<PAGE>

--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

--------------------------------------------------------------------------------


                                    FORM 10-Q

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For quarterly period ended July 31, 2001
                                       OR
     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the transition period from ___ to ____

                         Commission File Number 0-13907

               ---------------------------------------------------

                               BIO-VASCULAR, INC.
             (Exact name of Registrant as specified in its charter)

                        State of Incorporation: Minnesota
                 I.R.S. Employer Identification No.: 41-1526554

               Principal Executive Offices: 2575 University Avenue
                            St. Paul, Minnesota 55114
                        Telephone Number: (651) 603-3700

               ---------------------------------------------------


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 ___

On September 4, 2001, there were 9,219,490 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
<PAGE>

ITEM 1. FINANCIAL STATEMENTS

BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JULY 31, 2001 AND OCTOBER 31, 2000
--------------------------------------------------------------------------------

(in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                  July 31,   October 31,
                                                                    2001        2000
                                                                  --------    --------
<S>                                                               <C>         <C>
ASSETS                                                           (Unaudited)
Current assets:
Cash and cash equivalents .....................................   $  5,293    $  5,480
Accounts receivable, net ......................................      3,941       3,561
Inventories ...................................................      4,816       3,926
Deferred income taxes .........................................        201         216
Other .........................................................        364         549
                                                                  --------    --------
    Total current assets ......................................     14,615      13,732

Equipment and leasehold improvements, net .....................      5,096       4,630
Goodwill and other intangible assets, net .....................      7,317       6,024
Deferred income taxes .........................................        277         417
                                                                  --------    --------
    Total assets ..............................................   $ 27,305    $ 24,803
                                                                  ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..............................................   $    792    $    741
Accrued expenses ..............................................      1,553       1,754
Current maturities of long-term obligations ...................        193         294
                                                                  --------    --------
    Total current liabilities .................................      2,538       2,789

Capital lease obligations .....................................         --          15
Other liabilities .............................................        253         377
                                                                  --------    --------
    Total liabilities .........................................      2,791       3,181

Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
    none issued or outstanding at July 31, 2001 and
    October 31, 2000 ..........................................         --          --
Common stock: authorized 20,000,000 shares of $.01 par value;
    issued and outstanding, 9,218,990 at July 31, 2001 and
    8,975,061 at October 31, 2000 .............................         92          90
Additional paid-in capital ....................................     29,071      27,596
Unearned compensation .........................................       (155)       (287)
Accumulated deficit ...........................................     (4,494)     (5,777)
                                                                  --------    --------
    Total shareholders' equity ................................     24,514      21,622
                                                                  --------    --------
    Total liabilities and shareholders' equity ................   $ 27,305    $ 24,803
                                                                  ========    ========
</TABLE>

The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       2
<PAGE>

BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000
--------------------------------------------------------------------------------

(in thousands, except per share data)

<TABLE>
<CAPTION>
                                               Three Months Ended   Nine Months Ended
                                                     July 31,            July 31,
                                                  2001      2000      2001      2000
                                                -------   -------   -------   -------
                                                   (Unaudited)         (Unaudited)
<S>                                             <C>       <C>       <C>       <C>
Net revenue .................................   $ 7,087   $ 6,354   $20,458   $16,079
Cost of revenue .............................     3,523     3,148    10,194     7,878
                                                -------   -------   -------   -------
Gross margin ................................     3,564     3,206    10,264     8,201

Operating expenses:
Selling, general and administrative .........     2,423     2,058     7,140     6,276
Research and development ....................       384       456     1,178     1,629
                                                -------   -------   -------   -------

Operating income ............................       757       692     1,946       296

Other income, net ...........................        37        39       131       102
                                                -------   -------   -------   -------

Income before provision for income taxes ....       794       731     2,077       398

Provision for income taxes ..................       291       329       794       163
                                                -------   -------   -------   -------

Net income ..................................   $   503   $   402   $ 1,283   $   235
                                                =======   =======   =======   =======

Basic earnings per share ....................   $  0.06   $  0.05   $  0.14   $  0.03
                                                =======   =======   =======   =======

Diluted earnings per share ..................   $  0.05   $  0.04   $  0.14   $  0.03
                                                =======   =======   =======   =======
</TABLE>

The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       3
<PAGE>

BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2001
--------------------------------------------------------------------------------

(in thousands)

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                         July 31,
                                                                      2001       2000
                                                                    -------    -------
                                                                        (Unaudited)
<S>                                                                 <C>        <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................   $ 1,665    $    42
                                                                    -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ..........................    (1,204)      (614)
Investments in patents and trademarks ...........................       (70)       (41)
Purchase of MCA, net of cash acquired ...........................      (491)        --
Other ...........................................................        95       (106)
                                                                    -------    -------
Net cash used in investing activities ...........................    (1,670)      (761)
                                                                    -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans ..........       235         83
Repayment of capital lease and other long-term obligations ......      (240)      (329)
Repayment of debt in conjunction with the acquisition of MCA ....      (177)        --
                                                                    -------    -------
Net cash used in financing activities ...........................      (182)      (246)
                                                                    -------    -------

NET DECREASE IN CASH AND CASH EQUIVALENTS .......................      (187)      (965)

CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ..........................................................     5,480      5,596
                                                                    -------    -------


CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................   $ 5,293    $ 4,631
                                                                    =======    =======
</TABLE>

The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       4
<PAGE>

BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1)  BASIS OF PRESENTATION:

The accompanying unaudited consolidated condensed financial statements of
Bio-Vascular, Inc. ("Bio-Vascular" or "the Company") have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report to Shareholders
and incorporated by reference in the Company's Form 10-K for the year ended
October 31, 2000.

In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
financial position, results of operations and cash flows of the Company as of
and for the interim periods presented have been included. Operating results and
cash flows for the nine months ended July 31, 2001 are not necessarily
indicative of the results of operations and cash flows of the Company that may
be expected for the year ending October 31, 2001.

During the quarter ended July 31, 2001, the name of the Company's wholly-owned
subsidiary, Jerneen Micro Medical Technologies, was changed to Synovis
Interventional Solutions.


(2)  ACQUISITION OF BUSINESS:

On July 6, 2001, the Company acquired Medical Companies Alliance, Inc. (MCA), a
company located in Birmingham, Alabama that markets microsurgical products,
including the Microvascular Anastomotic Coupler System. This patented technology
enables micro surgeons to perform anastomosis, the connection of small arteries
or veins, faster, easier and without conventional sutures. The Company believes
that the addition of MCA's medical device business broadens the Company's
product offerings into the niche market of micro surgery, increases the
Company's long-term revenue potential and achieves a balance of market
opportunities consistent with the strategic objectives targeted by the Company.
The Company changed MCA's name to Micro Companies Alliance, Inc. subsequent to
the acquisition.

The Company issued 181,819 shares of its common stock at a price based on a fair
market value of $6.60 per share and paid $500,000 in cash in exchange for all
the outstanding stock of MCA. Additionally, the Company will pay an earnout to
the sole selling shareholder of MCA up to a cumulative total of $1.35 million
calculated based on 5% of related product revenues over a maximum period of 10
years from the date of acquisition. Also, in connnection with the acquisition,
the Company paid $177,000 to the selling shareholder of MCA as repayment of
advances made by the selling shareholder to MCA prior to the acquisition date.

As the acquisition occurred in early July 2001, MCA's operating results for July
2001 are included in the Consolidated Condensed Statements of Operations for the
three and nine month periods ended July 31, 2001. The assets and liabilities
acquired in the transaction are included in the Company's Consolidated Condensed
Balance Sheet as of July 31, 2001 and the purchase transaction has been included
in the Consolidated Condensed Statement of Cash Flows for the nine months ended
July 31, 2001.

The Company is in process of completing the allocation of the purchase price to
the assets and liabilities acquired. Accordingly, the values assigned and
reflected in the Consolidated Condensed Balance Sheet as of July 31, 2001 are
preliminary. The allocation of the MCA acquisition purchase price involves the
identification of the components of the intangible assets and goodwill purchased
of $1.7 million, and the determination of the useful lives of such components.
Management expects that the allocation and finalization of such amounts will be
completed by the end of the fourth quarter of fiscal 2001. Pro forma

                                       5
<PAGE>

combined financial information for the three and nine months ended July 31, 2000
and 2001 have not been provided as MCA's operating results are not considered
significant in relation to the Company's results for the periods then ended.

