. $ (0.80) $ (0.90) $ (1.10)
=========== =========== ===========
SHARES USED IN COMPUTING LOSS
PER SHARE ................................ 4,277,171 4,294,179 4,313,366
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4

LIFECELL CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>

<PAGE>
Series A Class 1
Preferred Stock Common Stock Common Stock Warrants
-------------------- ----------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount Number Amount
------- --------- --------- ------ --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ...... -- -- 1,473,359 $1,473 2,803,812 $ 2,804 $ 125,933 --
Warrant issued to purchase 40,000
shares of common stock .......... -- -- -- -- -- -- 40,000 116,260
Earned portion of restricted stock
compensation .................... -- -- -- -- -- -- -- --
Earned portion of warrants ........ -- -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- -- --
------- --------- --------- ------ --------- ------- ------- ---------
Balance at December 31, 1993 ...... -- -- 1,473,359 $1,473 2,803,812 $ 2,804 165,933 $ 116,260
Class I common converted to
common stock .................... -- -- 2,803,812 2,804 (2,803,812) (2,804) -- --
Purchase of common stock .......... -- -- -- -- -- -- -- --
Issuance for cash ($7.77 per share) -- -- 20,421 21 -- -- -- --
Issuance of Series A preferred
stock and warrants for cash ..... 264,500 4,877,995 -- -- -- -- 264,500 105,800
Warrant issued to purchase 90,816
shares of common stock .......... -- -- -- -- -- -- 90,816 5,000
Earned portion of restricted
stock compensation .............. -- -- -- -- -- -- -- --
Earned portion of warrants ........ -- -- -- -- -- -- -- --
Dividends accrued on preferred
stock ........................... -- 333,246 -- -- -- -- -- --
Accretion of preferred stock ...... -- 68,668 -- -- -- -- -- --
Expiration of warrants ............ -- -- -- -- -- -- (5,933) --
Net loss .......................... -- -- -- -- -- -- -- --
------- --------- --------- ------ --------- ------- ------- ---------
Balance at December 31, 1994 ...... 264,500 $ 5,279,909 4,297,592 $4,298 -- -- 515,316 $ 227,060
Warrant issued to purchase 60,000
shares of common stock .......... -- -- -- -- -- -- 60,000 --
Stock options exercised ........... -- -- 1,000 1 -- -- -- --
Warrants exercised ................ -- -- 1,250 1 -- -- (1,250) (500)
Issuance of common stock as
dividends on Series A
Preferred stock ................. -- (317,400) 103,816 104 -- -- -- --
Earned portion of restricted
stock compensation .............. -- -- -- -- -- -- -- --
Earned portion of warrants ........ -- -- -- -- -- -- -- --
Dividends accrued on preferred
stock ........................... -- 190,947 -- -- -- -- -- --
Accretion of preferred stock ...... -- 343,337 -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- -- --
------- --------- --------- ------ --------- ------- ------- ---------
Balance at December 31, 1995 ...... 264,500 $ 5,496,793 4,403,658 $4,404 -- -- 574,066 $ 226,560
======= ========= ========= ====== ========= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
Unearned
Portion of
Restricted
Stock
Compen- Total
sation Additional Accum- Stock-
and Paid-In Treasury ulated holders'
Warrants Capital Stock Deficit Equity
--------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ...... (736,522) $ 21,073,701 -- $(13,189,203) $ 7,152,253
Warrant issued to purchase 40,000
shares of common stock .......... (116,250) -- -- -- 10
Earned portion of restricted stock
compensation .................... 238,872 -- -- -- 238,872
Earned portion of warrants ........ 83,958 -- -- -- 83,958
Net loss .......................... -- -- -- (3,429,432) (3,429,432)
--------- ------------ -------- ------------ -----------
Balance at December 31, 1993 ...... $(529,942) $ 21,073,701 -- $(16,618,635) $ 4,045,661
Class I common converted to
common stock .................... -- -- -- -- --
Purchase of common stock .......... -- -- (307,755) -- (307,755)
Issuance for cash ($7.77 per share) -- 174,341 307,755 -- 482,117
Issuance of Series A preferred
stock and warrants for cash ..... -- -- -- -- 4,983,795
Warrant issued to purchase 90,816
shares of common stock .......... -- -- -- -- 5,000
Earned portion of restricted
stock compensation .............. 238,872 -- -- -- 238,872
Earned portion of warrants ........ 21,958 -- -- -- 21,958
Dividends accrued on preferred
stock ........................... -- -- -- (333,246) --
Accretion of preferred stock ...... -- (68,668) -- -- --
Expiration of warrants ............ -- -- -- -- --
Net loss .......................... -- -- -- (3,726,521) (3,726,521)
--------- ------------ -------- ------------ -----------
Balance at December 31, 1994 ...... $(269,112) $ 21,179,374 -- $(20,678,402) $ 5,743,127
Warrant issued to purchase 60,000
shares of common stock .......... -- -- -- -- --
Stock options exercised ........... -- 2,999 -- -- 3,000
Warrants exercised ................ -- 4,574 -- -- 4,075
Issuance of common stock as
dividends on Series A
Preferred stock ................. -- 317,198 -- -- (98)
Earned portion of restricted
stock compensation .............. 238,872 -- -- -- 238,872
Earned portion of warrants ........ 10,334 -- -- -- 10,334
Dividends accrued on preferred
stock ........................... -- -- -- (190,947) --
Accretion of preferred stock ...... -- (343,337) -- -- --
Net loss .......................... -- -- -- (3,905,404) (3,905,404)
--------- ------------ -------- ------------ -----------
Balance at December 31, 1995 ...... $ (19,906) $ 21,160,808 -- (24,774,753) $ 2,093,906
========= ============ ======== ============ ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5

LIFECELL CORPORATION

STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(3,429,432) $(3,726,521) $(3,905,404)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization ...................................... 245,594 107,351 138,518
Amortization of gain on sale-capital leaseback ..................... (11,053) -- --
Earned portion of restricted stock compensation and
warrants ......................................................... 322,840 260,830 249,206
Write-off of bad debt .............................................. 86,811 -- --
Change in assets and liabilities-
(Increase) decrease in accounts and other receivables ............ 268,092 (67,237) (87,014)
Increase in inventories .......................................... (52,948) (54,834) (243,720)
(Increase) decrease in prepayments and other ..................... (3,514) (8,580) 11,347
Increase in accounts payable and accrued liabilities ............. 42,542 270,219 118,494
Increase (decrease) in deferred revenues and credit .............. (46,906) 1,769,640 (90,638)
----------- ----------- -----------
Total adjustments ....................................................... 851,458 2,277,389 96,193
----------- ----------- -----------
Net cash used in operating activities ......................... (2,577,974) (1,449,132) (3,809,211)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................................... (421,508) (90,509) (190,199)
Intangible assets ....................................................... (43,628) (34,012) (24,354)
Short-term investments .................................................. (427,018) (2,138,313) 5,154,824
----------- ----------- -----------
Net cash provided by (used in) investing activities ........... (892,154) (2,262,834) 4,940,271
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ......................................... -- 5,163,157 6,977
Payments of notes payable ............................................... (42,366) -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities ........... (42,366) 5,163,157 6,977
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH .................................. (3,512,494) 1,451,191 1,138,037
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ................................................................. 3,938,598 426,104 1,877,295
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................................. $ 426,104 $ 1,877,295 $ 3,015,332
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ............................... $ 622 $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
At December 31, 1994 and 1995, the Company had
dividends payable of $45,847 and $70,533, respectively
During 1995, the Company issued common stock as payment
for a dividend in the amount of $317,400
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1995

1. ORGANIZATION:

LifeCell Corporation (LifeCell or the Company) was incorporated on January
6, 1992, in the State of Delaware for the purpose of merging with its
predecessor, which was organized in 1986, in the State of Delaware. Prior to
1995, the Company was in the development stage and was primarily involved in
research, product and market development, establishing a distribution network
and sales of its equipment. Subsequent to the sale of the equipment business in
June 1991, the Company focused primarily on research and development of
transplantable tissue and transfusable blood products. LifeCell commercially
introduced AlloDerm during December 1993, however, there can be no assurance of
broad market acceptance of AlloDerm or any other products.