(3)  FINANCIAL STATEMENT INFORMATION:

                                                    July 31,         October 31,
                                                      2001              2000
                                                   ----------        ----------
                                                   (Unaudited)
Inventories:
Raw materials and supplies ...............         $1,295,000        $1,002,000
Work in process ..........................          2,016,000         1,589,000
Finished goods ...........................          1,505,000         1,335,000
                                                   ----------        ----------
                                                   $4,816,000        $3,926,000
                                                   ==========        ==========

Consolidated condensed statement of cash flows:

At July 31, 2001, the Company recorded $76,000 in accounts payable for equipment
purchases made during the nine months then ended.


(4)  EARNINGS PER SHARE:

The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                                 Three Months Ended      Nine Months Ended
                                                      July 31,                July 31,
                                                  2001        2000        2001        2000
                                               ---------   ---------   ---------   ---------
                                                    (Unaudited)            (Unaudited)
<S>                                            <C>         <C>         <C>         <C>
Denominator for basic earnings per share -
weighted-average common shares .............   9,001,401   8,827,985   8,939,801   8,871,841

Effect of dilutive securities:
Shares associated with deferred
compensation ...............................      74,264      98,930      74,264      97,146
Shares associated with option plans ........     416,477     143,879     275,102     130,668
                                               ---------   ---------   ---------   ---------
Dilutive potential common shares ...........     490,741     242,809     349,366     227,814
                                               ---------   ---------   ---------   ---------

Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares ....................   9,492,142   9,070,794   9,289,167   9,099,655

Options outstanding with exercise prices
greater than the average market price of the
Company's common stock .....................     160,972     514,817     164,143     535,250

</TABLE>

                                       6
<PAGE>

                                                         As of July 31,
                                                     2001               2000
                                                 ------------       ------------
                                                  (Unaudited)

Options outstanding ......................          1,325,096          1,380,071
Exercise prices ..........................       $2.09-$12.21       $1.87-$12.21
Expiration dates .........................          2001-2009          2000-2008
Non-vested stock awards ..................             74,264             98,930


(5)  SEGMENT INFORMATION:

The following table presents certain financial information by business segment
for the three and nine month periods ended July 31, 2001 and 2000. MCA's
financial results since the acquisition date have been included with branded
medical devices for segment reporting purposes.

<TABLE>
<CAPTION>
                                             Three Months Ended            Nine Months Ended
                                                 July 31,                      July 31,
                                            2001           2000           2001           2000
                                        ------------   ------------   ------------   ------------
                                               (Unaudited)                  (Unaudited)
<S>                                     <C>            <C>            <C>            <C>
Net revenue
     Branded medical devices            $  4,141,000   $  3,505,000   $ 11,503,000   $  9,920,000
     Synovis Interventional Solutions      2,946,000      2,849,000      8,955,000      6,159,000
                                        ------------   ------------   ------------   ------------
         Total                          $  7,087,000   $  6,354,000   $ 20,458,000   $ 16,079,000
                                        ============   ============   ============   ============

Operating income (loss)
     Branded medical devices            $    648,000   $    355,000   $  1,245,000   $    453,000
     Synovis Interventional Solutions        109,000        337,000        701,000       (157,000)
                                        ------------   ------------   ------------   ------------
          Total                         $    757,000   $    692,000   $  1,946,000   $    296,000
                                        ============   ============   ============   ============
</TABLE>

(6)  SHAREHOLDERS' EQUITY:

During the nine months ended July 31, 2001, stock options for the purchase of
47,611 shares of the Company's common stock were exercised at prices between
$1.87 and $6.24 per share. In connection with the acquisition of MCA in July
2001, the Company issued 181,819 shares of common stock at a price of $6.60.
Also, 15,572 shares of common stock were purchased by employees at a price of
$3.91 under the Company's employee stock purchase plan and 1,073 shares of
common stock were forfeited by an employee upon termination of employment during
the first nine months of fiscal 2001.


(7)  NEW ACCOUNTING PRONOUNCEMENTS:

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137,
was adopted by the Company during fiscal 2001, and did not impact its
consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ending October 31, 2001. The Company has evaluated
the guidance outlined in SAB Nos. 101 and

                                       7
<PAGE>

101B, and does not believe the adoption of SAB Nos. 101 and 101B will
significantly impact the Company's revenue recognition practices or consolidated
financial statements.

Also, in fiscal 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs, which is effective for the
Company in conjunction with the adoption of SAB Nos. 101 and 101B during the
fourth quarter of fiscal 2001. EITF 00-10 requires companies to classify as
revenue all amounts billed to customers in a sales transaction related to
shipping and handling. The Company presently offsets all shipping and handling
charges billed to customers with the related shipping and handling expenses. Had
the Company adopted EITF 00-10 during the quarters ended July 31, 2001 and 2000,
the comparative reported net revenue would increase $39,000 and $42,000,
respectively, upon reclassification of shipping and handling charges billed to
customers during the quarters then ended. For the nine months ended July 31,
2001 and 2000, the comparative reported net revenue would increase $131,000 and
$135,000, respectively. The reclassification of shipping and handling charges
billed to customers to net revenue would increase the corresponding periods cost
of revenue by the same amount, and would have no effect on the net income or
earning per share as reported.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets (the Statements). The Company is required to apply SFAS Nos. 141 and 142
to all business combinations entered into after June 30, 2001. The Company has
the option of adopting the provisions of SFAS Nos. 141 and 142 for intangibles
and goodwill acquired before June 30, 2001 on the first day of fiscal 2002 or
2003.

SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and all acquisitions dated
July 1, 2001 or later. Under the Statements, goodwill as well as other
intangibles determined to have an indefinite life will no longer be amortized;
however, these assets will be reviewed for impairment on a periodic basis. The
Statements also include provisions for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.

The Company is currently assessing but has not yet determined the impact of the
Statements on its consolidated financial position and results of operations. As
of July 31, 2001, the Company had net goodwill and other intangibles assets of
approximately $5,830,000 and $1,487,000, respectively. Amortization expense
recorded during the nine months ended July 31, 2001 and 2000 was $518,000 and
$464,000, respectively.

                                       8
<PAGE>

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


Forward-Looking Statements:

Except for the historical information contained herein, the disclosures in this
Form 10-Q are "forward-looking statements" made under the Private Securities
Litigation Reform Act of 1995. All forward-looking statements in this document
are based upon information available to the Company as of the date hereof, and
the Company assumes no obligation to update any forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may include, among others, the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission, such as the year-end Annual Report on Form 10-K for the
year ended October 31, 2000.


Overview

Bio-Vascular, Inc. (the Company) is a diversified medical device company,
engaged in developing, manufacturing and bringing to market products to
significantly improve the quality of human life. The Company's businesses
provide medical devices for surgery and microsurgery, and solutions for
interventional medicine through the design, engineering and manufacturing of
devices and device components. The Company's branded medical devices include
branded implantable biomaterials, microsurgical products, surgical productivity
tools, and licensed and distributed products for use in critical surgeries,
including bariatric (stomach and intestines), thoracic (chest and lungs),
cardiac (heart), neurosurgical (brain and spine), micro surgery (head, neck,
orthopedic and hand) and vascular (arteries and veins) surgeries. Through its
wholly owned subsidiary, Synovis Interventional Solutions (Synovis IS), formerly
Jerneen Micro Medical Technologies, the Company specializes in custom designed
engineering and manufacturing of complex precision micro-wire forms, including
guidewires, micro coils, stylets and delivery components for use in
interventional cardiovascular and neurological medical devices.


Acquisition of Medical Companies Alliance, Inc.

On July 6, 2001, the Company acquired Medical Companies Alliance, Inc. (MCA), a
company located in Birmingham, Alabama that markets microsurgical products,
including the Microvascular Anastomotic Coupler System. This patented technology
enables micro surgeons to perform anastomosis, the connection of small arteries
or veins, faster, easier and without conventional sutures. The Company believes
that the addition of MCA's medical device business broadens the Company's
product offerings into the niche market of micro surgery, increases the
Company's long-term revenue potential and achieves a balance of market
opportunities consistent with the strategic objectives targeted by the Company.
The Company changed MCA's name to Micro Companies Alliance, Inc. subsequent to
the acquisition.

The Company is in process of completing the allocation of the purchase price to
the assets and liabilities acquired. Management expects that the allocation and
finalization of such amounts will be completed by the end of the fourth quarter
of fiscal 2001.

Pro forma combined financial information for the three and nine months ended
July 31, 2000 and 2001 have not been provided as MCA's operating results are not
considered significant in relation to the Company's results for the periods then
ended.

                                       9
<PAGE>

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


Results of Operations

Comparison of the Three Months Ended July 31, 2001 with
the Three Months Ended July 31, 2000.

For the third quarter of fiscal 2001, consolidated net revenue increased 12% to
$7,087,000 from $6,354,000 in the same quarter of fiscal 2000. The Company's
consolidated net income and earnings per share both increased 25% during the
third quarter of fiscal 2001, to $503,000, or five cents per diluted share, from
$402,000, or four cents per share in the same quarter of the prior year.

Branded medical device's fiscal 2001 third quarter net revenue, which includes
MCA's revenue for July, increased 18% to a record $4,141,000 from $3,505,000 in
the comparable quarter of fiscal 2000. The increase in branded medical device
revenue was driven by domestic sales of Peri-Strips(R), which grew 69% to $1.3
million in quarter ended July 31, 2001 over the same period of the prior year.
The significant increase in U.S. Peri-Strips sales during fiscal 2001 is
believed to be due to growing use of the product in gastric bypass procedures, a
surgical treatment for morbid obesity which provides integrity to the staple
line and helps ensure good clinical outcomes while reducing costs associated
with staple-line complications. Management believes the demonstrated efficacy
and increased public awareness of this procedure will generate future growth in
the number of these procedures performed. Tissue-Guard's sales during the third
quarter of fiscal 2001 over the same quarter of the prior year increased 8% to
$1.65 million, driven by a 37% increase in Vascu-Guard(R) sales during the
quarter. MCA contributed $62,000 to branded medical devices net revenue during
the quarter ended July 31, 2001.

Synovis IS' net revenue of $2,946,000 in the fiscal 2001 third quarter was 3%
greater than the fiscal 2000 third quarter, even though a significant customer
delayed product purchases expected during the fiscal 2001 third quarter until
the fourth quarter.

The consolidated gross margin percentage for the third quarters of fiscal 2000
and 2001 remained constant at 50%, which is consistent with the consolidated
percentage on a fiscal 2001 year-to-date basis as well. Factors which affect the
gross margin include the relative revenue of each business unit, product mix,
volume and other production activities including the training of new employees,
the amount of overtime required in the period and the cost of new product
production setups. The Company's consolidated gross margin may fluctuate quarter
to quarter based on variations in these factors.

Consolidated selling, general and administrative (SG&A) expense during the third
quarter of fiscal 2001 increased $365,000 or 18%, to $2,423,000 from $2,058,000
in the comparable fiscal 2000 quarter. The increase in SG&A expense is due
mainly to additional personnel at Synovis IS required to create new growth
opportunities while supporting current growth demands.

Consolidated research and development (R&D) expense during the third quarter of
fiscal 2001 decreased 16% to $384,000 from $456,000 in the same quarter last
year. The decrease in R&D expense reflects a smaller, more focused research
staff at branded medical devices partially offset by Synovis IS' investment in
additional R&D engineers, combined with the variability in timing of animal
studies to evaluate the sling product for the treatment of stress urinary
incontinence. In both business units, R&D expense is expected to fluctuate from
quarter to quarter based on the timing of projects. This forward-looking
statement will be influenced primarily by the number of projects and the related
R&D personnel requirements, development and regulatory approval path, expected
costs and the timing of those costs for each project.

The Company's consolidated operating income for the fiscal 2001 third quarter
was $757,000 as compared to $692,000 in the same quarter of fiscal 2000. By
business segment, branded medical device's operating income increased 83% during
the fiscal 2001 quarter to $648,000 from $355,000 in the prior year, which was
driven primarily by the segment's incremental revenues in the current year
quarter combined with a decrease in R&D

                                       10
<PAGE>

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


spending. Synovis IS' operating income decreased to $109,000 in the third
quarter of fiscal 2001 from $337,000 in the prior year, due to the current year
investment in personnel to support the segment's current and future growth.

The Company's income before income taxes was $794,000 in the fiscal 2001 third
quarter as compared to $731,000 in the same quarter of fiscal 2000.

The Company recorded a provision for income taxes of $291,000 in the current
year quarter, at an effective tax rate of 37%, as compared to a provision for
income taxes of $329,000 at an effective tax rate of 45% in the third quarter of
fiscal 2000. The decrease in the effective tax rate in the fiscal 2001 third
quarter from the comparable quarter of fiscal 2000 is primarily due to the
decreased impact of permanent differences on the Company's increased pre-tax
income level, combined with a tax benefit generated from the Company's
activation of its foreign sales corporation in fiscal 2001.

The Company's consolidated third quarter fiscal 2001 net income increased to
$503,000, or five cents per diluted share, from income of $402,000, or four
cents per share, in the third quarter of fiscal 2000.

Comparison of the Nine Months Ended July 31, 2001 with
the Nine Months Ended July 31, 2000

Consolidated net revenue increased 27% during the first three quarters of fiscal
2001 to $20,458,000 from $16,079,000 in the comparable period of fiscal 2000.
The Company's consolidated net income increased more than $1 million during the
nine months ended July 31, 2001 to $1,283,000, or fourteen cents per diluted
share, from net income of $235,000, or three cents per share, in the same period
of fiscal 2000.

Synovis IS' year-to-date fiscal 2001 net revenue increased 45% to $8,955,000
from $6,159,000 in the prior year period. The increase in Synovis IS' sales
during the first nine months of fiscal 2001 is primarily due to increased sales
orders from new and existing customers in addition to Synovis IS' expanded
ability and capacity to execute and deliver product orders as a result of
operational changes made during fiscal 2000.

Branded medical device's net revenue for the first nine months of fiscal 2001,
which includes MCA's sales for July 2001, increased $1,583,000 or 16%, to
$11,503,000 from $9,920,000 in the same period of fiscal 2000. Branded medical
devices experienced revenue increases across all product groups during the first
three quarters of fiscal 2001 over the comparable three quarters of fiscal 2000.
On a year-to-date basis, worldwide revenue from Peri-Strips increased 43% driven
by a 62% increase in domestic Peri-Strips sales during the current year. The
significant increase in U.S. Peri-Strips sales during fiscal 2001 is believed to
be due to growing use of the product in gastric bypass procedures, a surgical
treatment for morbid obesity which provides integrity to the staple line and
helps ensure good clinical outcomes while reducing costs associated with
staple-line complications. Management believes the demonstrated efficacy and
increased public awareness of this procedure will generate future growth in the
number of these procedures performed. Tissue-Guard's sales during the first
three quarters of fiscal 2001 over the same quarters of the prior year increased
6% to $4.6 million, driven by sales of Vascu-Guard and Dura-Guard(R) during the
year.

The Company's consolidated gross margin percentage decreased one percentage
point to 50% during the first nine months of fiscal 2001 from the same period of
fiscal 2000. This decrease is primarily attributable to business unit sales mix
in the comparative periods, as Synovis IS generated a greater portion of the
Company's consolidated revenues in the current year with a gross margin
percentage that is lower than branded medical devices. Factors which affect the
gross margin include the relative revenue of each business unit, product mix,
volume and other production activities including the training of new employees,
the amount of overtime required in the period and the cost of new product
production setups. The Company's consolidated gross margin may fluctuate period
to period based on variations in these factors.

                                       11
<PAGE>

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


Consolidated SG&A expense during the first three quarters of fiscal 2001
increased $864,000 or 14%, to $7,140,000 from $6,276,000 in the comparable
fiscal 2000 period, but declined as a percentage of net revenue from 39% in
fiscal 2000 to 35% in fiscal 2001 as a result of higher revenue levels combined
with a comparatively smaller increase in SG&A spending during the period.

Consolidated R&D expense for the year-to-date fiscal 2001 period was $1,178,000,
a decrease of $451,000 or 28%, from the comparable fiscal 2000 expense of
$1,629,000. The decrease in current year consolidated R&D expense largely
reflects a 48% reduction in branded medical device's R&D expense from the prior
year as a result of significant expenses incurred during the first nine months
of fiscal 2000 for the animal studies related to the sling product, combined
with the current year transition to a smaller, more focused research staff.
Offsetting this decrease, Synovis IS' R&D expense increased 39% to $529,000
during the first three quarters of fiscal 2001 due mainly to the unit's expanded
investment in R&D personnel. In both business units, R&D expense is expected to
fluctuate from period to period based on the timing of projects. This
forward-looking statement will be influenced primarily by the number of projects
and the related R&D personnel requirements, development and regulatory approval
path, expected costs and the timing of those costs for each project.