The Company has a history of operating losses and anticipates continuing
operating losses in 1996. The Company's future capital requirements will depend
on many factors, including successful expansion of sales of AlloDerm, continued
scientific progress with its research and development programs and expansion of
such programs and progress of preclinical and clinical trials of products under
development. There can be no assurance that the Company will be successful in
obtaining additional capital in amounts sufficient to continue to fund its
operations and product development. The Company's business is subject to
significant risks associated with marketing and developing products for human
therapeutic use. These risks include, but are not limited to, uncertainties
regarding the United States Food and Drug Administration regulatory status of
AlloDerm, government regulation, product liability, technological change and
competition and the availability of materials for use in its products. Other
factors include the uncertainty of market acceptance, the dependence on key
management and personnel and the reliance on patents and proprietary rights. The
Company may be limited by its third-party reimbursement and a limited public
market for its stock. Accordingly, there can be no assurance of the Company's
future success.

The Company plans to increase its marketing efforts during 1996 and,
accordingly, will require additional financing for its market development
activities. The Company believes that its current financial resources will be
sufficient to satisfy its increased marketing and manufacturing efforts into the
third quarter of 1996. The Company is contemplating obtaining additional equity
financing during 1996. Should such financing not be obtained by the beginning of
the third quarter of 1996, the Company intends to reduce its current operations
and delay certain expenditures in order to conserve its resources and be able to
continue its operations through the end of 1996.

2. ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. The Company invests excess cash in interest bearing
money market accounts and A1/P1 commercial paper with maturities of one year or
less. Cash equivalents and short-term investments have been classified as
securities held to maturity. At December 31, 1994 and 1995, securities held to
maturity have a carrying value of $1,854,001 and $3,009,376, respectively, which
approximates fair market value and amortized cost.

INVENTORIES

Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.

F-7

LIFECELL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

FURNITURE AND EQUIPMENT

Furniture and equipment are stated at cost. Maintenance and repairs that do
not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and betterments are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations.

Depreciation of furniture and equipment is provided on the straight-line
method based on the estimated useful lives of the assets of five years for
financial reporting purposes and the modified accelerated cost recovery system
for tax reporting purposes. Leasehold improvements are depreciated over the life
of the lease.

INTANGIBLE ASSETS

Intangible assets consist of patent costs, which are primarily legal fees.
These costs are being amortized over 17 years, the lesser of the legal or
economic life of the patent. Accumulated amortization at December 31, 1994 and
1995, amounted to $26,248 and $39,933 respectively.

REVENUE RECOGNITION

Product sales are recognized as revenue when the product is shipped.
Corporate alliance and research and development contracts and grants revenue are
recognized as the related work is performed. Revenue received, but not yet
earned, is classified as deferred revenue.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed when incurred. The Company
performs contract research on behalf of others as well as its own independent
proprietary research and development. These costs consist of direct costs
associated with specific projects. Contract research includes an allocation of
general and administrative costs associated with administering these activities.
Research and development costs also include costs associated with services
provided by others.

LOSS PER SHARE

Loss per share has been computed by dividing net loss, which has been
increased for periodic accretion and imputed and stated dividends, by the
weighted average number of shares of Common Stock outstanding during the
periods. In all applicable years, all Common Stock equivalents, including the
Series A Preferred Stock, were antidilutive and, accordingly, were not included
in the computation.

ACCOUNTING STANDARDS

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 establishes a fair value based method of
accounting for stock-based compensation issued to both employees and
non-employees. Adoption of the fair value based method is not required. SFAS 123
allows for companies to continue to measure cost for such compensation using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). However,
companies that elect to continue with

F-8

accounting under APB 25 must provide certain pro forma disclosures, as if SFAS
123 had been applied. The accounting and disclosure requirements of SFAS 123 are
effective for LifeCell for the fiscal year 1996. LifeCell is currently
evaluating its alternatives under SFAS 123; however, its impact on operating
results when initially adopted is expected to be immaterial.

USE OF ESTIMATES

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

CERTAIN RECLASSIFICATIONS

Certain reclassifications have been made to the 1993 and 1994 financial
statements contained herein to conform with the classifications presented in
1995.

3. INVENTORIES:

Inventories consist of products in various stages produced for sale and
includes the costs of raw materials, labor, and overhead.