The Company's consolidated operating income for the first nine months of fiscal
2001 was $1,946,000, representing an increase of $1,650,000 from income of
$296,000 generated in the comparable period of fiscal 2000. This increase
reflects significant operating income improvements at each business unit driven
primarily by the increase in revenues of each unit in fiscal 2001 over fiscal
2000.

The Company's income before income taxes was $2,077,000 in the nine months ended
July 31, 2001 as compared to income of $398,000 in the comparable fiscal 2000
period.

The Company recorded a provision for income taxes of $794,000 in the first three
quarters of fiscal 2001, at an effective tax rate of 38%, as compared to a
provision for income taxes of $163,000, at an effective tax rate of 41% in the
same period of fiscal 2000. The decrease in the effective tax rate in fiscal
2001 from the comparable period of fiscal 2000 is primarily due to the decreased
impact of permanent differences on the Company's increased pre-tax income level,
combined with a tax benefit generated from the Company's activation of its
foreign sales corporation in fiscal 2001. The effective tax rate of 38% for the
first nine months represents the expected annual effective tax rate to be
applied for fiscal 2001 based on forecasted income before income taxes for the
year.

The Company's consolidated net income for the nine months ended July 31, 2001
increased to $1,283,000, or fourteen cents per diluted share, from net income of
$235,000, or three cents per share, in same period of fiscal 2000.

Liquidity and Capital Resources

Cash and cash equivalents were $5,293,000 at July 31, 2001 as compared to
$5,480,000 at October 31, 2000, a decrease of $187,000.

Operating activities provided cash of $1,665,000 in the first nine months of
fiscal 2001, as compared to providing cash of $42,000 during the same period of
fiscal 2000. Cash was provided by operations during fiscal 2001 through the
combination of net income and non-cash expenses, partially offset by a net
increase in working capital primarily used for accounts receivable, inventories
and income taxes.

Investing activities used $1,670,000 of cash during the first nine months of
fiscal 2001, which included $1,204,000 in purchases of equipment and leasehold
improvements and $495,000 used for the acquisition of MCA, net of cash acquired.

                                       12
<PAGE>

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


Financing activities used $182,000 of cash during the first nine months of
fiscal 2001, which consisted of $240,000 in cash repayments of capital equipment
lease and other long-term obligations and $177,000 in cash payments to reduce
MCA's outstanding obligations, offset by proceeds of $235,000 received in
connection with the Company's stock-based compensation plans. The Company has
long-term obligations (including current portions) of $446,000 at July 31, 2001,
requiring payments through 2004.

The Company believes existing cash and investments will be sufficient to satisfy
its cash requirements for the next twelve months. This forward-looking
statement, as well as the Company's long-term cash requirements, will be a
function of a number of variables, including research & development priorities,
acquisition opportunities and the growth and profitability of the business.

New Accounting Standards

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137,
was adopted by the Company during fiscal 2001, and did not impact its
consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ending October 31, 2001. The Company has evaluated
the guidance outlined in SAB Nos. 101 and 101B, and does not believe the
adoption of SAB Nos. 101 and 101B will significantly impact the Company's
revenue recognition practices or consolidated financial statements.

Also, in fiscal 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs, which is effective for the
Company in conjunction with the adoption of SAB Nos. 101 and 101B during the
fourth quarter of fiscal 2001. EITF 00-10 requires companies to classify as
revenue all amounts billed to customers in a sales transaction related to
shipping and handling. The Company presently offsets all shipping and handling
charges billed to customers with the related shipping and handling expenses. Had
the Company adopted EITF 00-10 during the quarters ended July 31, 2001 and 2000,
the comparative reported net revenue would increase $39,000 and $42,000,
respectively, upon reclassification of shipping and handling charges billed to
customers during the quarters then ended. For the nine months ended July 31,
2001 and 2000, the comparative reported net revenue would increase $131,000 and
$135,000, respectively. The reclassification of shipping and handling charges
billed to customers to net revenue would increase the corresponding periods cost
of revenue by the same amount, and would have no effect on the net income or
earning per share as reported.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets (the Statements). The Company is required to apply SFAS Nos. 141 and 142
to all business combinations entered into after June 30, 2001. The Company has
the option of adopting the provisions of SFAS Nos. 141 and 142 for intangibles
and goodwill acquired before June 30, 2001 on the first day of fiscal 2002 or
2003.

SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and all acquisitions dated
July 1, 2001 or later. Under the Statements, goodwill as well as other
intangibles determined to have an indefinite life will no longer be amortized;
however, these assets will be reviewed for impairment on a periodic basis. The
Statements also include provisions for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.

                                       13
<PAGE>

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


The Company is currently assessing but has not yet determined the impact of the
Statements on its consolidated financial position and results of operations. As
of July 31, 2001, the Company had net goodwill and other intangibles assets of
approximately $5,830,000 and $1,487,000, respectively. Amortization expense
recorded during the nine months ended July 31, 2001 and 2000 was $518,000 and
$464,000, respectively.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts is not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies.

                                       14
<PAGE>

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


ITEM 1.  LEGAL PROCEEDINGS

The Company is currently involved in litigation, which is ordinary and
incidental to its business. Management believes losses, if any, that might
eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the above-discussed acquisition of Medical Companies
Alliance, Inc. (MCA) on July 6, 2001, the Company issued, in addition to a cash
payment, an aggregate of 181,819 shares of its common stock, $0.01 par value per
share. Such shares were issued in exchange for all outstanding securities of MCA
held by the sole selling shareholder of MCA as partial consideration for his
shares.

The shares of Company common stock issued as consideration in this acquisition
were issued without registration under the Securities Act of 1933 (the
"Securities Act") in reliance on the exemptions provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. The
Company's reliance on these exemptions is based upon the fact that these shares
were only offered and sold to one shareholder of MCA who received all the
shares, the Company's reasonable belief that the former shareholder of MCA was
capable of evaluating merits and risks of his investment decision, and the
information made available to the shareholder regarding the acquisition and the
Company, among other factors.

ITEM 3.  DEFAULT UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
     the exhibit index beginning on page 17.

     Form 8-K. The following report on Form 8-K was filed by the Company during
     the quarter ended July 31, 2001.

     *    May 11, 2001 report naming the Company's new certified public
          accountant.

                                       15
<PAGE>

SIGNATURES
--------------------------------------------------------------------------------


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.



                                         BIO-VASCULAR, INC.



Dated:   September 11, 2001               /s/ Connie L. Magnuson
                                         ---------------------------
                                         Connie L. Magnuson
                                         Vice President of Finance and Chief
                                         Financial Officer
                                         (Principal Financial Officer)

                                       16
<PAGE>

Bio-Vascular, Inc.
Index to Exhibits
--------------------------------------------------------------------------------


10.1     Acquisition Agreement and Plan of Reorganization by and among the
         Company, MCA Acquisition, Inc., Medical Companies Alliance, Inc. and
         Michael K. Campbell, dated July 6, 2001 (filed herewith
         electronically).

10.2     Employment Agreement dated July 6, 2001 among the Company, Medical
         Companies Alliance, Inc. and Michael K. Campbell (filed herewith
         electronically).