A summary of inventories is as follows:

1994 1995
-------- --------

Raw Materials ....................... $ 26,177 $ 29,171

Work-In-Process ..................... 20,732 107,988

Finished Goods ...................... 60,873 214,343
-------- --------

$107,782 $351,502
======== ========

4. FURNITURE AND EQUIPMENT:

A summary of furniture and equipment is as follows:

1994 1995
---------- ----------

Office furniture and fixtures .................... $ 48,804 $ 57,636

Machinery and equipment .......................... 999,671 1,097,480

Leasehold improvements ........................... 189,877 189,877
---------- ----------
1,238,352 1,344,993
Less -

Accumulated depreciation and amortization ..... 888,155 929,430
---------- ----------
Net furniture and equipment ................ $ 350,197 $ 415,563
========== ==========

F-9

5. STOCKHOLDERS' EQUITY:

SERIES A PREFERRED STOCK

On November 10, 1994, the Company raised gross proceeds of approximately
$5.3 million in a private offering of units consisting of convertible preferred
stock and warrants. The Company sold 264,500 units at a price of $20 per unit.
Each unit included one share of Series A Convertible Preferred Stock (Series A
Preferred Stock) and one warrant to purchase one share of Common Stock. Each
share of Series A Preferred Stock is convertible into 6.69 shares of Common
Stock. The Series A Preferred Stock is convertible at any time at the option of
the holder. The preferred stock automatically converts to Common Stock on
November 9, 1997 and may be redeemed sooner by the Company if, after November 9,
1995, the closing bid price of LifeCell's Common Stock averages $5.17 per share
for 20 consecutive days. The Series A Preferred Stock bears dividends at annual
rates of $1.20, $1.60, and $2.00 per share for each of the first, second and
third years, respectively, after the date of original issuance. Dividends may be
paid in cash, Common Stock, or any combination of cash and Common Stock at the
Company's discretion. The Series A Preferred Stock is senior to the Company's
Common Stock in liquidation. The Series A Preferred Stock has no ordinary voting
rights. While the preferred shares are outstanding or any dividends are owed
thereon, the Company may not declare or pay cash dividends on its Common Stock.
The units were not registered under the Securities Act of 1933 and may not be
offered or sold absent registration under the Act or an applicable exemption
from registration requirements. Each unit also includes a two-year warrant that
is exercisable for one share of Common Stock at $3.26 per share during the first
year and $3.54 per share during the second year. The warrants were recorded at
$105,800 in the accompanying financial statements. As of December 31, 1995,
warrants to purchase an aggregate of 263,250 shares of Common Stock were
outstanding. The private placement agent was issued a warrant to purchase 90,816
shares of Common Stock at $6.00 per share. The agent's warrant has a term of
five years commencing June 30, 1995 and was recorded at $5,000 in the
accompanying financial statements.

The carrying amount of the Series A Preferred Stock is increased for
accrued and unpaid stated dividends plus periodic accretion, using the effective
interest method, such that the carrying amount equals the redemption amount on
the earliest possible redemption date, November 9, 1997. In November 1994, the
Series A Preferred Stock was also increased by imputed dividends resulting from
the increasing dividend rates. Amortization of the imputed dividend of $25,000
and $151,000 has been recorded in 1994 and 1995, respectively.

On November 9, 1995, the Company paid dividends on the Series A Preferred
Stock of an aggregate of $317,400 by issuing 103,816 shares of Common Stock.

COMMON STOCK

On February 27, 1994, LifeCell purchased 43,965 shares of Common Stock from
several employees, including Paul M. Frison and Stephen A. Livesey, for the
purpose of satisfying their income tax liabilities. These treasury shares were
subsequently issued on March 3, 1994.

In June 1995, LifeCell's stockholders voted to increase the number of
shares of Common Stock authorized to 12,500,000 shares.

F-10

CLASS I COMMON STOCK

The stockholders of Class I common stock were entitled to .95 vote per
share. Each share of Class I common stock was automatically converted into one
share of Common Stock on February 27, 1994. In June 1995, LifeCell's
stockholders voted to eliminate the Class I common stock.

WARRANTS

The Company issued a Warrant to the underwriter in the initial public
offering, to purchase, at any time from February 27, 1993 until February 27,
1997 up to 80,000 Units, each consisting of one share of Common Stock and one
Common Stock Warrant, at an exercise price of $12.79 per Unit. The Warrant was
recorded at zero as the value was determined to be de minimis. The Warrant has
not been exercised. The Common Stock Warrants are exercisable only in pairs,
with each two Common Stock Warrants entitling the holder to purchase one share
of Common Stock at $12.62 per share at any time through February 27, 1997.

In January and February 1993, the Company issued Warrants to purchase
15,000 and 20,000 shares of Common Stock, respectively, to investment bankers.
In addition, in January 1993, the Company issued a Warrant to purchase 5,000
shares of Common Stock to a consultant.

In April and December 1995, the Company issued warrants to purchase 50,000
and 10,000 shares of Common Stock to an investment banker and a consultant,
respectively.

6. STOCK PLANS:

The Company has a stock option plan, pursuant to which options may be
granted to purchase 530,254 shares of Common Stock. The options become
exercisable over a four year period, 25 percent per year beginning on the first
anniversary of the date of grant. To the extent not exercised, options expire on
the 10th anniversary of the date of grant, except for employees who own more
than 10 percent of all the voting shares of the Company, in which event the
expiration date is the fifth anniversary of the date of grant. All options
granted under the plan have exercise prices equal to the fair market value at
the dates of grant.

F-11

A summary of stock option activity is as follows:

EXERCISE
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
Balance at December 31, 1992 ............... 7,543 $.07-$14.50
-------- -----------
Granted ............................... 223,200 9.00
Exercised ............................. --- ---
Forfeited ............................. (6,150) 4.00-9.00
-------- -----------
Balance at December 31, 1993 ............... 224,593 $.07-$14.50
-------- -----------
Granted ............................... 192,819 1.88-3.00
Exercised ............................. --- ---
Forfeited ............................. (2,650) 3.00-9.00
-------- -----------
Balance at December 31, 1994 ............... 414,762 $.07-$14.50
-------- -----------
Granted ............................... 266,350 2.125-2.50
Exercised ............................. (1,000) 3.00
Forfeited ............................. (225,917) 9.00-14.50
-------- -----------
Balance at December 31, 1995 ............... 454,195 $.07-$3.00
======== ===========

During 1995 options to purchase 225,917 shares of Common Stock at exercise
prices of $9.00 and $14.50 were canceled. During December 1995 new options to
purchase 225,917 shares of Common Stock were granted in substitution for the
canceled options. The option terms were substantially the same and the exercise
price of the new options was $2.50.

As of December 31, 1995, options to purchase 158,330 shares of Common Stock
were exercisable, and options to purchase 74,659 shares of Common Stock were
available to be granted under the 1992 Plan.

In January 1992, the Company adopted a Restricted Stock Plan and issued
241,372 shares of Common Stock to employees, a director and a consultant of the
Company for $.001 per share. The restricted stock vests over a four-year period,
50 percent two years from the date of grant and 25 percent in each of the
following two years. The total compensation expense, based on the estimated fair
market value of $4.00 per share on the date of issuance, under the Restricted
Stock Plan of $965,488 was expensed over the vesting period.

On July 22, 1993, the Board of Directors of the Company adopted the 1993
Non-Employee Director Stock Option Plan (Director Plan), which was adopted by
the stockholders in June 1994. An aggregate of 200,000 shares of Common Stock
are available for option grants under the Director Plan. Options to purchase
10,000 shares of Common Stock were granted to each current non-employee director
of the Company, subject to stockholder approval of the Director Plan, at an
exercise price equal to the fair market value of a share of Common Stock on the
date of the Director Plan. Options to purchase 10,000 shares of Common Stock
will be granted to newly elected directors at an exercise price equal to the
fair market value of a share of Common Stock on such election date. Under the
Director Plan, on June 1 of each year, beginning June 1, 1994, an option to
purchase an additional 2,500 shares of Common Stock will be granted at an
exercise price equal to the fair market value per share of the Common Stock on
such date to each person who is a non-employee director on such date. The
options granted to non-employee directors are exercisable for 10 years. On July
22, 1993, options to purchase a total of 40,000 shares of Common Stock at a per
share exercise price of $11.00 were granted to non-employee directors of the
Company.