                                       17
[{"type": "10-Q", "sequence": "1", "filename": "d10q.txt", "description": "FORM 10-Q", "secsgml_size_bytes": 52006}]
{"company-data": {"conformed-name": "BIO VASCULAR INC", "cik": "0000780127", "assigned-sic": "3842", "irs-number": "411526554", "state-of-incorporation": "MN", "fiscal-year-end": "1031"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "000-13907", "film-number": "1736150"}, "business-address": {"street1": "2575 UNIVERSITY AVENUE", "city": "ST PAUL", "state": "MN", "zip": "55114-1024", "phone": "6516033700"}}
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

--------------------------------------------------------------------------------

                                    FORM 10-Q

     [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For quarterly period ended July 31, 2001
                                       OR
     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the transition period from ___ to ____

                         Commission File Number 0-13907

               ---------------------------------------------------

                               BIO-VASCULAR, INC.
             (Exact name of Registrant as specified in its charter)

                        State of Incorporation: Minnesota
                 I.R.S. Employer Identification No.: 41-1526554

               Principal Executive Offices: 2575 University Avenue
                            St. Paul, Minnesota 55114
                        Telephone Number: (651) 603-3700

               ---------------------------------------------------

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 ___

On September 4, 2001, there were 9,219,490 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
ITEM 1. FINANCIAL STATEMENTS

BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JULY 31, 2001 AND OCTOBER 31, 2000
--------------------------------------------------------------------------------

(in thousands, except share and per share data)
July 31,   October 31,
                                                                    2001        2000
                                                                  --------    --------
ASSETS                                                           (Unaudited)
Current assets:
Cash and cash equivalents .....................................   $  5,293    $  5,480
Accounts receivable, net ......................................      3,941       3,561
Inventories ...................................................      4,816       3,926
Deferred income taxes .........................................        201         216
Other .........................................................        364         549
                                                                  --------    --------
    Total current assets ......................................     14,615      13,732

Equipment and leasehold improvements, net .....................      5,096       4,630
Goodwill and other intangible assets, net .....................      7,317       6,024
Deferred income taxes .........................................        277         417
                                                                  --------    --------
    Total assets ..............................................   $ 27,305    $ 24,803
                                                                  ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ..............................................   $    792    $    741
Accrued expenses ..............................................      1,553       1,754
Current maturities of long-term obligations ...................        193         294
                                                                  --------    --------
    Total current liabilities .................................      2,538       2,789

Capital lease obligations .....................................         --          15
Other liabilities .............................................        253         377
                                                                  --------    --------
    Total liabilities .........................................      2,791       3,181

Shareholders' equity:
Preferred stock: authorized 5,000,000 shares of $.01 par value;
    none issued or outstanding at July 31, 2001 and
    October 31, 2000 ..........................................         --          --
Common stock: authorized 20,000,000 shares of $.01 par value;
    issued and outstanding, 9,218,990 at July 31, 2001 and
    8,975,061 at October 31, 2000 .............................         92          90
Additional paid-in capital ....................................     29,071      27,596
Unearned compensation .........................................       (155)       (287)
Accumulated deficit ...........................................     (4,494)     (5,777)
                                                                  --------    --------
    Total shareholders' equity ................................     24,514      21,622
                                                                  --------    --------
    Total liabilities and shareholders' equity ................   $ 27,305    $ 24,803
                                                                  ========    ========
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       2
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2000
--------------------------------------------------------------------------------

(in thousands, except per share data)
Three Months Ended   Nine Months Ended
                                                     July 31,            July 31,
                                                  2001      2000      2001      2000
                                                -------   -------   -------   -------
                                                   (Unaudited)         (Unaudited)
Net revenue .................................   $ 7,087   $ 6,354   $20,458   $16,079
Cost of revenue .............................     3,523     3,148    10,194     7,878
                                                -------   -------   -------   -------
Gross margin ................................     3,564     3,206    10,264     8,201

Operating expenses:
Selling, general and administrative .........     2,423     2,058     7,140     6,276
Research and development ....................       384       456     1,178     1,629
                                                -------   -------   -------   -------

Operating income ............................       757       692     1,946       296

Other income, net ...........................        37        39       131       102
                                                -------   -------   -------   -------

Income before provision for income taxes ....       794       731     2,077       398

Provision for income taxes ..................       291       329       794       163
                                                -------   -------   -------   -------

Net income ..................................   $   503   $   402   $ 1,283   $   235
                                                =======   =======   =======   =======

Basic earnings per share ....................   $  0.06   $  0.05   $  0.14   $  0.03
                                                =======   =======   =======   =======

Diluted earnings per share ..................   $  0.05   $  0.04   $  0.14   $  0.03
                                                =======   =======   =======   =======
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       3
BIO-VASCULAR, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JULY 31, 2001 AND 2001
--------------------------------------------------------------------------------

(in thousands)
Nine Months Ended
                                                                         July 31,
                                                                      2001       2000
                                                                    -------    -------
                                                                        (Unaudited)
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................   $ 1,665    $    42
                                                                    -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements ..........................    (1,204)      (614)
Investments in patents and trademarks ...........................       (70)       (41)
Purchase of MCA, net of cash acquired ...........................      (491)        --
Other ...........................................................        95       (106)
                                                                    -------    -------
Net cash used in investing activities ...........................    (1,670)      (761)
                                                                    -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds related to stock-based compensation plans ..........       235         83
Repayment of capital lease and other long-term obligations ......      (240)      (329)
Repayment of debt in conjunction with the acquisition of MCA ....      (177)        --
                                                                    -------    -------
Net cash used in financing activities ...........................      (182)      (246)
                                                                    -------    -------

NET DECREASE IN CASH AND CASH EQUIVALENTS .......................      (187)      (965)

CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ..........................................................     5,480      5,596
                                                                    -------    -------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................   $ 5,293    $ 4,631
                                                                    =======    =======
The accompanying notes are an integral part of the interim unaudited
consolidated condensed financial statements.

                                       4
BIO-VASCULAR, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

(1)  BASIS OF PRESENTATION:

The accompanying unaudited consolidated condensed financial statements of
Bio-Vascular, Inc. ("Bio-Vascular" or "the Company") have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report to Shareholders
and incorporated by reference in the Company's Form 10-K for the year ended
October 31, 2000.

In the opinion of management, all adjustments considered necessary, consisting
only of items of a normal recurring nature, for a fair presentation of the
financial position, results of operations and cash flows of the Company as of
and for the interim periods presented have been included. Operating results and
cash flows for the nine months ended July 31, 2001 are not necessarily
indicative of the results of operations and cash flows of the Company that may
be expected for the year ending October 31, 2001.

During the quarter ended July 31, 2001, the name of the Company's wholly-owned
subsidiary, Jerneen Micro Medical Technologies, was changed to Synovis
Interventional Solutions.

(2)  ACQUISITION OF BUSINESS:

On July 6, 2001, the Company acquired Medical Companies Alliance, Inc. (MCA), a
company located in Birmingham, Alabama that markets microsurgical products,
including the Microvascular Anastomotic Coupler System. This patented technology
enables micro surgeons to perform anastomosis, the connection of small arteries
or veins, faster, easier and without conventional sutures. The Company believes
that the addition of MCA's medical device business broadens the Company's
product offerings into the niche market of micro surgery, increases the
Company's long-term revenue potential and achieves a balance of market
opportunities consistent with the strategic objectives targeted by the Company.
The Company changed MCA's name to Micro Companies Alliance, Inc. subsequent to
the acquisition.

The Company issued 181,819 shares of its common stock at a price based on a fair
market value of $6.60 per share and paid $500,000 in cash in exchange for all
the outstanding stock of MCA. Additionally, the Company will pay an earnout to
the sole selling shareholder of MCA up to a cumulative total of $1.35 million
calculated based on 5% of related product revenues over a maximum period of 10
years from the date of acquisition. Also, in connnection with the acquisition,
the Company paid $177,000 to the selling shareholder of MCA as repayment of
advances made by the selling shareholder to MCA prior to the acquisition date.

As the acquisition occurred in early July 2001, MCA's operating results for July
2001 are included in the Consolidated Condensed Statements of Operations for the
three and nine month periods ended July 31, 2001. The assets and liabilities
acquired in the transaction are included in the Company's Consolidated Condensed
Balance Sheet as of July 31, 2001 and the purchase transaction has been included
in the Consolidated Condensed Statement of Cash Flows for the nine months ended
July 31, 2001.

The Company is in process of completing the allocation of the purchase price to
the assets and liabilities acquired. Accordingly, the values assigned and
reflected in the Consolidated Condensed Balance Sheet as of July 31, 2001 are
preliminary. The allocation of the MCA acquisition purchase price involves the
identification of the components of the intangible assets and goodwill purchased
of $1.7 million, and the determination of the useful lives of such components.
Management expects that the allocation and finalization of such amounts will be
completed by the end of the fourth quarter of fiscal 2001. Pro forma

                                       5
combined financial information for the three and nine months ended July 31, 2000
and 2001 have not been provided as MCA's operating results are not considered
significant in relation to the Company's results for the periods then ended.