F-12

On June 8, 1994, options to purchase a total of 10,000 shares of Common
Stock at a per share exercise price of $3.00 were granted to non-employee
directors of the Company. On June 1, 1995, options to purchase a total of 10,000
shares of Common Stock at a per share exercise price of $2.75 were granted to
non-employee directors of the Company.

7. 401(K) PLAN:

Effective January 1, 1993, the Company established a retirement savings
plan in which any employee of the Company may elect to participate. The plan is
an individual account plan providing for deferred compensation as described in
Section 401(k) of the Internal Revenue Code of 1986, as amended (Code) and is
subject to, and intended to comply with, the Employee Retirement Income Security
Act of 1974, as amended. Each employee is permitted to contribute up to 15% of
his annual salary up to the applicable statutory maximum prescribed in the Code.
The Company may, at its discretion, contribute an amount equal to the employee's
contribution. In February 1995 and January 1996, the Company made a total
contribution of $3,884 and $5,292 under the 401(k) Plan based on 10% of the
employee's first $2,000 contribution in 1994 and 1995, respectively, for a
maximum of $200 per contributing employee.

8. FEDERAL INCOME TAXES:

The Company had losses since inception and, therefore, has not been subject
to federal income taxes. The Company has accumulated approximately $365,000 of
research and development tax credits which expire in 2001 through 2010. As of
December 31, 1995, the Company has net operating loss (NOL) carryforwards for
income tax purposes, subject to limitations described below, expiring as
follows:

YEAR EXPIRES
2001 ......................................... $ 500,000
2002 ......................................... 1,500,000
2003 ......................................... 2,800,000
2004 ......................................... 2,200,000
2005 ......................................... 1,700,000
2006 ......................................... 1,400,000
2007 ........................................ 2,400,000
2008 ......................................... 3,000,000
2009 ......................................... 2,500,000
2010 ......................................... 4,000,000
-----------
$22,000,000

The Tax Reform Act of 1986 provided for a limitation on the use of NOL and
tax credit carryforwards following certain ownership changes that could limit
the Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. Additionally,
because U.S. tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOLs and tax credit
carryforwards for federal income tax purposes.

F-13

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". As
the Company has incurred losses since inception, and there is no certainty of
future revenues, a deferred tax asset has been recorded and reserved for in full
in the accompanying financial statements for the Company's NOL carryforward.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1994 and
1995, are as follows:

1994 1995
----------- -----------
Deferred tax assets and liabilities:
Net operating loss carryforwards ........... $ 6,117,000 $ 7,480,000
Deferred revenue ........................... 602,000 582,000
Restricted stock compensation .............. (328,000) (196,000)
Research and development
tax credits .............................. 347,000 365,000
Uniform capitalization of
inventory costs .......................... 58,000 160,000
Other items ................................ 60,000 66,000
----------- -----------
Total deferred tax assets .................... 6,856,000 8,457,000
Less valuation allowance ................... (6,856,000) (8,457,000)
----------- -----------
Net deferred tax asset ....................... $ -- $ --
=========== ===========

9. COMMITMENTS AND CONTINGENCIES:

On March 3, 1994, LifeCell entered into a License and Development Agreement
(License Agreement) with Medtronic, Inc. (Medtronic) for the development and
commercialization of universal tissue heart valves engineered with LifeCell's
proprietary technology. Pursuant to the License Agreement, Medtronic paid
LifeCell a $1,500,000 licensing fee, agreed to fund the development of heart
valve products utilizing LifeCell's technology and agreed to pay total
cumulative royalties of up to $25,000,000. On the same date, LifeCell also
entered into an Investment Agreement (the Investment Agreement) with Medtronic
pursuant to which Medtronic paid $500,000 to purchase 64,386 shares of LifeCell
Common Stock. Pursuant to the Investment Agreement, LifeCell granted Medtronic
certain rights of first refusal to evaluate technology and negotiate license and
development agreements for vascular conduit products utilizing LifeCell's
technology and agreed to issue shares of Common Stock to Medtronic for the
$1,500,000 licensing fee in the event of termination, as defined, of the License
Agreement. LifeCell has recorded the $1,500,000 as deferred credit in 1994 and
1995. The Investment Agreement also granted Medtronic the right upon the
occurrence of certain events, subject to certain restrictions, to purchase
additional shares of LifeCell Common Stock. Medtronic has registration rights
for stock currently owned or that may become owned and the right to designate a
member to the LifeCell Board of Directors during the five year period commencing
March 3, 1994.

As of January 1, 1993, the Company entered into a three year Investment
Banking Agreement with The Renaissance Group Limited (TRGL). Under the agreement
the Company paid TRGL a fee of $2,500, $5,000 and $5,000 per month for 1993,
1994 and 1995, respectively under certain agreed upon performance conditions. On
January 26, 1993, the Company issued TRGL a Warrant to purchase 15,000 shares of
Common Stock exercisable

F-14

for five years at $4.00 per share subject to certain vesting requirements. The
Warrant was valued at $116,260, the difference between the fair market value of
the Company's stock at the date of grant and the exercise price of the Warrant.
The expense related to the Warrant is being amortized over the term of the
investment banking agreement. The expense recognized in general and
administrative expense during 1993, 1994 and 1995 was approximately $84,000,
$22,000 and $10,000, respectively.

On February 26, 1993, the Company entered into an investment banking
agreement with Thomas James Associates, Inc. (Thomas James) pursuant to which
Thomas James receives a fee of $2,000 per month plus reasonable expenses.
Pursuant to the agreement, LifeCell issued Thomas James a Warrant to purchase
20,000 shares of Common Stock exercisable for five years at $11.05 per share.
The Warrant was recorded at zero in the accompanying financial statements
because the value was determined to be de minimis. The Company terminated the
agreement effective December 31, 1993.

On July 14, 1993, the Company and Robert Todd Financial Corporation (RTF)
terminated the Financial Advisory Agreement dated March 6, 1992 between said
parties. The Company paid RTF $150,000 upon termination of the agreement, which
is recorded as a general and administrative expense in the accompanying
financial statements.

EXCLUSIVE LICENSE AGREEMENT

The Company has an exclusive license agreement with the Board of Regents of
the University of Texas System (Board) for analysis or preservation of certain
cells or tissues. The Company is required to pay the Board royalties on the net
sales. For the periods ended December 31, 1993, 1994 and 1995, no significant
royalties were paid under the agreement.

SMALL BUSINESS INNOVATIVE RESEARCH GRANTS AND CONTRACTS

The Company has been awarded Phase I and Phase II Small Business Innovation
Research (SBIR) grants from the Natural Science Foundation, Department of Health
and Human Services, and the Department of Defense. Phase I grants have been for
$50,000 to $65,000 and have been completed in one year. The Phase II grants have
been for $500,000 to $750,000 and are for work performed over two years. During
1993, 1994 and 1995, the Company recognized revenue of approximately $377,000,
$364,000 and $239,000, respectively.

F-15

LIFECELL CORPORATION

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

DECEMBER 31, 1995

LEASES

The Company leases approximately 20,000 square feet for office and
laboratory space. The future minimum lease payments under noncancelable lease
terms in excess of one year as of December 31, 1995 were as follows:

1996 .................................... 191,631
1997 .................................... 218,028
1998 .................................... 221,320
1999 .................................... 221,320
2000 .................................... 221,320
2001 .................................... 18,443
----------
Total ......................... $1,092,062
==========
10. RELATED-PARTY TRANSACTIONS:

The Company leases office space from an affiliate of a stockholder of the
Company. The Company paid rent expense of approximately $141,000, $139,000 and
$129,000 during 1993, 1994 and 1995 respectively, related to this lease.

The Company paid consulting fees and expenses to an affiliate of a
stockholder and director of the Company, totaling approximately $74,000, $96,000
and $91,000 during the years ended December 31, 1993, 1994 and 1995
respectively, pursuant to a consultant agreement.

F-16

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

LIFECELL CORPORATION
(Registrant)

By: /s/ PAUL M. FRISON
Paul M. Frison,
President and Chief Executive Officer
and Chairman of the Board of Directors
Dated: May 29, 1996.

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K/A-1, into the Company's
previously filed Registration Statement File No. 33-90740.

ARTHUR ANDERSON LLP

Houston, Texas
May 24, 1996