(3)  FINANCIAL STATEMENT INFORMATION:

                                                    July 31,         October 31,
                                                      2001              2000
                                                   ----------        ----------
                                                   (Unaudited)
Inventories:
Raw materials and supplies ...............         $1,295,000        $1,002,000
Work in process ..........................          2,016,000         1,589,000
Finished goods ...........................          1,505,000         1,335,000
                                                   ----------        ----------
                                                   $4,816,000        $3,926,000
                                                   ==========        ==========

Consolidated condensed statement of cash flows:

At July 31, 2001, the Company recorded $76,000 in accounts payable for equipment
purchases made during the nine months then ended.

(4)  EARNINGS PER SHARE:

The following table sets forth the presentation of shares outstanding used in
the calculation of basic and diluted earnings per share:
Three Months Ended      Nine Months Ended
                                                      July 31,                July 31,
                                                  2001        2000        2001        2000
                                               ---------   ---------   ---------   ---------
                                                    (Unaudited)            (Unaudited)
Denominator for basic earnings per share -
weighted-average common shares .............   9,001,401   8,827,985   8,939,801   8,871,841

Effect of dilutive securities:
Shares associated with deferred
compensation ...............................      74,264      98,930      74,264      97,146
Shares associated with option plans ........     416,477     143,879     275,102     130,668
                                               ---------   ---------   ---------   ---------
Dilutive potential common shares ...........     490,741     242,809     349,366     227,814
                                               ---------   ---------   ---------   ---------

Denominator for diluted earnings per share -
weighted-average common shares and dilutive
potential common shares ....................   9,492,142   9,070,794   9,289,167   9,099,655

Options outstanding with exercise prices
greater than the average market price of the
Company's common stock .....................     160,972     514,817     164,143     535,250
6
As of July 31,
                                                     2001               2000
                                                 ------------       ------------
                                                  (Unaudited)

Options outstanding ......................          1,325,096          1,380,071
Exercise prices ..........................       $2.09-$12.21       $1.87-$12.21
Expiration dates .........................          2001-2009          2000-2008
Non-vested stock awards ..................             74,264             98,930

(5)  SEGMENT INFORMATION:

The following table presents certain financial information by business segment
for the three and nine month periods ended July 31, 2001 and 2000. MCA's
financial results since the acquisition date have been included with branded
medical devices for segment reporting purposes.
Three Months Ended            Nine Months Ended
                                                 July 31,                      July 31,
                                            2001           2000           2001           2000
                                        ------------   ------------   ------------   ------------
                                               (Unaudited)                  (Unaudited)
Net revenue
     Branded medical devices            $  4,141,000   $  3,505,000   $ 11,503,000   $  9,920,000
     Synovis Interventional Solutions      2,946,000      2,849,000      8,955,000      6,159,000
                                        ------------   ------------   ------------   ------------
         Total                          $  7,087,000   $  6,354,000   $ 20,458,000   $ 16,079,000
                                        ============   ============   ============   ============

Operating income (loss)
     Branded medical devices            $    648,000   $    355,000   $  1,245,000   $    453,000
     Synovis Interventional Solutions        109,000        337,000        701,000       (157,000)
                                        ------------   ------------   ------------   ------------
          Total                         $    757,000   $    692,000   $  1,946,000   $    296,000
                                        ============   ============   ============   ============
(6)  SHAREHOLDERS' EQUITY:

During the nine months ended July 31, 2001, stock options for the purchase of
47,611 shares of the Company's common stock were exercised at prices between
$1.87 and $6.24 per share. In connection with the acquisition of MCA in July
2001, the Company issued 181,819 shares of common stock at a price of $6.60.
Also, 15,572 shares of common stock were purchased by employees at a price of
$3.91 under the Company's employee stock purchase plan and 1,073 shares of
common stock were forfeited by an employee upon termination of employment during
the first nine months of fiscal 2001.

(7)  NEW ACCOUNTING PRONOUNCEMENTS:

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137,
was adopted by the Company during fiscal 2001, and did not impact its
consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ending October 31, 2001. The Company has evaluated
the guidance outlined in SAB Nos. 101 and

                                       7
101B, and does not believe the adoption of SAB Nos. 101 and 101B will
significantly impact the Company's revenue recognition practices or consolidated
financial statements.

Also, in fiscal 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs, which is effective for the
Company in conjunction with the adoption of SAB Nos. 101 and 101B during the
fourth quarter of fiscal 2001. EITF 00-10 requires companies to classify as
revenue all amounts billed to customers in a sales transaction related to
shipping and handling. The Company presently offsets all shipping and handling
charges billed to customers with the related shipping and handling expenses. Had
the Company adopted EITF 00-10 during the quarters ended July 31, 2001 and 2000,
the comparative reported net revenue would increase $39,000 and $42,000,
respectively, upon reclassification of shipping and handling charges billed to
customers during the quarters then ended. For the nine months ended July 31,
2001 and 2000, the comparative reported net revenue would increase $131,000 and
$135,000, respectively. The reclassification of shipping and handling charges
billed to customers to net revenue would increase the corresponding periods cost
of revenue by the same amount, and would have no effect on the net income or
earning per share as reported.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets (the Statements). The Company is required to apply SFAS Nos. 141 and 142
to all business combinations entered into after June 30, 2001. The Company has
the option of adopting the provisions of SFAS Nos. 141 and 142 for intangibles
and goodwill acquired before June 30, 2001 on the first day of fiscal 2002 or
2003.

SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and all acquisitions dated
July 1, 2001 or later. Under the Statements, goodwill as well as other
intangibles determined to have an indefinite life will no longer be amortized;
however, these assets will be reviewed for impairment on a periodic basis. The
Statements also include provisions for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.

The Company is currently assessing but has not yet determined the impact of the
Statements on its consolidated financial position and results of operations. As
of July 31, 2001, the Company had net goodwill and other intangibles assets of
approximately $5,830,000 and $1,487,000, respectively. Amortization expense
recorded during the nine months ended July 31, 2001 and 2000 was $518,000 and
$464,000, respectively.

                                       8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
--------------------------------------------------------------------------------

Forward-Looking Statements:

Except for the historical information contained herein, the disclosures in this
Form 10-Q are "forward-looking statements" made under the Private Securities
Litigation Reform Act of 1995. All forward-looking statements in this document
are based upon information available to the Company as of the date hereof, and
the Company assumes no obligation to update any forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors may include, among others, the risk
factors listed from time to time in the Company's filings with the Securities
and Exchange Commission, such as the year-end Annual Report on Form 10-K for the
year ended October 31, 2000.

Overview

Bio-Vascular, Inc. (the Company) is a diversified medical device company,
engaged in developing, manufacturing and bringing to market products to
significantly improve the quality of human life. The Company's businesses
provide medical devices for surgery and microsurgery, and solutions for
interventional medicine through the design, engineering and manufacturing of
devices and device components. The Company's branded medical devices include
branded implantable biomaterials, microsurgical products, surgical productivity
tools, and licensed and distributed products for use in critical surgeries,
including bariatric (stomach and intestines), thoracic (chest and lungs),
cardiac (heart), neurosurgical (brain and spine), micro surgery (head, neck,
orthopedic and hand) and vascular (arteries and veins) surgeries. Through its
wholly owned subsidiary, Synovis Interventional Solutions (Synovis IS), formerly
Jerneen Micro Medical Technologies, the Company specializes in custom designed
engineering and manufacturing of complex precision micro-wire forms, including
guidewires, micro coils, stylets and delivery components for use in
interventional cardiovascular and neurological medical devices.

Acquisition of Medical Companies Alliance, Inc.

On July 6, 2001, the Company acquired Medical Companies Alliance, Inc. (MCA), a
company located in Birmingham, Alabama that markets microsurgical products,
including the Microvascular Anastomotic Coupler System. This patented technology
enables micro surgeons to perform anastomosis, the connection of small arteries
or veins, faster, easier and without conventional sutures. The Company believes
that the addition of MCA's medical device business broadens the Company's
product offerings into the niche market of micro surgery, increases the
Company's long-term revenue potential and achieves a balance of market
opportunities consistent with the strategic objectives targeted by the Company.
The Company changed MCA's name to Micro Companies Alliance, Inc. subsequent to
the acquisition.

The Company is in process of completing the allocation of the purchase price to
the assets and liabilities acquired. Management expects that the allocation and
finalization of such amounts will be completed by the end of the fourth quarter
of fiscal 2001.

Pro forma combined financial information for the three and nine months ended
July 31, 2000 and 2001 have not been provided as MCA's operating results are not
considered significant in relation to the Company's results for the periods then
ended.

                                       9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------

Results of Operations

Comparison of the Three Months Ended July 31, 2001 with
the Three Months Ended July 31, 2000.

For the third quarter of fiscal 2001, consolidated net revenue increased 12% to
$7,087,000 from $6,354,000 in the same quarter of fiscal 2000. The Company's
consolidated net income and earnings per share both increased 25% during the
third quarter of fiscal 2001, to $503,000, or five cents per diluted share, from
$402,000, or four cents per share in the same quarter of the prior year.

Branded medical device's fiscal 2001 third quarter net revenue, which includes
MCA's revenue for July, increased 18% to a record $4,141,000 from $3,505,000 in
the comparable quarter of fiscal 2000. The increase in branded medical device
revenue was driven by domestic sales of Peri-Strips(R), which grew 69% to $1.3
million in quarter ended July 31, 2001 over the same period of the prior year.
The significant increase in U.S. Peri-Strips sales during fiscal 2001 is
believed to be due to growing use of the product in gastric bypass procedures, a
surgical treatment for morbid obesity which provides integrity to the staple
line and helps ensure good clinical outcomes while reducing costs associated
with staple-line complications. Management believes the demonstrated efficacy
and increased public awareness of this procedure will generate future growth in
the number of these procedures performed. Tissue-Guard's sales during the third
quarter of fiscal 2001 over the same quarter of the prior year increased 8% to
$1.65 million, driven by a 37% increase in Vascu-Guard(R) sales during the
quarter. MCA contributed $62,000 to branded medical devices net revenue during
the quarter ended July 31, 2001.

Synovis IS' net revenue of $2,946,000 in the fiscal 2001 third quarter was 3%
greater than the fiscal 2000 third quarter, even though a significant customer
delayed product purchases expected during the fiscal 2001 third quarter until
the fourth quarter.

The consolidated gross margin percentage for the third quarters of fiscal 2000
and 2001 remained constant at 50%, which is consistent with the consolidated
percentage on a fiscal 2001 year-to-date basis as well. Factors which affect the
gross margin include the relative revenue of each business unit, product mix,
volume and other production activities including the training of new employees,
the amount of overtime required in the period and the cost of new product
production setups. The Company's consolidated gross margin may fluctuate quarter
to quarter based on variations in these factors.

Consolidated selling, general and administrative (SG&A) expense during the third
quarter of fiscal 2001 increased $365,000 or 18%, to $2,423,000 from $2,058,000
in the comparable fiscal 2000 quarter. The increase in SG&A expense is due
mainly to additional personnel at Synovis IS required to create new growth
opportunities while supporting current growth demands.

Consolidated research and development (R&D) expense during the third quarter of
fiscal 2001 decreased 16% to $384,000 from $456,000 in the same quarter last
year. The decrease in R&D expense reflects a smaller, more focused research
staff at branded medical devices partially offset by Synovis IS' investment in
additional R&D engineers, combined with the variability in timing of animal
studies to evaluate the sling product for the treatment of stress urinary
incontinence. In both business units, R&D expense is expected to fluctuate from
quarter to quarter based on the timing of projects. This forward-looking
statement will be influenced primarily by the number of projects and the related
R&D personnel requirements, development and regulatory approval path, expected
costs and the timing of those costs for each project.

The Company's consolidated operating income for the fiscal 2001 third quarter
was $757,000 as compared to $692,000 in the same quarter of fiscal 2000. By
business segment, branded medical device's operating income increased 83% during
the fiscal 2001 quarter to $648,000 from $355,000 in the prior year, which was
driven primarily by the segment's incremental revenues in the current year
quarter combined with a decrease in R&D

                                       10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------

spending. Synovis IS' operating income decreased to $109,000 in the third
quarter of fiscal 2001 from $337,000 in the prior year, due to the current year
investment in personnel to support the segment's current and future growth.

The Company's income before income taxes was $794,000 in the fiscal 2001 third
quarter as compared to $731,000 in the same quarter of fiscal 2000.

The Company recorded a provision for income taxes of $291,000 in the current
year quarter, at an effective tax rate of 37%, as compared to a provision for
income taxes of $329,000 at an effective tax rate of 45% in the third quarter of
fiscal 2000. The decrease in the effective tax rate in the fiscal 2001 third
quarter from the comparable quarter of fiscal 2000 is primarily due to the
decreased impact of permanent differences on the Company's increased pre-tax
income level, combined with a tax benefit generated from the Company's
activation of its foreign sales corporation in fiscal 2001.

The Company's consolidated third quarter fiscal 2001 net income increased to
$503,000, or five cents per diluted share, from income of $402,000, or four
cents per share, in the third quarter of fiscal 2000.

Comparison of the Nine Months Ended July 31, 2001 with
the Nine Months Ended July 31, 2000

Consolidated net revenue increased 27% during the first three quarters of fiscal
2001 to $20,458,000 from $16,079,000 in the comparable period of fiscal 2000.
The Company's consolidated net income increased more than $1 million during the
nine months ended July 31, 2001 to $1,283,000, or fourteen cents per diluted
share, from net income of $235,000, or three cents per share, in the same period
of fiscal 2000.

Synovis IS' year-to-date fiscal 2001 net revenue increased 45% to $8,955,000
from $6,159,000 in the prior year period. The increase in Synovis IS' sales
during the first nine months of fiscal 2001 is primarily due to increased sales
orders from new and existing customers in addition to Synovis IS' expanded
ability and capacity to execute and deliver product orders as a result of
operational changes made during fiscal 2000.

Branded medical device's net revenue for the first nine months of fiscal 2001,
which includes MCA's sales for July 2001, increased $1,583,000 or 16%, to
$11,503,000 from $9,920,000 in the same period of fiscal 2000. Branded medical
devices experienced revenue increases across all product groups during the first
three quarters of fiscal 2001 over the comparable three quarters of fiscal 2000.
On a year-to-date basis, worldwide revenue from Peri-Strips increased 43% driven
by a 62% increase in domestic Peri-Strips sales during the current year. The
significant increase in U.S. Peri-Strips sales during fiscal 2001 is believed to
be due to growing use of the product in gastric bypass procedures, a surgical
treatment for morbid obesity which provides integrity to the staple line and
helps ensure good clinical outcomes while reducing costs associated with
staple-line complications. Management believes the demonstrated efficacy and
increased public awareness of this procedure will generate future growth in the
number of these procedures performed. Tissue-Guard's sales during the first
three quarters of fiscal 2001 over the same quarters of the prior year increased
6% to $4.6 million, driven by sales of Vascu-Guard and Dura-Guard(R) during the
year.

The Company's consolidated gross margin percentage decreased one percentage
point to 50% during the first nine months of fiscal 2001 from the same period of
fiscal 2000. This decrease is primarily attributable to business unit sales mix
in the comparative periods, as Synovis IS generated a greater portion of the
Company's consolidated revenues in the current year with a gross margin
percentage that is lower than branded medical devices. Factors which affect the
gross margin include the relative revenue of each business unit, product mix,
volume and other production activities including the training of new employees,
the amount of overtime required in the period and the cost of new product
production setups. The Company's consolidated gross margin may fluctuate period
to period based on variations in these factors.

                                       11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------

Consolidated SG&A expense during the first three quarters of fiscal 2001
increased $864,000 or 14%, to $7,140,000 from $6,276,000 in the comparable
fiscal 2000 period, but declined as a percentage of net revenue from 39% in
fiscal 2000 to 35% in fiscal 2001 as a result of higher revenue levels combined
with a comparatively smaller increase in SG&A spending during the period.

Consolidated R&D expense for the year-to-date fiscal 2001 period was $1,178,000,
a decrease of $451,000 or 28%, from the comparable fiscal 2000 expense of
$1,629,000. The decrease in current year consolidated R&D expense largely
reflects a 48% reduction in branded medical device's R&D expense from the prior
year as a result of significant expenses incurred during the first nine months
of fiscal 2000 for the animal studies related to the sling product, combined
with the current year transition to a smaller, more focused research staff.
Offsetting this decrease, Synovis IS' R&D expense increased 39% to $529,000
during the first three quarters of fiscal 2001 due mainly to the unit's expanded
investment in R&D personnel. In both business units, R&D expense is expected to
fluctuate from period to period based on the timing of projects. This
forward-looking statement will be influenced primarily by the number of projects
and the related R&D personnel requirements, development and regulatory approval
path, expected costs and the timing of those costs for each project.

The Company's consolidated operating income for the first nine months of fiscal
2001 was $1,946,000, representing an increase of $1,650,000 from income of
$296,000 generated in the comparable period of fiscal 2000. This increase
reflects significant operating income improvements at each business unit driven
primarily by the increase in revenues of each unit in fiscal 2001 over fiscal
2000.

The Company's income before income taxes was $2,077,000 in the nine months ended
July 31, 2001 as compared to income of $398,000 in the comparable fiscal 2000
period.

The Company recorded a provision for income taxes of $794,000 in the first three
quarters of fiscal 2001, at an effective tax rate of 38%, as compared to a
provision for income taxes of $163,000, at an effective tax rate of 41% in the
same period of fiscal 2000. The decrease in the effective tax rate in fiscal
2001 from the comparable period of fiscal 2000 is primarily due to the decreased
impact of permanent differences on the Company's increased pre-tax income level,
combined with a tax benefit generated from the Company's activation of its
foreign sales corporation in fiscal 2001. The effective tax rate of 38% for the
first nine months represents the expected annual effective tax rate to be
applied for fiscal 2001 based on forecasted income before income taxes for the
year.

The Company's consolidated net income for the nine months ended July 31, 2001
increased to $1,283,000, or fourteen cents per diluted share, from net income of
$235,000, or three cents per share, in same period of fiscal 2000.

Liquidity and Capital Resources

Cash and cash equivalents were $5,293,000 at July 31, 2001 as compared to
$5,480,000 at October 31, 2000, a decrease of $187,000.

Operating activities provided cash of $1,665,000 in the first nine months of
fiscal 2001, as compared to providing cash of $42,000 during the same period of
fiscal 2000. Cash was provided by operations during fiscal 2001 through the
combination of net income and non-cash expenses, partially offset by a net
increase in working capital primarily used for accounts receivable, inventories
and income taxes.

Investing activities used $1,670,000 of cash during the first nine months of
fiscal 2001, which included $1,204,000 in purchases of equipment and leasehold
improvements and $495,000 used for the acquisition of MCA, net of cash acquired.

                                       12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------

Financing activities used $182,000 of cash during the first nine months of
fiscal 2001, which consisted of $240,000 in cash repayments of capital equipment
lease and other long-term obligations and $177,000 in cash payments to reduce
MCA's outstanding obligations, offset by proceeds of $235,000 received in
connection with the Company's stock-based compensation plans. The Company has
long-term obligations (including current portions) of $446,000 at July 31, 2001,
requiring payments through 2004.

The Company believes existing cash and investments will be sufficient to satisfy
its cash requirements for the next twelve months. This forward-looking
statement, as well as the Company's long-term cash requirements, will be a
function of a number of variables, including research & development priorities,
acquisition opportunities and the growth and profitability of the business.

New Accounting Standards

In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133, as amended by SFAS No. 137,
was adopted by the Company during fiscal 2001, and did not impact its
consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which summarizes certain of the SEC's views regarding revenue recognition. The
provisions of SAB No. 101, as amended by SAB No. 101B, will be effective for the
Company during the quarter ending October 31, 2001. The Company has evaluated
the guidance outlined in SAB Nos. 101 and 101B, and does not believe the
adoption of SAB Nos. 101 and 101B will significantly impact the Company's
revenue recognition practices or consolidated financial statements.

Also, in fiscal 2000 the Emerging Issues Task Force (EITF) issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs, which is effective for the
Company in conjunction with the adoption of SAB Nos. 101 and 101B during the
fourth quarter of fiscal 2001. EITF 00-10 requires companies to classify as
revenue all amounts billed to customers in a sales transaction related to
shipping and handling. The Company presently offsets all shipping and handling
charges billed to customers with the related shipping and handling expenses. Had
the Company adopted EITF 00-10 during the quarters ended July 31, 2001 and 2000,
the comparative reported net revenue would increase $39,000 and $42,000,
respectively, upon reclassification of shipping and handling charges billed to
customers during the quarters then ended. For the nine months ended July 31,
2001 and 2000, the comparative reported net revenue would increase $131,000 and
$135,000, respectively. The reclassification of shipping and handling charges
billed to customers to net revenue would increase the corresponding periods cost
of revenue by the same amount, and would have no effect on the net income or
earning per share as reported.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
Assets (the Statements). The Company is required to apply SFAS Nos. 141 and 142
to all business combinations entered into after June 30, 2001. The Company has
the option of adopting the provisions of SFAS Nos. 141 and 142 for intangibles
and goodwill acquired before June 30, 2001 on the first day of fiscal 2002 or
2003.

SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after June 30, 2001 and all acquisitions dated
July 1, 2001 or later. Under the Statements, goodwill as well as other
intangibles determined to have an indefinite life will no longer be amortized;
however, these assets will be reviewed for impairment on a periodic basis. The
Statements also include provisions for the reclassification of certain existing
recognized intangibles as goodwill, reclassification of certain intangibles out
of previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill.

                                       13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS - CONTINUED
--------------------------------------------------------------------------------

The Company is currently assessing but has not yet determined the impact of the
Statements on its consolidated financial position and results of operations. As
of July 31, 2001, the Company had net goodwill and other intangibles assets of
approximately $5,830,000 and $1,487,000, respectively. Amortization expense
recorded during the nine months ended July 31, 2001 and 2000 was $518,000 and
$464,000, respectively.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal financial instruments the Company maintains are in accounts
receivable and long-term obligations. The Company believes that the interest
rate, credit and market risk related to these accounts is not significant. The
Company manages the risk associated with these accounts through periodic reviews
of the carrying value for non-collectibility of assets and establishment of
appropriate allowances in connection with the Company's internal controls and
policies.

                                       14
PART II.  OTHER INFORMATION
--------------------------------------------------------------------------------

ITEM 1.  LEGAL PROCEEDINGS

The Company is currently involved in litigation, which is ordinary and
incidental to its business. Management believes losses, if any, that might
eventually be sustained from such litigation would not be material to the
Company's consolidated financial position, results of operations or cash flows
for any period. Further, product liability claims may be asserted in the future
relative to events not known to management at the present time. Management
believes that the Company's risk management practices, including its insurance
coverage, are reasonably adequate to protect against potential material product
liability losses.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the above-discussed acquisition of Medical Companies
Alliance, Inc. (MCA) on July 6, 2001, the Company issued, in addition to a cash
payment, an aggregate of 181,819 shares of its common stock, $0.01 par value per
share. Such shares were issued in exchange for all outstanding securities of MCA
held by the sole selling shareholder of MCA as partial consideration for his
shares.

The shares of Company common stock issued as consideration in this acquisition
were issued without registration under the Securities Act of 1933 (the
"Securities Act") in reliance on the exemptions provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. The
Company's reliance on these exemptions is based upon the fact that these shares
were only offered and sold to one shareholder of MCA who received all the
shares, the Company's reasonable belief that the former shareholder of MCA was
capable of evaluating merits and risks of his investment decision, and the
information made available to the shareholder regarding the acquisition and the
Company, among other factors.

ITEM 3.  DEFAULT UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits. The exhibits to this quarterly report on Form 10-Q are listed in
     the exhibit index beginning on page 17.

     Form 8-K. The following report on Form 8-K was filed by the Company during
     the quarter ended July 31, 2001.

     *    May 11, 2001 report naming the Company's new certified public
          accountant.

                                       15
SIGNATURES
--------------------------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

                                         BIO-VASCULAR, INC.

Dated:   September 11, 2001               /s/ Connie L. Magnuson
                                         ---------------------------
                                         Connie L. Magnuson
                                         Vice President of Finance and Chief
                                         Financial Officer
                                         (Principal Financial Officer)

                                       16
Bio-Vascular, Inc.
Index to Exhibits
--------------------------------------------------------------------------------

10.1     Acquisition Agreement and Plan of Reorganization by and among the
         Company, MCA Acquisition, Inc., Medical Companies Alliance, Inc. and
         Michael K. Campbell, dated July 6, 2001 (filed herewith
         electronically).

10.2     Employment Agreement dated July 6, 2001 among the Company, Medical
         Companies Alliance, Inc. and Michael K. Campbell (filed herewith
         electronically).

                                       17